Should I stay or should I go? residential

Should I stay or should I go?
Housing    and   residential
mobility      across     OECD
countries
by Orsetta Causa and Jacob Pichelmann

Promoting residential mobility is not an end in itself, still
it is an important policy challenge, especially in countries
with large spatial disparities and labour market skills
mismatches. Policies that remove disincentives to move are
likely to bring efficiency and equity gains by lifting
productivity growth and social mobility. Residential mobility
is one way to encourage labour market adjustment and
reallocation to encourage a smooth recovery from the Covid-19
crisis.

Recent work by Causa and Pichelmann (2020) presents new
evidence on housing and residential mobility across OECD
countries and on the role of individual factors and policies,
in particular housing policies, in enhancing or hampering
mobility. The evidence strongly supports the view that housing
conditions and structural policies influence people’s
decisions and possibilities to move.

To set the scene, there is a strong negative association
between countries’ homeownership rates and their mobility
rates, confirming previous evidence in this area. Mobility is
particularly low in Eastern European countries exhibiting very
high homeownership rates for historical reasons and also in
large Southern European countries (e.g. Italy and Spain). The
negative cross-country association between homeownership and
residential mobility arises because across all countries,
homeowners, whether outright owners or owners paying back

mortgage debt, are much less mobile than renters, controlling
for an extensive array of individual and household drivers of
mobility.

By influencing mobility, the housing market can give rise to
externalities, in particular on the labour market. The
implication is that housing conditions and policies that
magnify the cost of moving are likely to affect economic
efficiency and equality of opportunities. Analyzing the policy
drivers of residential mobility yields the following findings:

     A more responsive housing supply is associated with
     higher residential mobility. Reducing policy-driven
     barriers in this area, for example reforming poorly
     designed land-use and planning policies, may facilitate
     moving by reducing house price differences across
     locations.
     Stricter rental regulations are associated with lower
     residential mobility, particularly for low-educated and
     low-income households. Rental regulations need to strike
     a balance between tenants’ and landlords’ interests,
     create security of tenure and encourage the supply of
     rental housing for all socio-economic groups.

Social cash and in-kind spending on housing are
positively correlated with residential mobility. While
housing allowances are in principle more favorable to
mobility than direct provision of social housing, the
latter can be designed to avoid lock-in effects, for
example, by waiving residency or queuing requirements in
the case of unemployed workers taking up a job in the
region.
Higher transaction costs in buying and selling a home,
in particular from transfer taxes and notary fees, are
associated with lower residential mobility, especially
among younger households, which are more likely to be
first time-buyers.
Tax reforms shifting housing taxation from non-recurrent
(e.g. transfer) to recurrent taxes would help reducing
barriers to mobility, on top of making the tax system
more efficient with positive aggregate growth effects.
Beyond housing policies, more generous cash income
support to low-wage jobseekers and minimum income
schemes embedded in social transfers are positively
associated with residential mobility. By contrast,
excessive job protection on regular contracts is
negatively associated with mobility, particularly for
youth, low-income and low-educated individuals. This
suggests that shifting protection from jobs to
individuals coupled with job counselling and training
may help removing barriers to mobility.

This study highlights the importance of removing policy-driven
obstacles to mobility and offers insights enabling policy
makers to balance between encouraging people to move from less
to more productive areas and avoiding the emergence of left-
behind areas. It poses the question whether tax-favoring of
owner-occupied housing is in need of rethinking and makes a
case for reducing tax-driven barriers to mobility, such as
housing transfer takes, while taking resilience implications
into consideration. The findings underline the importance of
housing-related policies that support affordability,
especially for households at the bottom of the distribution:
well-designed housing allowances and social housing, balanced
rental market regulations, and a responsive housing supply.

Further reading:

Causa, O. and J. Pichelmann (2020), “Should I stay or should I
go? Housing and residential mobility across OECD
countries”, OECD Economics Department Working Papers, No.
1626,                    OECD                    Publishing,
Paris, https://doi.org/10.1787/d91329c2-en

Tax      challenges      from
digitalisation: A global two-
pillar     solution     could
increase tax revenues and
support economic activity
By David Bradbury, Tibor Hanappi, Pierce O’Reilly, Ana Cinta
González Cabral (OECD Centre for Tax Policy and
Administration), Åsa Johansson, Stéphane Sorbe, Valentine
Millot, Sébastien Turban (OECD Economics Department)

The international corporate tax system faces growing
challenges. While the OECD/G20 Base Erosion and Profit
Shifting (BEPS) project represented an unprecedented
multilateral effort to tackle profit shifting, many questions
over the allocation of taxing rights remain unresolved.
Digitalisation and globalisation have highlighted certain
vulnerabilities in the existing framework, which allocates
taxing rights principally on the basis of physical presence.
In addition to this, some BEPS issues remain. In this context,
an increasing number of jurisdictions are taking uncoordinated
and unilateral actions (e.g. digital services taxes),
contributing to an increase in tax and trade disputes and
growing tax uncertainty.

The COVID-19 crisis is exacerbating these tensions by
accelerating the digitalisation of the economy and increasing
pressures on public finances. The fact that many firms have
benefitted from direct or indirect government support during
the crisis is also likely to intensify public dissatisfaction
with tax avoidance by multinational enterprises (MNEs).

Towards a global two-pillar solution
Against this backdrop, the OECD/G20 Inclusive Framework on
BEPS (Inclusive Framework), which brings together 137 member
jurisdictions, is discussing proposals for a consensus-based
reform of the international tax rules to address the tax
challenges arising from the digitalisation of the economy. The
proposals fall under two pillars, which are described in the
Pillar One and Pillar Two Blueprint reports released last week
(OECD, 2020a; OECD, 2020b). In their latest communiqué, G20
Finance Ministers confirmed that they remain committed to
further progress on both pillars and urged the Inclusive
Framework to address the remaining issues with a view to
reaching a global and consensus-based solution by mid-2021
(G20, 2020).

Pillar One seeks to adapt the international corporate tax
system to the digital age through significant changes to the
rules applicable to business profits to ensure that the
allocation of taxing rights on business profits is no longer
exclusively determined by reference to physical presence.

Pillar Two aims to address remaining BEPS challenges and is
designed to ensure that large internationally operating
businesses pay a minimum level of tax regardless of where they
are headquartered or the jurisdictions they operate in.

This blog post summarises the main findings of the Economic
Impact Assessment of the proposals carried out by the OECD
Secretariat (OECD, 2020c). This is an ‘ex ante’ assessment,
which relies on a number of illustrative assumptions on
proposal design and parameters, without prejudice to the final
decisions of the Inclusive Framework.

The proposals would increase global tax

revenues
Pillar One and Pillar Two could increase global corporate
income tax (CIT) revenues by about USD 50-80 billion per year.
Taking into account the combined effect of these reforms and
the US GILTI regime, the total effect could represent USD
60-100 billion per year or up to around 4% of global CIT
revenues.

     Pillar One would involve a significant change to the way
     taxing rights are allocated among jurisdictions, as
     taxing rights on about USD 100 billion of profit could
     be reallocated to market jurisdictions. This would lead
     to a modest increase in global tax revenues. On average,
     low, middle and high income economies would all benefit
     from revenue gains, while ‘investment hubs’ would tend
     to lose tax revenues.
     Pillar Two would yield a significant increase in CIT
     revenues and significantly reduce the incentives for
     MNEs to shift profits to low-tax jurisdictions, which
     would generate revenue gains in addition to the direct
     gains resulting from the implementation of the new
     rules.
     The combined revenue gains from the two pillars are
     estimated to be broadly similar – as a share of current
     CIT revenues – across low, middle and high income
     jurisdictions (Figure 1).

A consensus-based solution would support
investment and economic growth
A consensus-based multilateral solution involving Pillar One
and Pillar Two would lead to a more favourable environment for
investment and growth than would likely be the case in absence
of an agreement by the Inclusive Framework:

     The two pillars would lead to a relatively small
     increase in the average (post-tax) investment costs of
     MNEs (Hanappi and González Cabral, 2020). The ensuing
     negative effect on global investment is estimated to be
     very small, as the proposals would mostly affect highly
     profitable MNEs whose investment is less sensitive to
     taxes (Millot et al., 2020). Overall, the negative
     effect on global GDP stemming from the expected increase
     in tax revenues associated with the proposals is
     estimated to be less than 0.1% in the long term.
     In contrast, the absence of a consensus-based solution
     would likely lead to a proliferation of uncoordinated

and unilateral tax measures (e.g. digital services
     taxes) and an increase in damaging tax and trade
     disputes. This would undermine tax certainty and
     investment and also result in additional compliance and
     administration costs. The magnitude of the negative
     consequences would depend on the extent, design and
     scope of these unilateral measures, and the scale of any
     ensuing trade retaliation. In the “worst-case” scenario,
     these disputes could reduce global GDP by more than 1%
     (Figure 2).

The COVID-19 crisis has increased the
need for reform
The full impact of the COVID-19 crisis remains highly
uncertain at this stage, but a few likely implications for the
impact assessment of Pillar One and Pillar Two already stand
out:

     The COVID-19 crisis is likely to reduce the expected

revenue gains from the proposals at least in the short
     run as the crisis weighs on the profitability of many
     MNEs, even though some digital-intensive MNEs have
     managed to sustain or enhance their profitability since
     the beginning of the crisis.
     The crisis has accelerated the digitalisation of the
     economy, increasing the need to address the tax
     challenges arising from digitalisation.

References

G20 (2020), “Communiqué – G20 Finance Ministers & Central Bank
Governors                                          Meeting”,
https://g20.org/en/media/Documents/FMCBG%20Communiqu%C3%A9_Eng
lish_14October2020_700pm.pdf.

Hanappi, T. and A. González Cabral (2020), “The impact of the
pillar one and pillar two proposals on MNE’s investment costs
: An analysis using forward-looking effective tax rates”, OECD
Taxation Working Papers, No. 50, OECD Publishing, Paris,
https://dx.doi.org/10.1787/b0876dcf-en.

Millot, V. et al. (2020), “Corporate Taxation and Investment
of Multinational Firms: Evidence from Firm-Level Data”, OECD
Taxation Working Papers, No. 51, OECD Publishing, Paris,
https://dx.doi.org/10.1787/9c6f9f2e-en.

OECD (2020a), Tax Challenges Arising from Digitalisation –
Report on Pillar One Blueprint: Inclusive Framework on BEPS,
OECD/G20 Base Erosion and Profit Shifting Project, OECD
Publishing, Paris, https://dx.doi.org/10.1787/beba0634-en.

OECD (2020b), Tax Challenges Arising from Digitalisation –
Report on Pillar Two Blueprint: Inclusive Framework on BEPS,
OECD/G20 Base Erosion and Profit Shifting Project, OECD
Publishing, Paris, https://dx.doi.org/10.1787/abb4c3d1-en.

OECD (2020c), Tax Challenges Arising from Digitalisation –
Economic Impact Assessment: Inclusive Framework on BEPS,

OECD/G20 Base Erosion and Profit Shifting Project, OECD
Publishing, Paris, https://dx.doi.org/10.1787/0e3cc2d4-en.

Navigating the United Kingdom
towards fairer weather
By Annabelle Mourougane, Trade and Agriculture Directorate

The United Kingdom is sailing through troubled waters. Like
other economies, the country is experiencing one of the most
severe downturns in decades since the outbreak of the COVID-19
crisis. In addition, it has to manage its exit from the
European Union, following almost 50 years of deep integration,
and address its long-standing productivity gap. The country is
at a critical juncture. Decisions made now about management of
the COVID-19 crisis and future trade relationships will have a
lasting impact on the country’s economic trajectory for the
years to come. The latest OECD Economic Survey of the United
Kindgom investigates these three inter-related issues in depth
and puts forward recommendations to steer towards fairer
weather.

Moving from emergency to a new phase of targeted support is
essential to chart a course to a sustainable recovery. The
United Kingdom has been hit hard by the COVID-19 crisis.
Policy reaction to limit long-term scarring of the economy has
been massive. A large majority of firms applied to the
Coronavirus Job Retention Scheme. Since July, the Government
has moved to a new phase of support by phasing out some
emergency measures, and extending and introducing others,
including programmes to help people get back to work.

A key challenge will be ensuring that people in activities
that are lastingly impacted by the COVID-19 crisis are able to
move to new activities and do not become detached from the
labour market. It will be important to ensure support remains
available as needed given epidemiological and economic
developments, and to consider introducing more targeted
measures. Further increasing active labour market spending to
support displaced and low-skilled workers will also help to
get people back to work in good-quality jobs and to support
low-income households. The crisis also provides an opportunity
to move toward a greener economy and to meet the UK’s
ambitious target of zero net emissions by 2050 by investments
that will help to lower emissions in the transport sectors.

A smooth exit from the EU Single Market and Customs Union and
maintaining close trade relationships with the UK’s largest
trading partners will be essential to maintain on course
toward a sustainable recovery. Estimates from the OECD METRO
model suggest that the trade impact of entering a Free Trade
Agreement with the European Union with zero tariffs and
without quotas would be much less costly than an exit without
a deal (Arriola et al., 2020). Firms will nevertheless have to
adapt to new trading relations and the overall output loss
could amount to 3.5% in the medium term compared to the
present situation. About two-thirds of the cost would come
from rising trade costs on goods and the remaining third stems
from rising regulations on services. Keeping low barriers to

trade and investment vis-à-vis EU and non EU countries and
seeking high market access for services, including financial
services, would help key sectors to continue to flourish.

Fostering productivity in the service sector is key to
ensuring recovery and sustained growth. Productivity growth in
the United Kingdom has consistently underperformed relative to
expectations and has been disappointed more than in most other
OECD economies since at least the global financial crisis
(Figure 1). Sluggish productivity growth in the service
sectors was the main factor behind this weak performance.
Raising productivity will help to sustain employment and
wages, but there is no silver-bullet: it will require a broad
range of policies.

Data: https://stat.link/3vd4tl
Keeping low barriers to trade and competition will create a
supportive environment for strong productivity performance for
the UK service sectors. Prioritising digital infrastructure in
the allocation of the planned increase in public investment
would bring large productivity dividends. Further increasing
public spending on training to develop the digital skills of
low-qualified workers, who have been particularly affected by
the COVID-19 crisis, will be a double-dividend policy,

boosting productivity and lowering inequality.

Navigating through the current waves will be challenging, but
there, policy can steer a course to a fairer, greener and more
resilient economy.

References

OECD (2020), OECD Economic Surveys: United Kingdom 2020, OECD
Publishing, Paris, https://doi.org/10.1787/2f684241-en.

Arriola, C., S. Benz, A. Mourougane and F. Van Tongeren
(forthcoming), “The Trade Impact of the UK’s Leaving the EU
Single Market”, OECD Economics Department Working Papers, OECD
Publishing, Paris.

Five   priorities to  help
rejuvenate Greece’s labour
market after the COVID-19
crisis
by Tim Bulman, Greece Desk, OECD Economics Department

Across the globe, the COVID-19 crisis has hit workers with
temporary contracts and those working in tourism and consumer-
related services particularly hard. These groups make up large
shares of Greece’s workforce, and tourism’s strong growth in
recent years.

Greece’s government is currently planning how the European
Recovery and Resilience Facility will help overcome the
COVID-19 shock and move the economy to a path of sustained and

stronger growth. To support Greece’s workers through the
COVID-19 crisis and to set the labour force for a stronger
recovery, the OECD’s new Working Paper on ‘Rejuvenating
Greece’s labour market to generate more and higher-quality
jobs’ highlights five policy priorities:

1. Strengthen the social safety net’s protection for low-
income households (Figure 1). Reforms to Greece’s social
protection in recent years helped reduce poverty prior to the
COVID-19 crisis but important coverage gaps remain. Further
raising the value of Guaranteed Minimum Income transfers while
tapering transfers to ensure that work pays would help protect
households from income losses. Responsive and efficient
administrative processes are vital for vulnerable households
to access this support when they need it.

2. Better support caregivers. Around the world, the COVID-19
crisis has disrupted schools and workplaces, and added to the
pressures on family caregivers. In Greece, comparatively few
young children are enrolled in early childhood education and
care, while support to care for elderly relatives is limited.
This can make the barriers to working or to engaging in adult
education and training insurmountable (Figure 2), contributing

to low employment rates among women in Greece.

3. Improve access to active labour market policies for job
search, training and work experience. This will improve
employment prospects and help employers find the skills they
need (Figure 3). Greece has been boosting the capacity of its
public employment services, but they play a smaller role in
Greece’s labour market than in other OECD countries and suffer
a legacy of under investment. Leveraging private sector
providers to complement the public employment services would
allow Greece to swiftly boost its capacity to support
jobseekers to find lasting jobs.

4. Dramatically expand access to adult education and
reskilling programmes. This would help prepare Greece’s
workers for new career opportunities, and ensure workers are
ready for the coming opportunities and disruption from
digitalisation. Historically, participation in lifelong
learning has been low in Greece, and much of the workforce’s
skills need upgrading to employers’ modern needs. Deep
downturns such as the COVID-19 crisis are the best time to
invest in adult education. Greece can do this by financing
access to courses, encouraging universities to provide courses
for adults that develop professional skills, and by certifying
the quality and contents of private providers’ courses.

5. Reducing social contribution rates while aligning effective
income tax rates across different employment types would
reduce both the cost of employing workers and the incentives
to work semi-formally. Greece’s high labour income tax and
social contribution wedge create high employment costs and
reduce the return from working. The government is cutting some
tax and social contribution rates. Large differences in tax
rates depending on the legal form of employment can encourage

self-employment. The self-employed are generally less
productive and more at risk from income shocks, such as the
shock from the COVID-19 crisis. Aligning tax rates across
employment types would reduce the incentive to be self-
employed. It would boost the tax base, and so support
revenues.

The Working Paper discusses how Greece can pursue these
priorities. The Paper accompanies the 2020 Economic Survey of
Greece , launched in July 2020. The Survey estimated that
pursuing these priorities would boost incomes by 5% by 2030
and by more over the following years. Along with other reforms
outlined in the Survey, these five priorities can contribute
to Greece reversing the COVID-19 shock and moving to stronger
and sustained recovery.

For more details see:

Bulman, T. (2020), “Rejuvenating Greece’s labour market to
generate more and higher-quality jobs”, OECD Economics
Department Working Papers, No. 1622, OECD        Publishing,
Paris, https://doi.org/10.1787/8ea5033a-en.

2020 OECD Economic Survey of Greece

Why are some U.S. cities
successful, while others are
not? Past lessons for the

post COVID-19 era
By Fozan Fareed, Patrick Lenain and Douglas Sutherland1

The COVID-19 pandemic has triggered severe recessions around
the world. Beyond this short-term impact, long-lasting changes
are also likely to happen. After past shocks, such as the
global financial crisis, some industries have remained
depressed for a long time, while others got back on their feet
and returned to growth quickly, as shown by the evidence from
the United States. Similarly, past shocks have hit large
cities: some have been quick to recover, but others have
struggled for many years, with severe social consequences.
Drawing lessons from past shocks is useful as cities plan
their own recovery from the pandemic — see also OECD (2020a).

Our research investigated why some cities have adapted to
shocks, while others have struggled (Azzopardi et al.,
forthcoming). We built a dataset covering the 372 metropolitan
areas and took advantage of the new Job-to-Job flow statistics
compiled by the U.S. Census Bureau, which tracks all job
                                             2
moves. We used a machine-learning algorithm to classify the
metropolitan areas in statistically distinct clusters.
Preliminary results were included in the 2020 OECD Economic
Survey of the United States.

Four categories of cities were identified: booming areas (67),

prosperous mega metropolitan areas (99), resilient areas
(149), and distressed metropolitan areas (57). This
classification was obtained by focusing on indicators such as
the job-to-job mobility rate, unemployment rate, income
growth, population increase and GDP growth rate. The results
show that prosperous cities are predominantly located in the
West and the South of the United States (Figure 1). The main
features of their success have revolved around embracing
digital technologies, adopting local regulations friendly to
job mobility and business creation, avoiding strict rules on
land-use and housing market, and improving the wellbeing of

the city’s population 3 . These results highlight that cities
adopting well-targeted policies can accelerate the return to
growth after a shock.

     Booming metropolitan areas: These 67 metropolitan areas,
     home to about 7% of urban population, have enjoyed very
     fast growth of GDP per capita. They have often found
     success thanks to fast-growing industries, notably
     technology clusters – Midland, Austin, and Colorado

Springs are examples. Other cities have found prosperity
by becoming retirement destinations – most obviously
cities in Florida (The Villages, Pensacola area, Panama
City). They have become magnets for people looking for
good jobs, high quality of life and comparatively low
cost of living. For example, in 2017, about 305,000
workers were attracted by cities in Texas, many having
decided to leave California and Louisiana. About 260,000
workers left states such as Georgia and New York and
moved to Florida.

Prosperous mega metropolitan areas: This cluster is the
largest one: it includes 99 metropolitan areas and about
three quarters of the U.S. urban population resides
here. These are very large cities, with an average
population size of 2 million, which can take advantage
of agglomeration externalities. This category includes
some of the largest U.S. metropolitan areas such as New
York, Los Angeles, Chicago, Dallas, Houston, Washington
DC and Miami. They have stayed buoyant in the face of
shocks and have benefited from low unemployment rates,
average job mobility rate, and a high income per capita
as compared to other clusters. However, rising
inequality is a challenge here, and their future will
depend on improving housing affordability and
transportation.

Resilient metropolitan areas: 149 metropolitan areas are
part of this cluster and account for about 11% of the
urban population. This cluster is mainly composed of
relatively smaller areas such as Lewiston, ID-WA, Great
Falls, MT, Columbus, IN and Kokomo, IN. Neither booming
nor in distress, these areas are generally classified by
relatively low job mobility. However, they have a
comparatively higher income per capita growth rate, and
a number of these areas seem to be on an upward
trajectory. The average population size of this group is

the lowest among all clusters.

Distressed metropolitan areas: Home to 6% of the total
urban population, these 57 metropolitan areas are
characterized by a low job mobility rate, high
unemployment rate, and low GDP and income per capita
growth rates. This group includes many trailing cities
and old industrial areas. They can be found in North
Dakota (Bismarck), Illinois (Bloomington, Champaign-
Urbana) and Southern California (El Centro).
Metropolitan areas in central California are also in
this cluster. Many of these distressed cities are
located in states that are characterized by strict rules
on occupational licensing, which has been found in
recent OECD work as hindering labour mobility
(Hermansen, 2019) and productivity growth (Bambalaite,
Nicoletti and Rueden, 2020). In 2017, more than one-
quarter million job-to-job moves went out of California
to other states. The highest number of these jobs went
to Texas (about 33,000) followed by Arizona (about
25,000) and Washington (about 24,000). Another major
reason behind these moves seems to be the high cost of
living and the high housing prices in some of these
metropolitan areas.

Diverging trends between cities create social challenges
because new jobs are being created in places far away from the
places where old jobs are lost. Moving from job to job is
essential for workers to avoid spells of joblessness, remain
productive and benefit from higher earnings (Haltiwanger et
al., 2018; Hermansen, 2019). However, the U.S. population has
become less mobile: the share of the population moving each
year has fallen from around 20% in the 1970s to under 10% more
recently, with moves across state and metropolitan boundaries
or moves to look for work also having been reduced.

Therefore, in order to address the economic and social
challenges that the ongoing COVID-19 pandemic has brought to
the fore, cities need to act now to avoid long periods of
economic downturn. With drastic changes happening in the urban
ecosystem, it has become more important than ever to focus on
housing and land zoning rules, and other restrictions to
mobility, notably occupational licensing. With a major

reallocation coming up4, cities that address these regulatory
barriers would be in a better position to benefit from new
opportunities and attract businesses and talents looking for a
new home.

References:

Azzopardi, D., F. Fareed, P. Lenain, D. Sutherland
(forthcoming), “Why are some U.S. cities successful, while
others are not – New evidence from machine learning”, OECD
Economics Department Working Paper.

Bambalaite, I., G. Nicoletti and C. von Rueden (2020),
“Occupational entry regulations and their effects on
productivity in services: Firm-level evidence”, OECD Economics
Department Working Papers, No. 1605, OECD Publishing, Paris.

Barrero, J. M., Bloom, N., and Davis, S. J. (2020). “Covid-19
is also a reallocation shock”. National Bureau of Economic
Research Working Paper, No. w27137.

Haltiwanger, J., Hyatt, H., and McEntarfer, E. (2018). “Who
moves up the job ladder?”. Journal of Labor Economics, 36(S1),
301-336.

Hermansen, M. (2019). “Occupational licensing and job mobility
in the United States”. OECD Economics Department Working
Papers, No. 1585, OECD Publishing, Paris.

OCDE (2020a), “Cities Policy Responses”, COVID-19 notes on
policy responses.

OECD (2020b). “OECD Economic Surveys: United States 2020

Ensuring a strong, inclusive
and sustainable recovery from

the COVID-19 crisis in Israel
by Gabriel Machlica and Oliver Röhn, Economics Department

The coronavirus pandemic has interrupted Israel’s progress in
boosting standards of living. Before the pandemic, Israel
enjoyed strong employment growth and living standards had
risen close to the OECD average. To contain the spread of the
pandemic, the government reacted swiftly and introduced
stringent confinement measures in March and April. The
government and financial authorities deployed emergency
measures quickly to support households’ and firms’ incomes and
liquidity. After the economy had largely reopened, a second
outbreak has given way to a renewed lockdown in September
(Figure 1, Panel A).

As in other countries, high uncertainty and the containment
measures necessary to limit the spread of the virus have led
to a sharp drop in economic activity. The economy is projected
to decline by around 6% this year (Figure 1, Panel B). At the
height of the crisis, over a million employees were
temporarily laid off. Many have returned to work as the
economy reopened. However, the unemployment rate, broadly
defined to include workers on unpaid leave and workers who
have left the labour force due to the pandemic, remains high
at 11%. Moreover, the crisis threatens to aggravate Israel’s
long-standing challenges of high poverty and wide productivity
disparities between its vibrant high-tech sector and lagging
sheltered sectors.

The new OECD Economic Survey of Israel (2020) identifies
measures that can help Israel navigate this crisis. In the
short term, the government and financial authorities should
continue to provide fiscal, monetary and financial market
support to buttress the recovery, boost confidence and avoid
widespread bankruptcies. The government has expanded the
eligibility to unemployment benefits to workers on unpaid
leave and extended benefits until next year. This should be
complemented by stepping up active labour market policies,
such as retraining and job search support, to help workers
transition to new jobs with better prospects.

The Survey identifies priorities to put Israel on a stronger,
sustained and inclusive recovery. Introducing ambitious
reforms can improve the standard of living of the average
Israeli citizen by some 15% by 2050 and help to reduce the gap
in living standards vis-à-vis the upper half of the OECD
countries (Figure 2). These measures and reform areas include:

     Upgrading infrastructure. Israel’s core infrastructure
     stock is almost a third smaller than in other OECD
     countries. The availability and quality of public
     transport is also limited. Boosting public

infrastructure investment can lift productivity and
connect people to job opportunities.
Improving educational outcomes. The gaps in students’
outcomes between Arab-Israeli students and the rest of
the population are significant, amounting to 4 years of
schooling on average. Reducing gaps will require
improving pre-school education, recruiting high-quality
teachers, especially in the poor municipalities, and
reducing disparities in students’ outcomes between
different school streams.
Strengthening the fiscal framework for local
governments. Poorer municipalities lack resources to
finance adequate public services for their residents.
This calls for supporting poorer municipalities through
higher compensation from wealthier municipalities.
Merging municipalities and promoting regional clusters
can improve efficiency.
Supporting the poor. Employment among groups with
traditionally low labour market attachment has
significantly improved. However, the income received
from work was not enough to make a substantial dent in
poverty, which remains comparatively high. Further
expanding Israel’s earned income tax credit would
support the poor while maintaining strong incentives to
work.
Simplifying the tax system and reducing economic
distortions. The tax mix is reasonably growth- and
employment-friendly with a relatively low tax burden on
labour. Nevertheless, ample room exists to simplify the
tax system by abolishing inefficient tax expenditures
and broadening tax bases, which would support revenues.
The business and property tax system should be reviewed
to reduce distortions.
Improving environmental outcomes and reducing health
risks. Poor air quality remains a concern for the well-
being of Israelis. Introducing congestion charges would
reduce traffic flows and air pollution, and can provide

additional resources to boost the public transport
       infrastructure. Pricing fossil fuels according to their
       carbon content and other pollutants, while protecting
       the most vulnerable, would further lower carbon
       emissions, and make renewable energy generation more
       competitive.

References:

OECD   (2020),   OECD   Economic   Surveys:   Israel   2020,   OECD
Publishing,                                       Paris,
http://dx.doi.org/10.1787/eco_surveys-isr-2018-en.

Coronavirus:                        Living               with
Uncertainty
by Laurence Boone, OECD Chief Economist

The global economy is facing unprecedented uncertainty as the
evolution of the Covid-19 pandemic weighs heavily on the

economic outlook. Nine months after the initial outbreak in
Wuhan, it is still difficult to predict the path of the virus.
Each country has been hit in a different way, and response
strategies have varied. There is much we still do not know.
Research for a vaccine is ongoing across the globe, but more
needs to be done to prepare for mass-scale testing,
manufacturing and distribution that will be required. It seems
clear today that we will have to live with the virus for some
time, with our principal defence being tigher hygiene
standards and physical distancing measures.

Amid this unprecedented uncertainty, what we know is that the
world will be much poorer than it would have been without the
virus. If our central projection of a gradual recovery, after
the rebound, materialises, global income will be USD 7
trillion lower by the end of 2021 than what we projected less
than a year ago in November 2019. This is roughly equivalent
to losing a year’s production from France and Germany
combined.

The initial economic shock in the first part of 2020 was deep
and profound. In the wake of national confinements, the global
economy plunged 7.8% in the second quarter of this year, an
unprecedented drop in peace time. The decline would have been
harder had governments not put in place a wide safety net for
firms and individuals. As economies began to reopen,
activities that could operate with physical distancing
rebounded strongly. But it would be imprudent to infer from
this that the recovery is V-shaped and global income can
rapidly return to pre-crisis levels. In some industries a
rapid recovery will occur; those linked to digital activity
for example, but others will not be able to fully recover for
some time. Scheduled flights are still down around 50% on a
year ago in September. Entertainment and tourism have been
deeply affected. Overall, 13-20% of OECD employment is
threatened.

Because developments are so varied across countries and
uncertainty is so high, we have produced two scenarios around
our central projection. On the upside, if businesses and
households were to become more confident because a vaccine or
treatment is in sight or only mild containment measures were
required to contain virus outbreaks, world growth would be
stronger (figure). The loss of global output would be around
USD4 trillion by the end of 2021. On the downside, if
confidence remains weak because outbreaks were to intensify or
stricter containment measures were required, household
spending and business investment would weaken and the recovery
would slow, and the loss in output would be USD11 trillion.

Even if this crisis is strikingly different from others we
have experienced and uncertainty is extremely high, we have
seen that policy matters. In the confinement phase of the
Covid-19 crisis, policymakers worldwide used a rich policy
toolbox. These measures included short-term working schemes,
furloughed employment, credit or grants to firms and tax
holidays. This is pushing debt up by around 15 percentage
points of GDP across the OECD, but was necessary, and will
remain so for 2021. Central banks provided liquidity support,

and low rates kept debt interest payments at lower levels.

Policy will continue to play an important role in the next
phase of the crisis. We learnt from the aftermath of the
Global Financial Crisis that tightening fiscal policy
prematurely could impart a serious blow to an already weakened
economy. Fiscal support will have to continue. We also learnt
that policy can only temporarily prevent a rise in
bankruptcies and unemployment. Support to firms must evolve to
let non-viable firms go and encourage viable ones to grow.
Equity instruments could be deployed for large firms, with
state support, provided competition is preserved and a clear
strategy for exit designed. However, it will require more
creativity for SMEs, for example in the form of tax credits,
with repayments occuring when firms sustainably return to
profit.

Individuals in vulnerable sectors also need policy support.
For sectors where the shock is seen as temporary, short-term
working schemes may continue, with more flexibility to allow
people to take on new activity. For other sectors, existing
schemes to support individuals and firms need to be tailored
to avoid maintaining support to unviable jobs and firms that
blocks reallocation necessary for a strong and persistent
recovery. Training and job placement should be supported by
digital infrastructure and be tailor-made to individuals as a
norm. Policymakers need to make an extra-effort to be sure
support reaches those who need it most. Furthermore, the first
phase of the crisis has shown that barriers to trade can be
hugely disruptive for an efficient supply of goods and
services. International cooperation must resume to ensure
health goods and services can be delivered to all, but also
that trade barriers do not rise further putting some firms and
activities, and the associated jobs, at risk.

Looking further ahead, there is no way today to predict how
people will behave after 18 months of a pandemic, how they
will work and undertake leisure activities. We can sketch out

how some trends will accelerate though. First, there will be a
wider use of teleworking, although the limits of out-of-office
work must be taken into consideration. Second, we will see
more services move online and increased online retail sales.
Third, there will be greater demand, and need, for crisis
management preparation, including health, cybersecurity,
energy security and protection against natural disasters.
Fourth, as the crisis impacts more precarious workers, the
essential workers who cannot telework, those living in crowded
accomodation, those in poor health, public demand for greater
access to essential goods and services including public health
and education provision should prevail. Amid a background of
public disapproval with the evolution of inequality, policies
will need to improve on transparency, increasing competition
and reducing collusion, and finding the means for a more
efficient delivery of public services.

Policymakers have to aim higher than trying to restore our
pre-pandemic living standards: they need to deal with pre-
crisis trends that threaten our future and seize the
opportunity for change. It is an opportunity to implement
green recovery and a significant shift in the sustainability
of our economies. Governments are spending a lot of money in
the policy response to the pandemic, but not enough of this is
focused on sustainable solutions. Some countries are taking
measures, but the effort needs to be bolder. Still, over 50%
of policy support for energy in recovery packages is going to
‘brown’ fossil fuels. As recovery plans will be at the heart
of governments budget preparation for 2021, the opportunity to
reboot the economy on a stronger, fairer and more sustainable
footing should not be wasted.

Further reading:

OECD Interim Economic Outlook, 16 September, 2020

Coronavirus :                        Vivre          avec
l’incertitude
par Laurence Boone, Cheffe économiste de l’OCDE

L’économie mondiale fait face à des incertitudes sans
précédent. L’évolution de la pandémie pèse lourdement sur les
perspectives économiques. Neuf mois après son apparition à
Wuhan, la trajectoire de propagation du virus reste toujours
délicate à prévoir. Les pays ont été touchés de différentes
façons, et leur stratégie, en réaction, a varié. De nombreuses
inconnues demeurent. La recherche d’un vaccin est en cours
dans le monde entier, mais beaucoup reste à faire pour
préparer les opérations de dépistage de grande échelle, et la
large production et distribution du vaccin qui seront
nécessaires. Il semble clair aujourd’hui que nous devrons
vivre avec le virus pendant un certain temps, avec comme
principale défense des normes d’hygiène renforcées et de

mesures de distanciation physique à respecter.

Dans ce climat d’incertitude inédit, la seule chose que nous
sachions est que le monde se retrouvera beaucoup plus pauvre
qu’il ne l’aurait été en l’absence de virus. Si notre scénario
central d’une reprise graduelle, après la phase de rebond, se
réalise, le revenu mondial sera inférieur, à la fin de 2021,
de 7 000 milliards USD au niveau que nous avions estimé il y a
moins d’un an, en novembre 2019. Ce chiffre équivaut
globalement à une année de production de la France et de
l’Allemagne réunies.

Le choc initial sur l’économie au premier semestre de 2020 a
été rude. Dans le sillage des mesures de confinement
nationales, l’économie mondiale a plongé de 7.8 % au second
trimestre de cette année, une chute jamais vue en temps de
paix. La déclin aurait été plus prononcé encore si les
pouvoirs publics n’avaient pas déployé de larges filets de
sécurité pour protéger les entreprises et les personnes.
Lorsque les mesures de strict confinement ont pris fin, les
secteurs qui pouvaient fonctionner en appliquant des mesures
de distanciation physique ont rebondi énergiquement.
Toutefois, il serait imprudent d’en déduire que l’économie se
redressera en suivant une courbe en V et que le revenu mondial
pourra renouer bientôt avec ses niveaux d’avant la crise.
Certains secteurs se redresseront rapidement, notamment ceux
liés aux activités du numérique, mais d’autres auront besoin
de temps pour se rétablir totalement. Ainsi, le nombre de vols
prévus en septembre était encore inférieur de près de la
moitié à celui d’il y a un an. Les secteurs du divertissement
et du tourisme ont été profondément touchés. Au total, 13 % à
20 % des emplois sont menacés dans l’OCDE.

Face à des évolutions si diverses d’un pays à l’autre et à un
degré d’incertitude aussi élevé, nous avons choisi de produire
deux scénarios articulés autour de notre scénario de
référence. Selon le scénario favorable d’une révision à la
hausse par rapport aux prévisions, la croissance mondiale
serait plus forte (graphique) si la confiance des entreprises
et des ménages s’améliorait parce qu’un vaccin ou un
traitement serait en vue, ou si des mesures d’endiguement
plutôt légères suffisaient à circonscrire la propagation du
virus. La contraction de la production mondiale se situerait
alors autour de 4 000 milliards USD d’ici la fin de 2021. Dans
le scénario plus défavorable, les dépenses des ménages et
l’investissement des entreprises fléchiraient, la reprise
ralentirait et la perte de production s’établirait à
11 000 milliards USD si la confiance devait rester faible en
raison d’une intensification de l’épidémie, ou parce que des
mesures d’endiguement plus strictes s’imposeraient.

Même s’il est évident que cette crise est très différente
d’autres crises que nous avons connues et si les incertitudes
sont particulièrement fortes, nous avons pu observer que
l’action publique est importante. Pendant la phase de

confinement de la crise liée au COVID-19, les responsables de
l’action publique ont, partout dans le monde, mobilisé un
vaste arsenal de mesures. Parmi ces mesures, on peut citer les
dispositifs de chômage partiel, le chômage technique, les
prêts ou subventions aux entreprises ou encore les
exonérations fiscales temporaires. Ces mesures devraient
augmenter la dette de quelque 15 points de PIB dans la zone
OCDE, mais elles étaient nécessaires et le resteront en 2021.
Les banques centrales ont procédé à des apports de liquidités
et le faible niveau des taux d’intérêts a permis aux charges
d’intérêt de la dette de ne pas trop augmenter.

L’action publique continuera de jouer un rôle important au
cours de la prochaine phase de la crise. Nous avons appris des
suites de la crise financière mondiale qu’un resserrement
prématuré de la politique budgétaire pouvait mettre
sérieusement à mal une économie déjà affaiblie. Le soutien
budgétaire devra donc être poursuivi. Nous avons aussi appris
que l’action publique ne parvient que temporairement à
prévenir l’augmentation des faillites et du chômage. Le
soutien aux entreprises doit évoluer pour laisser disparaître
les entreprises non viables et encourager celles qui le sont à
se développer. Des instruments de fonds propres pourraient
être déployés pour les grandes entreprises, avec le soutien de
l’État, à condition que la concurrence soit préservée et
qu’une stratégie de sortie claire soit définie. Une plus
grande créativité sera toutefois nécessaire s’agissant des
PME, le soutien prenant par exemple la forme de crédits
d’impôt remboursables une fois que les entreprises auront
renoué durablement avec les bénéfices.

Les personnes se trouvant dans des secteurs vulnérables ont
aussi besoin du soutien de l’action publique. Dans les
secteurs où le choc est considéré comme temporaire, les
dispositifs de chômage partiel peuvent être maintenus, avec
une souplesse plus grande pour permettre à chacun de s’engager
dans une activité nouvelle. Dans les autres secteurs, les

mécanismes actuels d’aide aux personnes et aux entreprises
doivent être réajustés pour éviter de continuer à soutenir des
emplois et des entreprises non viables, bloquant ainsi la
réaffectation nécessaire à une reprise vigoureuse et durable.
Les actions de formation et de placement professionnel
devraient pouvoir s’appuyer sur une infrastructure numérique
et être systématiquement personnalisées. Les responsables de
l’action publique devraient renforcer leurs efforts pour
s’assurer que les dispositifs de soutien bénéficient
effectivement à ceux qui en ont le plus besoin. En outre, la
première phase de la crise a montré que les obstacles aux
échanges pouvaient très gravement perturber la fourniture des
biens et des services en nuisant à son efficacité. La
coopération internationale doit reprendre pour garantir que
des produits et services de santé pourront être mis à la
disposition de tous, mais aussi que les entraves au commerce
ne vont pas continuer d’augmenter, avec les risques que cela
fait peser sur certaines entreprises et activités, et sur les
emplois associés.

À un horizon plus lointain, il est impossible aujourd’hui de
prévoir comment les individus se comporteront après 18 mois de
pandémie, comment ils travailleront et quels seront leurs
loisirs. Toutefois, nous pouvons esquisser la manière dont
certaines tendances vont s’accélérer. Premièrement, le recours
au télétravail va se développer, même si les limites du
travail à distance doivent être prises en compte.
Deuxièmement, de plus en plus de services vont être proposés
en ligne et le commerce électronique va s’intensifier.
Troisièmement, on va voir augmenter la demande, et la
nécessité, d’une préparation à la gestion de crise, que cela
concerne la santé, la cybersécurité, la sécurité énergétique
ou la protection contre les catastrophes naturelles.
Quatrièmement, la demande citoyenne d’une augmentation de
l’offre de services publics de santé et d’éducation devrait
prendre de l’ampleur car la crise a touché en premier lieu les
travailleurs les plus précaires, les professions de première

ligne pour lesquelles le télétravail est impossible, ceux qui
vivent dans des logements trop étroits et ceux qui ne sont pas
en bonne santé. Dans un contexte de mécontentement du public
face à l’évolution des inégalités, les responsables des
politiques publiques devront progresser en matière de
transparence, favoriser la concurrence et réduire les
phénomènes de collusion, et trouver les moyens de rendre plus
efficiente la fourniture des services publics.

Les pouvoirs publics doivent viser plus haut qu’une simple
tentative de rétablissement de nos niveaux de vie d’avant la
pandémie : il est nécessaire qu’ils prennent plus largement en
compte les menaces qui, avant la crise, pesaient déjà sur
notre avenir et saisissent cette opportunité pour changer
l’action publique dans ces domaines. Nous avons la possibilité
d’engager une relance verte et d’opérer un basculement dans la
durabilité de nos économies. Les pouvoirs publics consacrent
énormément d’argent aux mesures destinées à faire face à la
pandémie, mais la part de cet argent consacrée à des solutions
durables n’est pas suffisante. Certains pays agissent, mais
les efforts doivent être plus audacieux. Dans les trains de
mesures en faveur de la reprise, plus de 50 % des aides
publiques à l’énergie concernent encore les combustibles
fossiles « bruns ».

Alors que les plans de relance vont être au cœur de la
préparation des budgets publics pour 2021, il ne faut pas
laisser échapper l’occasion de remettre l’économie sur une
trajectoire plus vigoureuse, plus juste et plus durable.

À lire:

Perspectives économiques de l’OCDE, Rapport intermédiaire,
Septembre 2020

Thomas Laubach – A world-
class economist and a dear
friend
by Laurence Boone, Vincent Koen and Patrick Lenain, OECD
Economics Department
Across the OECD, Thomas’ family and friends are in our
thoughts.

Photo source: “Der einflussreiche Deutsche im Hintergrund der
Fed”, Handelsblatt, 9 April 2018
Rarely does an economist have the opportunity to exert a
direct influence on policymaking and contribute to better
outcomes. Thomas Laubach did just that during his 23-year
tenure in the Federal Reserve system, where he rose to the key
position of Director of Monetary Affairs and directly advised
Chairwoman Janet Yellen and Chairman Jerome Powell. Known
worldwide for his innovative work on the natural rate of
interest – famously labelled “R-star” — he was also the author
and co-author of over twenty articles published in key
academic journals. His 2003 piece with John Williams,
“Measuring the natural rate of interest”, was quoted no less
than 1100 times (Google scholar) and his 1998 book with Ben
Bernanke, Frederic Mishkin and Adam Posen on “Inflation
targeting: lessons from international experience” received
almost 3000 quotations.

Thomas was also a close friend of the OECD. He spent two years
in the OECD Economics Department, in 2003-05, as part of a
long-standing programme where the Federal Reserve dispatches
one their promising researchers to Paris, with mutual benefits
for both institutions. There, he worked on two OECD countries
– the largest economy (United States) and the smallest one

(Iceland). Thomas was passionate about both, and his
intellectual contributions continued to resonate in Reykjavik
for many years. His unfailing kindness, collegiality and
equanimity, to borrow Jay Powell’s words, won him many good
friends in Paris. Back at the Fed, he remained involved with
the OECD, notably as a regular and key participant in working
groups, including the small but influential network of
“Monetary Experts”, which has been recognized as a key
platform to exchange views on the latest in monetary
economics. A loyal friend, he stayed in touch with many of his
former OECD colleagues.

Born in Germany in 1965, Thomas graduated from the University
of Bonn before embarking on one of his countless transatlantic
trips. At Princeton University, he started to work with then
Professor Ben Bernanke, who supervised his PhD in Economics,
which led to their investigation of the international
experience with inflation targeting. Thomas stayed close to
Ben Bernanke and their joint efforts eventually led to the
Federal Reserve adopting in 2012 a long-run inflation
objective of 2% as a new framework to anchor inflation
expectations. After a brief stint at the Federal Reserve
Branch of Kansas City, Thomas joined the Board of Governors in
Washington DC, where he published his important work on the
natural rate of interest.

The idea of a neutral interest rate was already present in
John Taylor’s monetary policy rule as the interest rate that
should prevail when the economy is operating at potential with
stable inflation. However, there was no consensus on how to
estimate it. Together with John Williams, now President of the
New York Fed, Thomas elaborated a methodology to estimate a
time-varying natural rate of interest, depending on the trend
growth rate of output. It used the Kalman filter to jointly
estimate the natural rate of interest, potential output, and
trend growth. The Laubach-Williams model (“LW R-star”) found
the estimated natural rate of interest to have varied