The Great Recession’s long-term damage
Laurence Ball 01 July 2014
Whereas textbook macroeconomic theory suggests that output should return to potential after a recession, there is mounting evidence that deep recessions have highly persistent effects on output. This column reports estimates of the long-term damage caused by the Great Recession. In most countries in the sample, the loss of potential output – 8.4% on average – has been almost as large as the loss of actual output. In the countries hit hardest by the recession, the growth rate of potential output is much lower today than it was before 2008.
According to macroeconomics textbooks, a fall in aggregate demand causes a recession in which output drops below potential output – the normal level of production given the economy’s resources and technology. This effect is temporary, however. A recession is followed by a recovery period in which output returns to potential, and potential itself is not affected significantly by the recession.
growth, unemployment, OECD, potential output, Great Recession, hysteresis
DynEmp: New cross-country evidence on the role of young firms in job creation, growth, and innovation
Chiara Criscuolo, Peter N. Gal, Carlo Menon 26 May 2014
Young firms are known to play a central role in job creation. This column presents the results of a new OECD project on the dynamics of employment (DynEmp) based on an innovative methodology using firm-level data. It confirms that young firms play a central role in creating jobs, and in enhancing growth and innovation. Public policies can help by enabling firms to experiment, and by fostering the reallocation of resources towards the most productive firms. Structural reforms to product, labour, and capital markets, as well as bankruptcy laws that do not overly penalise failure, are particularly relevant.
Since well before the crisis, many OECD economies have been confronted with sluggish productivity growth. In the aftermath of the crisis, job creation has also stalled and has become an important policy issue. Business dynamics are at the core of the creative destruction process. Available evidence points to significant cross-country heterogeneity in the dynamism of businesses, even after taking into account differences in sectoral composition. This raises policymakers’ interest in understanding the role of framework conditions in this area.
Labour markets Productivity and Innovation
R&D, employment, growth, OECD, job creation, business cycles, firms, start-ups
Economic liberty in the long run: Evidence from OECD countries
Leandro Prados de la Escosura 07 April 2014
Measures of economic freedom provide useful cross-country comparisons, but lack the time dimension to track intertemporal progress. This column presents a new measure and extends it back in time to tell a history of economic freedom over the course of the twentieth century.
How has freedom evolved over time? A distinction has been made between ‘negative’ freedom – a lack of interference or coercion by others (freedom from) – and ‘positive’ freedom, the guarantee of access to markets that allow people to control their own existence (freedom to) (Berlin 1958). An example of negative freedom is economic liberty. A country is economically free to the extent that privately owned property is protected, contracts enforced, prices stable, barriers to trade small, and resources mainly allocated through the market (Friedman 1962).
OECD, protectionism, negative freedom, economic freedom, economic liberty
Public procurement markets: Where are we?
Patrick A Messerlin, Sébastien Miroudot 07 September 2012
Public spending on large-scale projects is often a way of sneaking in protectionism through the back door and there are many cases of outright corruption. With the EU and US pushing hard for more open public procurement elsewhere in the world, this column asks just how open these markets are, particularly in the EU, which claims to have the most open market in the world.
Recently, the EU and US have pushed very hard for opening public procurement markets, as illustrated by the EU and US pressures on Japan and China, respectively. In particular, the EU claims that it is by far the most open market in the world. In March 2012, this belief has induced the European Commission to request from member states a mandate for closing EU public procurement markets to firms originating from countries using ‘restrictive practices’ in this domain – the so-called ‘reciprocity’ approach.
EU policies Global governance Institutions and economics
US, EU, Corruption, OECD, public procurement
Precautionary savings in the Great Recession
Ashoka Mody, Damiano Sandri, Franziska Ohnsorge 22 February 2012
Uncertainty rose sharply during the Great Recession, as did saving rates. This column shows that these two developments were related. Using a panel of OECD countries, it estimates that at least two-fifths of the increase in households’ saving rates between 2007 and 2009 was due to increased uncertainty about labour-income prospects. It adds that restoring higher levels of consumption and aggregate demand will require employment-friendly social insurance and reduced policy-induced uncertainty.
A key feature of the Great Recession was a striking increase in uncertainty. The volatility of real GDP increased (left chart in Figure 1) and, at the same time, the higher unemployment rate raised the risks of job losses, longer unemployment durations, and, hence, of severe reductions in income (see Carroll 1992 for a similar interpretation of unemployment rates). These developments stood in marked contrast to the immediately preceding years of apparent tranquility, often characterised as the Great Moderation.
OECD, crises, savings
Is short-time work a good method to keep unemployment down?
Pierre Cahuc, Stéphane Carcillo 01 February 2011
One method for combating unemployment during the global crisis has been the use of short-time work schemes that allow employers to temporarily reduce hours worked while compensating workers for the induced loss of income. In the first of two columns on labour markets, the authors present new evidence establishing that these schemes do indeed reduce unemployment. But they are no panacea and are not without their own problems.
Short-time compensation (or short-time work) aims at reducing lay-offs by allowing employers to temporarily reduce hours worked while compensating workers for the induced loss of income. At present, short-time work schemes are widespread among OECD countries, having grown in popularity during the Great Recession. As shown by Figure 1, they are now used in 25 of the 33 OECD countries.1
Figure 1. Short-time work take-up rates in the OECD countries (as a percentage of employees)
unemployment, OECD, Short-term work
The impact of class size on the performance of university students
Oriana Bandiera, Valentino Larcinese, Imran Rasul 11 January 2010
The effect of increasing class size in tertiary education is not well understood. This column estimates the effects of class size on students’ exam performance by comparing the same student’s performance to her own performance in courses with small and large class sizes. Going from the average class of 56 to a class size of 89 would decrease the mark by 9% of the observed variation in marks within a given student. The effect is almost four times larger for students in the top 10%.
The organisation of university education is increasingly in the spotlight, both in academic and policy circles. Recent research has stressed the importance of higher education in providing positive externalities within firms (Moretti 2004), within local labour markets (Glaeser et al. 1992), and in fostering economy wide growth (Aghion et al. 2007).
education, OECD, tertiary education
How to spend it: Sovereign wealth funds and the wealth of nations
Helmut Reisen 05 June 2008
Sovereign wealth funds have raised fears in developed countries, but development economics suggests a number of legitimate motives for such investment vehicles. This column explains why there is no need for suspicion – only level-headed policy responses.
Sovereign wealth funds (SWFs) are government-controlled investment vehicles that are stimulating protectionist sentiments in some OECD countries. Their asset size (more than $3 billion) and their owners (governments) create fertile ground for conspiracy theories, such as fear of industrial espionage or geopolitical threats. The funds with assets higher than $100 billion are from oil-exporting countries and East Asia (Table 1).
Table 1. Sovereign wealth funds and saving
Development Financial markets
OECD, sovereign wealth funds, investment vehicles, oil exporters
Culture, gender and growth
Denis Drechsler, Johannes P. Jütting 07 March 2008
Discrimination against women significantly hampers the economic development of many poor countries. This column introduces two new OECD Development Centre efforts to assess and reduce gender discrimination, including a new portal www.wikigender.org.
“Tradition is a guide and not a jailer”, wrote W. Somerset Maugham. Could it be that some traditions, however rooted in great histories and cultures, are now trapping countries in poverty? This certainly appears to be the case when it comes to the influence of social and cultural norms on the status of women.
gender equality, Discrimination, OECD, social institutions
Do temporary jobs improve workers long-term labour market performance?
Julia Lane, Harry J. Holzer , Fredrik Andersson 15 October 2007
Research has long shown that workers who take temp jobs subsequently do better in the labour market. New research from the US suggests that the positive effects seem mostly to occur because those working for temp agencies have a higher chance of subsequently working for higher-wage firms.
What are the long term labour market consequences of temporary help work? As the importance of temporary help work has increased across OECD countries, economists have started paying attention to this question.
unemployment, OECD, temporary work