Isabell Koske

THE DRIVERS OF LABOR INCOME INEQUALITY — A LITERATURE REVIEW

Despite a general trend of increasing labor income inequality, there have been differences in the timing, intensity and even direction of these changes across OECD countries. These stylized facts have led to numerous studies about the main determinants of labor income inequality and, as a result, a significant revision of the previous consensus about the key drivers. The most researched channels include skill-biased technological change, international trade, immigration, education as well as the role of labor market policies and institutions.

Improving the Functioning of the Slovenian Labour Market

Labour market outcomes have improved markedly in the past years as the beneficial effects of the economic upswing were reinforced by important structural reforms.With the economy on the verge of a severe economic downturn, it is important to avoid alleviating measures that adversely affect the functioning of the labour market in the long run. Moreover, several structural challenges remain which require further reform efforts. Firstly, to raise labour force participation of the elderly the pension system needs to be reformed by removing incentives for early retirement and facilitating gradual exits from the labour force. Secondly, to increase employment rates of younger age cohorts, the length of tertiary studies needs to be reduced by strengthening incentives for rapid graduation. Moreover, potential negative employment effects associated with the relatively high minimum wage compared to the average wage should be avoided. Thirdly, to combat increasing labour market dualism, employment protection legislation on regular work contracts needs to be eased once the current economic crisis subsides and the preferential treatment of student work should be phased out. This Working Paper relates to the 2009 OECD Economic Survey of the Slovenia (www.oecd.org/eco/surveys/slovenia). Ameliorer le fonctionnement du marche de travail de la Slovenie La situation du marche du travail s’est nettement amelioree ces dernieres annees, sous l’effet cumule du redressement economique et d’importantes reformes structurelles. Face a la menace imminente d’un ralentissement economique grave, il est essentiel d’eviter toute mesure de soutien qui pourrait nuire au bon fonctionnement du marche du travail a terme. Des efforts restent en outre a fournir en matiere de reformes pour remedier a certaines difficultes structurelles. Tout d’abord, le regime de retraite doit etre remanie afin d’ameliorer le taux d’activite des travailleurs âges, en eliminant les incitations a la retraite anticipee et en facilitant la sortie progressive de la population active. Ensuite, pour stimuler l’emploi des jeunes, il faut reduire la duree des etudes superieures, en renforcant les mesures d’incitation a l’obtention rapide des diplomes, et eviter par ailleurs les effets potentiellement negatifs sur l’emploi du niveau relativement eleve du salaire minimum. Enfin, pour lutter contre le dualisme croissant du marche du travail, on devra assouplir la legislation sur la protection de l’emploi pour les contrats de travail reguliers une fois la crise economique dissipee, et il convient aussi de supprimer progressivement le traitement preferentiel applique a l’emploi des etudiants. Ce Document de travail se rapporte a l’Etude economique de l’OCDE de la Slovenie 2009 (www.oecd.org/eco/etudes/slovenie).

The drivers of labour income inequality -- an analysis based on Bayesian Model Averaging

Many Organisation for Economic Co-operation and Development (OECD) countries have seen income inequality rising over the past decade, which has led to a renewed interest among researchers and policy makers in understanding the causes of income inequality. To shed light on this issue, this article investigates the determinants of labour income inequality for a sample of 22 OECD countries. As model uncertainty is likely to be a major issue in such an underpinning, the empirical analysis relies on a Bayesian Model Averaging (BMA) technique. The results suggest that in particular labour, education and tax policies have an important influence on the distribution of labour income.

Achieving Fiscal Flexibility and Safeguarding Sustainability

Euro area entry calls for more fiscal flexibility to absorb cyclical shocks that cannot be dealt with by the common monetary policy. At the same time fiscal consolidation must not be put at risk, especially given rising ageing related costs. The current fiscal framework could be improved by introducing multi-year expenditure ceilings and by removing pro-cyclical elements in fiscal rules. An adjustment account that serves to register breaches of fiscal rules and eliminates them over time could help in coping with projection errors. To ensure long-term sustainability of public finances it is essential not to dilute the substantial improvements in the long-term balance of the definedbenefit pillar associated with past pension reforms. The government should consider making participation in the defined contribution pillar mandatory for new labour market entrants or, at the very least, make it the default option. For current workers the pillars should remain closed. Moreover, further parametric changes such as increasing the retirement age in line with life expectancy gains and reducing unsustainable elements in the pension formula would improve the balance of the defined benefit pillar.