GDP summarizes only one aspect of a country’s condition; other measures in addition to GDP would be valuable
Gross domestic product (GDP) is the key indicator of the health of an economy and can be easily compared across countries. But it has limitations. GDP tells what is going on today, but does not inform about sustainability of growth. It does not measure happiness, so residents can be dissatisfied even when GDP is rising. GDP does not consider environmental factors or reflect what individuals do outside paid employment. It might increase in times of military conflicts and after natural disasters or terrorist acts, as the loss of property is not counted. Hence, complementary measures may help to show a more comprehensive picture of an economy.
Payroll tax cuts in developing economies might
be beneficial to the formal sector, even when the informal sector is
Informal employment accounts for more than half
of total employment in Latin America and the Caribbean, and an even higher
percentage in Africa and South Asia. It is associated with lack of social
insurance, low tax collection, and low productivity jobs. Lowering payroll
taxes is a potential lever to increase formal employment and extend social
insurance coverage among the labor force. However, the effects of tax cuts
vary across countries, often resulting in large wage shifts but relatively
small employment effects. Cutting payroll taxes requires levying other taxes
to compensate for lost revenue, which may be difficult in developing
The type, quality, and quantity of
entrepreneurship are influenced significantly by corporate income
taxes—though only slightly
Corporate income taxation influences the
quantity and type of entrepreneurship, which in turn affects economic
development. Empirical evidence shows that higher corporate income tax rates
reduce business density and entrepreneurship entry rates and increase the
capital size of new firms. The progressivity of tax rates increases
entrepreneurship entry rates, whereas highly complex tax codes reduce them.
Policymakers should understand the effects and underlying mechanisms that
determine how corporate income taxation influences entrepreneurship in order
to provide a favorable business environment.
Promoting intergenerational mobility can make
societies more egalitarian
Income inequality has been rising in many
countries. Is this bad? One way to decide is to look at the change in
incomes across generations (intergenerational mobility) and, more generally,
at the extent to which income differences among individuals are traceable to
their social origins. Inequalities that reflect factors largely out of one’s
control—such as local schools and communities—require attention in order to
reduce income inequality. Evidence shows a negative association between
income inequality and intergenerational mobility. The debate on whether
community effects exert additional effects is still open.
Minimum wages reduce entry-level jobs, training,
and lifetime income
Policymakers often propose a minimum wage as a
means of raising incomes and lifting workers out of poverty. However,
improvements in some young workers’ incomes as a result of a minimum wage
come at a cost to others. Minimum wages reduce employment opportunities for
youths and create unemployment. Workers miss out on
opportunities that would have been paid for by reduced wages upfront but
would have resulted in higher wages later. Youths who cannot find jobs must
be supported by their families or by the social welfare system. Delayed
entry into the labor market reduces the lifetime income stream of young
To boost the employment rate of the low-skilled
trapped in inactivity is it sufficient to supplement their earnings?
High risk of poverty and low employment rates
are widespread among low-skilled groups, especially in the case of some
household compositions (e.g. single mothers). “Making-work-pay” policies
have been advocated for and implemented to address these issues. They
alleviate the above-mentioned problems without providing a disincentive to
work. However, do they deliver on their promises? If they do reduce poverty
and enhance employment, can we further determine their effects on indicators
of well-being, such as mental health and life satisfaction, or on the
acquisition of human capital?
Policies to tackle wage inequality should focus
on skills alongside reform of labor market institutions
Policymakers in many OECD countries are
increasingly concerned about high and rising inequality. Much of the
evidence (as far back as Adam Smith’s ) points to the importance of skills in tackling wage
inequality. Yet a recent strand of the research argues that (cognitive)
skills explain little of the cross-country differences in wage inequality.
Does this challenge the received wisdom on the relationship between skills
and wage inequality? No, because this recent research fails to account for
the fact that the price of skill (and thus wage inequality) is determined to
a large extent by the match of skill supply and demand.
Stronger wage coordination and higher union
density are associated with lower unemployment and higher inflation
Aside from employment protection laws, which
have been converging, other labor market institutions in new and old EU
member states, such as wage bargaining coordination and labor union density,
still differ considerably. These labor market institutions also differ among
the new EU member states, with the Baltic countries being much more liberal
than the others. Research that pools data on old and new EU member states
shows that wage coordination mechanisms can improve a country’s
macroeconomic performance. Stronger wage coordination and higher union
density reduce the response of inflation to the business cycle.
Minimum wage increases fail to stimulate growth
and can have a negative impact on vulnerable workers during recessions
Proponents of minimum wage increases have argued
that such hikes can serve as an engine of economic growth and assist
low-skilled individuals during downturns in the business cycle. However, a
review of the literature provides little empirical support for these claims.
Minimum wage increases redistribute gross domestic product away from
lower-skilled industries and toward higher-skilled industries and are
largely ineffective in assisting the poor during both peaks and troughs in
the business cycle. Minimum wage-induced reductions in employment are found
to be larger during economic recessions.
Countries set minimum wages in different ways,
and some countries set different wages for different groups of workers
The minimum wage has never been as high on the
political agenda as it is today, with politicians in Germany, the UK, the
US, and other OECD countries calling for substantial increases in the rate.
One reason for the rising interest is the growing consensus among economists
and policymakers that minimum wages, set at the right level, may help
low-paid workers without harming employment prospects. But how should
countries set their minimum wage rate? The processes that countries use to
set their minimum wage rate and structure differ greatly, as do the methods
for adjusting it. The different approaches have merits and shortcomings.