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Is Economic Growth Good for the Bottom 40 Percent?

Mamta Murthi's picture
Also available in: Română

Lessons from the recent history of Central Europe and the Baltics

Economic growth has returned to Central Europe and the Baltics. With the exception of Slovenia, all countries are expected to see positive growth in 2014 - ranging from a tepid 0.8% in Croatia, to more respectable growth rates of 2.2% in Romania and 2.8% in Poland, to highs of 3-4.5% percent in the Baltic Republics. Europe, more broadly, is also turning the corner and is expected to grow at around 1.5%.

Amidst this much welcome growth, however, one question remains: will economic growth be good for the bottom 40 percent and can they expect to see their incomes grow?

By and large, yes. These European countries have a solid track record of ensuring that prosperity is shared – in the recent past the bottom 40 % have benefitted equally from income growth, in some cases like Romania even more than average (see Figure 1).  So, with the usual caveats that the past is no guide to the future, we can be reasonably confident of a fair amount of shared prosperity. Typically, this will be through job growth and growth in earnings.

What, then, can governments do to ensure that this sharing is as strong as possible?

In the short run, at least two things can be achieved. First, as the economies generate jobs, governments can assist those who need help securing one. We know that those in the bottom 40% tend to have higher unemployment rates than those higher up in the income distribution. New analysis undertaken by my colleagues, Ulrich Hoerning and Ramya Sundaram, shows that in Bulgaria the biggest group of unemployed consists of middle-aged, mid-skilled men, with work experience, living in rural areas (23%).  Other big groups are early retirees, mostly women 60-64 years of age (19%), stay-at-home mothers with a working partner (15%), and single young men not in education, employment, or training – known by the acronym NEETs (15%). While some of these groups can be expected to find jobs on their own, many can benefit from a helping hand.

Each group needs a different kind of assistance. The group of middle-aged, mid-skilled rural unemployed could benefit from assistance to find jobs and move to them, and possibly also from supplemental training.  With no work experience, the group of single male NEETs may need both training and placement services, especially to land their first job.  Stay-at-home mothers need support to find jobs but also assistance with childcare arrangements. Public employment services can be asked to provide more targeted assistance to different groups in place of the generalized assistance that is common practice.  In fact, the payoff from helping young labor market entrants get their first jobs can have a significant effect on shared prosperity not only in the short term, but also over the long term - as early labor market experiences often affect longer-term employability.

Second, governments need to think about the elderly poor.  In Central Europe and the Baltics anywhere from 10 -30 percent of the poor live in households where everyone in the household is 65 years or older. While some of the 65+ can and do work, many rely solely on pensions and other transfer payments as their main source of income. As governments continue to reduce budget deficits, they need to think carefully about where cuts in cash benefits should fall. Maintaining adequate benefit levels for the elderly at the lower end of the income distribution can go a long way towards sharing prosperity. The costs of such an approach can be paid for by restricting access to pensions at earlier ages – which can also serve to incentivize early retirees back to work.

In the long run, obviously much more needs to be done to maintain the track record of shared prosperity in these countries.  But that is the subject of another blog!