Don’t supply chains: responsible business conduct in agriculture

You've read the book, now buy the banana
You’ve read the book, now buy the banana

Two questions today: which fictional character helped bring down a colonial empire and gave his name to a food label? If you’re Dutch, you probably know the answer, if not, I’ll save you an Internet search by telling you: Max Havelaar, eponymous protagonist of Multatuli’s Max Havelaar, of de koffi-veilingen der Nederlandsche Handel-Maatschappy, translated into English as Max Havelaar: Or the Coffee Auctions of the Dutch Trading Company. In the middle of the nineteenth century, the Dutch government ordered farmers in its East Indies, modern-day Indonesia, to grow quotas of export crops rather than food. The Dutch also reformed the tax system, creating a public-private partnership that allowed tax commissioners to keep a share of what they collected. The result was the misery and starvation the book denounces. Max Havelaar helped change attitudes to colonial exploitation in the Netherlands and was even described as “The book that killed colonialism” by Indonesian novelist Pramoedya Ananta Toer in the New York Times Magazine.

The name Max Havelaar was adopted by the Dutch Fairtrade organisation and other European members of their network. The movement describes itself as “an alternative approach to conventional trade and is based on a partnership between producers and consumers. When farmers can sell on Fairtrade terms, it provides them with a better deal and improved terms of trade”. The movement has its critics. For instance in this article on Fairtrade coffee in the Stanford Social Innovation Review, Colleen Haight argues that “strict certification requirements are resulting in uneven economic advantages for coffee growers and lower quality coffee for consumers” and that while some small farmers may benefit, farm workers may not.

Which brings us to the second question: what’s that got to do with the OECD? We’re asking for comments on the draft FAO-OECD Guidance for Responsible Agricultural Supply Chains. Government, business and civil society representatives, international organisations, and the general public are invited to send comments by email to coralie dot david squiggly sign oecd dot org by 20 February 2015. I’d like to say that winning entries will receive a guinea, but they won’t. We will however publish a compilation on this web page from the OECD division in charge of the Guidelines for Multinational Enterprises (MNEs).

The world’s population is increasing and, human biology being what it is, so is the demand for food. Agriculture is expected to attract more investment, especially in developing countries, and human nature being what it is, some rascals may be tempted not to trade fairly. Or as the call for comments puts it: “Enterprises operating along agricultural supply chains may be confronted with ethical dilemmas and face challenges in observing internationally agreed principles of responsible business conduct, notably in countries with weak governance and insecure land rights.”

Apart from the OECD MNE Guidelines, the guidance considers half a dozen other sets of standards and principles from the FAO, UN, and International Labour Organization among others, designed to encourage “responsible business conduct”. Intended users include everybody from farmers to financiers, in fact the whole supply chain from seed sellers to grocers. The guidance as it stands today was developed by an Advisory Group with members from OECD and non-OECD countries, institutional investors, agri-food companies, farmers’ organisations, and civil society organisations.

The aim is not to create new standards, but to help enterprises respect standards that already exist “by referring to them in order to undertake risk-based due diligence”. Some unfamiliar language/jargon/special terminology is inevitable in a document like this, but the authors of the guidance have taken care to explain it all. “Due diligence” here refers to the process through which “enterprises can identify, assess, mitigate, prevent, and account for how they address, the actual and potential adverse impacts of their activities” (and those of their business partners).

The draft proposes a five-step framework for risk-based due diligence, covering management systems, identifying risks, responding to them, auditing due diligence, and reporting on due diligence. Some of the concrete proposals will provoke little or no discussion I imagine, such as “respect human rights”. On the other hand, “promote the security of employment”  is likely to see a frank and open exchange of views. (The 2013 OECD Employment Outlook has a chapter on enhancing flexibility in labour markets.)

The human rights and labour sections could apply to any sector of the economy, as could most of the proposals on governance (we’re against corruption) and innovation (we’re for appropriate technologies), but there are a number of proposals targeting agriculture in particular, for example “promoting good agricultural practices, including to maintain or improve soil fertility and avoid soil erosion”. Again, some of the draft focusing on agriculture is uncontroversial (respect legitimate rights over natural resources), but I can’t imagine owners of factory farms agreeing to grant animals “the freedom to express normal patterns of behaviour”.

I’m sure you’ll find plenty to agree or disagree with, so let us know and we’ll rid the agricultural supply chain of, as Multatuli would say, all the “miserable spawn of dirty covetousness and blasphemous hypocrisy”.

Useful links

The OECD Cleangovbiz Initiative “supports governments to reinforce their fight against corruption and engage with civil society and the private sector to promote real change towards integrity”.

OECD Integrity Week, 23-26 March, brings together stakeholders from government, academia, business, trade and civil society to engage in dialogue on policy, best practices, and recent developments in the fields of integrity and anti-corruption.

OECD work on agriculture

Find, compare and share OECD data

Sunday Post
Data suggest they’re not Greek

Scottish newspaper The Sunday Post (“A thoroughly decent read”) built its fortune on a mixture of gratitude for heart-warming behaviour; outrage at things that should or should not be happening in this day and age; cartoon strips featuring happy families; editorials that denounced absolute disgraces; and reader services that catered to two main groups. First, clueless shoppers in Kirkcaldy, asking for: “A Kirkcaldy stockist of men’s coats, please.” (“Wright’s Coats on High Street should have what you’re looking for, Mr. B”) And people who spent their time starting fights: “To settle an argument, which has the bigger population, Kirkcaldy or Tokyo?” (“Tokyo, but it’s hard to find a reasonably-priced coat”.)

Thanks to the Internet, finding a shop that sells coats is now a lot easier than it used to be, but it’s an absolute disgrace that in this day and age the same still isn’t true for information on other subjects that are nearly as important to many people, such as GDP or employment. So thank goodness for the new OECD Data Portal. Its 500+ free databases provide quick, easy access to information on all the topics, for OECD and a number of non-OECD countries too. The data are divided into twelve themes (agriculture, education, innovation and technology, and so on).

When you click on the catalogue, the default listing is by relevance. The most intriguing, for me anyway, was the second dataset: Energy prices in national currency per toe. But I was disappointed to discover it’s nothing to do with your frostbitten tootsies dropping off because you can’t afford heating. It turns out that “toe” here means “tonnes of oil equivalent”. It’s a standardised measure used by energy economists based on the energy released by burning a tonne of crude oil – 11.63 MWh in these tables. The toe is a practical way to compare prices and consumption, given the large variations in types of energies used even within a single country.

Take Greece for instance. On Saturday, a BBC reporter described how the smell of wood smoke was now characteristic of Athens since so many people couldn’t afford central heating anymore. A toe of electricity costs Greek households 1895 euros, more than France (1693), but less than Germany (3395). Average household disposable income in 2012 (last year for which comparable data are available) was the equivalent of $33,406 in Germany, $30,811 in France and $19,224 in Greece. Despite the crisis, France and Germany have seen rises in average income, but it’s fallen in Greece ($23,682 in 2008).

The OECD Data Portal has a useful feature called “pinboard” that allows you to collect a number of different data sets and present them together. To stick with Greece, here are a few of the things voters are asking the new Syriza-led government to change:

You can also compare groups of countries for the 518 indicators provided and share your results via the pinboard in various formats. Here for instance is a map giving the share of corporate tax in total tax, showing that it’s much lower in rance than in the US for isntance.

Useful links

OECD work on Greece

What is quantitative easing?

Getting ready to print
Getting ready to print

In this morning’s blog post, Brian Keeley mentioned quantitative easing (QE) as one way governments can stimulate the economy, and (in an unrelated move) the European Central Bank has just announced it is launching a QE initiative amounting to 60 billion euros a month until September 2016. But what is quantitative easing?

First we have to understand the role of interest rates, the main weapon in central banks’ armouries. The rate set by a central bank is soon followed by other banks, thereby influencing the “price of money” – how much you have to repay on a loan, how much the bank will pay you for your savings and how much the government will pay to borrow money.

Central banks set different rates, depending on the type and length of the loan. In general, the shorter the payback period, the higher the rate. The rate most often referred to as “interest rates” is the so-called base rate or prime rate used to calculate the other interest rates.

As Brian said, central banks use interest rates for two main reasons. First, rates may be raised to “cool” the economy when there are fears about inflation. The idea is that by making credit more expensive, demand will be restrained and prices will not rise so quickly. Second, when economic growth is too slow, a cut in interest rates makes it cheaper to borrow money to purchase goods or to invest in a business, thereby stimulating growth.

In April 2009, the average interest rate set by the central banks of the Group of Seven nations fell to 0.5% and has been hovering around this level since. What happens when money is so cheap it can’t get any cheaper? In other words, what can governments do when interest rates can no longer be cut because they are so low already?

Quantitative easing is one possibility. The central bank injects money into the economy by buying certain financial products, notably government bonds (also known as gilts). The sellers are expected to use the money to lend to businesses and households or to invest (although they may just leave it in bank deposits or send it offshore). The US Federal Reserve applied quantitative easing during the banking crisis that followed the 1929 Wall Street Crash, and the Bank of Japan adopted a similar approach to dealing with the crisis in the 1990s following the crash of the property market.

The media often present this as “the government printing money”. The reason is that instead of borrowing money in the usual way by issuing new bonds, the government, through the central bank, simply creates the money and uses it to pay the banks and other financial institutions it intends to help.

We’ve become so used to describing the crisis in terms of trillions of dollars that the ECB’s 60 billion euros a month, seem modest by comparison (and it is compared to the $3.7 trillion the Federal reserve spent buying bonds in the US QE programme). But to put that into perspective, in March 2009 when the Bank of England announced it was making available £75 billion to buy gilts and corporate debt as part of its QE strategy, that was one and a half times the total value of all banknotes and coins circulating in the UK at the time.

If quantitative easing succeeds in making government bonds more attractive, the interest paid on these bonds does not have to be as high as it was previously. As I write, that seems to be happening. The Financial Times’ latest headline is “Eurozone bonds on fire after ECB launches QE”, with the paper reporting drops to record lows in the interest rates on 10-year government bonds in Eurozone countries.

That’s good news for governments who have to borrow money and to finance the debt they have already accumulated. But it may not be good news for everybody, pensioners for instance. Pension funds are massive holders of government bonds, so a drop in the interest paid on them (the yield) translates directly into a loss of income to the funds. And since the pensions industry uses bond yields to calculate pension payments such as annuity income, pensioners will be affected. Company pension schemes could be affected too. The yield on government bonds is an important element in calculating the future liability of pension funds, and when yields fall, liability increases.

Useful links

OECD work on sovereign debt and financial stability

Stuck in a rut …

technique_to_cure_Qi_stagnation
Works for Qi stagnation

Few people can have been very surprised when the IMF announced this week that it was lowering its growth projections for this year. It feels like that’s been the story of the recovery in much of the OECD – a succession of disappointments and dashed hopes. Today, seven years after the financial crisis, growth remains well below where it was pre-crisis and unemployment well above.

All this begs a question: Is there something wrong with the economy? Some leading economists fear there is, and they’ve given it a name – “secular stagnation.” The expression was coined in the 1930s and famously revived in 2013 by Larry Summers, a former US Treasury Secretary. It may sound strange, but all it really means is “persistent stagnation.” Whatever you call it, it’s causing a lot of concern, including, no doubt, among the global movers and shakers at Davos this week.

What is persistent stagnation? As The Economist notes, it’s a “baggy concept” that’s hard to pin down. Still, there are a few ideas that crop up repeatedly. Most notable is the idea that it describes a period when interest rates can’t be pushed low enough to provide the economy with the stimulus that it needs.

To explain: In normal economic times, interest rates are among central banks’ most powerful weapons. When the economy’s overheating, central banks can raise rates, making it more expensive to borrow, which puts a brake on consumers and businesses; when the economy’s cooling, they can send rates back down to encourage consumers and businesses to borrow and invest more.

That weapon’s currently proving much less effective. Inflation is very low, as are real interest rates – in other words, the return on money once inflation is accounted for. Today, many economists believe the economy would need a real rate of interest well below zero in order to shift money out of what Martin Wolf calls the “global savings glut” and into productive investment. But because inflation is so low, that would require nominal (or advertised) interest rates to also go well below zero. And that, by general agreement, can’t happen.

Yes, it’s true that some national central banks, such as in Sweden and Denmark and, more recently, Switzerland, have experimented with negative nominal interest rates, as did the European Central Bank (ECB) in 2014. But the rates weren’t much below zero and usually didn’t apply to all the rates set by the bank. This “zero lower bound” limit on interest rates explains why central banks have sought other ways to boost the economy in recent years, most notably quantitative easing – a step the ECB is widely expected to follow this week.
So what’s causing this situation? There’s no shortage of theories, but broadly speaking a range of factors – often interrelated and self-sustaining – may be dragging down the economy, both in the short and longer term. Take unemployment: Despite some recent signs of improvement in the jobs market, joblessness remains worryingly high in many OECD countries. As time goes on, at least some of those without work risk seeing their skills become outdated, may lose the will to go on searching for work or may become unfairly stigmatised as “unemployable”. That robs the economy both of workers and of workers’ spending power.

Business investment is also an issue (albeit a complex one). In theory, the current low interest rates should make this an ideal time for businesses to borrow. In practice, this doesn’t seem to be happening, probably because of economic uncertainty and because many firms are already sitting on large stockpiles of cash.

There are longer-term drags on the economy, too, such as the slowdown in population growth and the ageing of our societies, which will leave a rising number of retirees dependent on a declining number of workers. And there’s widening inequality – as highlighted at Davos by Oxfam – which may play a role by reducing overall consumption, as Robert Peston notes: “The poor in aggregate spend more than the rich (there are only so many motor cars and yachts a billionaire can own, so much of the super-rich’s wealth sits idle, as it were).”

So, if interest rates won’t work to boost the economy, what will? An OECD paper released this week at Davos argues for a comprehensive stimulus package, especially in the euro area and Japan, where signs of stagnation are arguably strongest. It calls for action in four main areas: Encouraging investment by, for example, establishing public-private partnerships and reducing the incentives for firms to buy back shares; supporting SMEs and entrepreneurs; promoting trade by, for example, making customs procedures more efficient and liberalising the services sector; and raising employment by supporting job-seekers and encouraging women and older workers into the workforce.

Useful links

Escaping the Stagnation Trap: Policy Options for the Euro Area and Japan” (OECD, 2015).

Secular Stagnation: Evidence and Implications for Economic Policy,” by Łukasz Rawdanowicz, Romain Bouis, Kei-Ichiro Inaba and Ane Kathrine Christensen (OECD, 2014)

Infrastructure Versus Other Investments in the Global Economy and Stagnation Hypotheses:

What Do Company Data Tell Us?” by Adrian Blundell-Wignall and Caroline Roulet (OECD, 2014)

OECD Insights: From Crisis to Recovery (OECD, 2010)

An Atlas of the Sahara-Sahel: Geography, Economics and Security

Click to read online
Click to read online

Today’s post is by Laurent Bossard, Director of the Sahel and West Africa Club (SWAC) Secretariat. You can find the article in French here.

The attacks that took place in Paris on 7, 8 and 9 January are part of a global, complex, diffuse and multi-faceted threat of which the bloodiest zones of action are presently in the Middle East and Africa, including within the confines of the Maghreb and the Sahel. The emergence of Salafist Jihadism in this area dates back to the early 2000s. When the Salafist Group for Preaching and Combat (GSPC) moved further south and jihadists arrived from Afghanistan and Pakistan following the events of 11 September 2001, terrorist activities quickly merged with the trafficking of weapons, drugs, cigarettes and human beings.

The international community was slow to recognize the magnitude of the threat. The European Union developed a strategy for the Sahel in 2011, followed in 2013 by the United Nations and soon after by the African Union, the Economic Community of West African States and the Sahel G5 (Burkina Faso, Chad, Niger, Mali and Mauritania). The international community has thrown its support behind these initiatives which all share a long-term approach involving working simultaneously on the key areas of security, governance and development.

The Atlas of the Sahara-Sahel is intended to inform these strategies. The publication is the fruit of the Sahel and West Africa Club Forum, which took place in November 2013 in Abidjan. The Forum called into question the various “security and development” initiatives as well as their scale and level of consistency. The stakeholders in attendance embarked on a dialogue concerning the need to strengthen co‑operation among the regions of North, West and Central Africa.

The Atlas looks at the situation from the perspective of this macro-regional scale. The 250‑page publication, including some 150 maps and graphs, addresses security challenges in the Sahara-Sahelian area by considering the mobility of its territories and populations in conjunction with the socio-economic networks that connect them.

Given that the inhabitants are concentrated along roads and in towns (most people living in the Sahara-Sahel are urbanites), the Sahara-Sahel is neither empty nor immobile. The roads and towns form the framework of this area associated with mobile societies that are organised on the basis of social and trade networks more than ties to the state. The movement of people and goods within that framework — associated with nomadism, transhumance, trade and migration, but also with trafficking and violence — is the main focus of the Atlas.

Borders are superimposed onto these mobile areas that have long been and continue to be marked by the movement of such networks. Close to 17,000 km of boundary lines have been demarcated in recent history. While these lines are not obstacles to the movement of people, they are symbols of the strong political and institutional dividing lines between Morocco and Algeria, for example, but also between the geopolitical areas of the Maghreb and Sub-Saharan Africa.

Transnational trafficking organisations and terrorist groups, whose activities rely on a complex web of spatial, economic and social mobility, use the borders to exploit trans‑Saharan networks. This is a major challenge for stabilisation strategies.

Location of incidents by terrorist group 2003-2012. Click to see full size.
Location of incidents by terrorist group 2003-2012. Click to see full size.

The same can be said for the regional threats facing countries other than Mali. For example, Niger is “caught” between instability in Mali to the east, southern Libya to the northwest — an area rife with terrorists groups and where conflicts between Arab and Tubu tribes are commonplace — and Boko Haram to the south.

All of this is combined with forced migration and trafficking in heavy weapons and drugs. West Africa and the Maghreb are used as a convenient, low-risk transit area for traffickers: institutions’, police and justice budgets are small, and the potential for corruption is high due to the low salaries of civil servants and members of the security forces. The proceeds from trafficking activities also finance (at least in part) rebel or jihadist groups that are often mere links in global criminal networks operating on five continents.

That is why the countries concerned must work at the regional level if they wish to succeed, as most of the dangers that threaten them are expressed at that level.   It is also crucial that any analysis of the Sahara-Sahel be grounded in the reality of that area, namely, the fact that it is a territory shared by countries on both sides of the desert. The implication here is that strengthened co-operation on the part of the countries involved is indispensable. But such co‑operation must not be seen only through the prism of the urgent need for short-term stabilisation. The countries concerned should and must develop their complementarities in all domains. Sharing leads to interdependency which in turn results in a higher degree of motivation to jointly solve shared problems.

In addition to the need for trans-Saharan dialogue, there is an even greater need for international co‑operation and dialogue. A number of Sahel strategies have been developed since 2011. While this is a positive sign of the international community’s commitment, these efforts must be made on behalf of the affected populations and must tackle three challenges:

  1. The capacity for dialogue and the ability to propose concerted and joint implementation.
  2. The ability to adapt the geographical scale of the response to the area affected by terrorism and trafficking; for example, Nigeria and Libya are facing very critical situations but are not central to the existing strategies.
  3. The capacity to simultaneously implement security and development activities.

Useful links

Un Atlas du Sahara – Sahel : géographie, économie, insécurité (l’article de Laurent Bossard en français)

Les défis sécuritaires au Sahel Débat avec Laurent Bossard et Emmanuel Nkunzumwamsur Africa N°1

West African Futures 2013-14: The Sahara-Sahelian areas by SWAC

Data for the people

BLI Initiative

Today’s post is from the Australian Bureau of Statistics

The Australian Bureau of Statistics (ABS), like many other National Statistic Offices, is transforming its systems and processes to change the way we disseminate statistics. This transformation will deliver the first large scale Australian digital Census in 2016, increase efficiency, develop new solutions, and ensure the ABS provides a better evidence base for use by government and the community. We have a variety of users, with, broadly, the following needs:

  • Give me the detailed data, so I can analyse, re-use and combine it with other data, to help me make informed decisions.
  • What is the number, so I can quickly tell others about it?
  • Is there a good summary? I want to learn more about a subject or geographic areas.
  • Tell me an interesting, engaging or interactive story so I learn something new.

Through the transformation and by meeting the differing needs of these groups, the ABS aims to communicate information in a clear and understandable way that effectively supports users’ varying levels of statistical and technical skills, and make information available and accessible on an impartial basis, with supporting metadata and guidance.

One way we connected with our users and disseminated information was through the large-scale campaign undertaken for the 2011 Census. This campaign increased awareness and understanding of the Census to individuals, communities and the nation, and drove behaviour change from passive to active participation. The campaign also heavily targeted certain groups within the community.

Aside from the delivery of detailed Census 2011 data to meet the needs of “Give me the detailed data” and “Is there a good summary?” users, one focus was to meet needs of those with lower statistical literacy, the “Tell me an interesting or engaging story” users. With the release of Run That Town   and Spotlight 2.0 the ABS met that need by developing innovative tools and shifted from static to dynamic and interactive web content.

2014-07-31-Run-That-Town

Run That Town is a strategy game with a twist – it’s a resource management game with a strong emphasis on applying and highlighting 2011 Census data. The game uses real Census data but is not considered a dissemination tool, rather a communication and engagement tool. Run That Town was launched in April 2013 and around 75,000 people have downloaded the game from the App Store to date, maintaining a four out of five star rating via peer review. It has also received formal recognition from a number of prestigious Australian and international awards programmes for its creativity and innovation, as well as the effectiveness of government to engage with citizens.

The ultimate goal of the game is to become the most popular civic leader the selected town has ever seen. At the end of the game you are either “hailed as a hero” or “run out of town”. The game centres on town-building activities, where players complete projects to influence growth, direction and happiness of residents in their chosen postal area. The demographic data for each postal area used in the game is actual data from the 2011 Census. Players can also share their results on social media platforms such as Facebook and Twitter, which essentially drives the engagement with the Census. Run that Town also provides an experience to users that is tailored to the individual, incorporating them directly into the game, and helps the public to understand their role and contribution to Australia’s future through the participation in the Census.

Similarly, Spotlight is an online data visualisation that demonstrates how interesting and important Census information can be. Spotlight brings the raw data to life by placing it in contexts that are surprising and entertaining, for example how many kilos of flour you would need to bake a cake for the people that live in your area. This tool allows people to dynamically see and interpret Census Data in a way that relates specifically to them – when they were born, where they live, who they are – to again facilitate the understanding of the value of the Census. Like Run That Town, Spotlight has also been recognised through numerous Australian and international award programmes.

Together, Run That Town and Spotlight demonstrate the ABS’ ability to be innovative and provide experiences to our users that are engaging, dynamic and meaningful, placing us in a strong position in the changing world of dissemination and the transformation of our business. As well as the growing need to deliver content on mobile platforms, users now expect experiences that are engaging. Run that Town and Spotlight 2.0 allow users to easily gain valuable insights through interacting with Census data, with the view that the best way to understand the data is to use it.

These types of platforms are the foundation of a future where technology will play an increasingly critical role in the efficient and effective operations of governments and public services, but also as the next wave of citizen-centric, interactive communication channels. Tools such as Run that Town and Spotlight 2.0 are being considered for the 2016 Census and more broadly as part of a suite of dissemination approaches to ensure ABS meets the needs of all its users.

Useful links

Australian Census homepage

OECD Better Life Index

Is long-term earnings inequality growing? Evidence from German baby-boomers and their parents

Neither cohort looks too happy
Neither cohort looks too happy

Today’s post is by Giacomo Corneo of the Free University of Berlin, following a talk given in the OECD Directorate for Employment, Labour and Social Affairs Seminar Series in October 2014.

Modern welfare economics suggests that lifetime income is a main determinant of how well individuals fare in economic terms. However, most analyses of income inequality are based on yearly data that might be poorly correlated with lifetime incomes. Typically, these analyses include individuals of different age and educational attainment, whose incomes in a given year may be little representative of their long-term incomes. As sample composition changes over time, it is unclear whether the increase of inequality that is often found in cross-sectional analyses corresponds to a similar evolution of long-term inequality or is simply due to sample changes.

In a recent study, we pinned down the evolution of intra-cohort lifetime earnings inequality in Germany. Starting with the cohort born in 1935, we computed the distribution of lifelong earnings among employees who were born in a same year. Our analysis exploits a rich dataset of the German social security system that includes monthly information about earnings, employment status, sickness and other variables of interest for some 240,000 individuals. Based on this, we built a sample that covers about 80 % of the West German labor force in a typical year.

For the cohorts born between 1935 and 1952, we can compute for each individual his or her lifetime earnings, defined as discounted earnings received between age 17 and age 60. For these cohorts we can thus compare lifetime inequality to annual inequality using the Gini coefficient. We find that the distribution of lifetime earnings for these cohorts is rather compressed, with a Gini coefficient that is less than two thirds of the average value of the Gini coefficients of the distributions of yearly earnings. In other words, yearly earnings show far greater inequality than lifetime earnings. This big difference is caused by the mobility of the individuals in the distribution of yearly earnings during their life cycle – the fact that the same individual may rank low in the distribution of annual earnings in some years and rank high in others. Over a lifetime, the ups and downs offset each other to some extent and make the income distribution less unequal.

But how is lifetime inequality evolving over time? Is it increasing, similarly to what is happening in terms of annual inequality?

It is instructive to compare the lifetime inequality experienced by the baby-boomers – who in Germany were born in the 1960s – with their parents. The parents correspond to the oldest cohorts in our sample, while the baby-boomers are now entering their fifties, so that their lifetime earnings cannot be measured yet. In order to gauge the evolution of long-term inequality up to the baby-boomers, we generalized the concept of lifetime earnings to one of up-to-age-X earnings (UAX). These are defined as the present value of earnings received until some age X and discounted to the year when the individual turned age 17. Lifetime earnings are thus a special case of UAX for X equal to 60.

The figure below shows the Gini-coefficient of representative UAX distributions for all cohorts in our sample, the youngest being born in 1972. It shows an upward trend of lifetime inequality, with a secular rise from the cohorts born in the mid-1930s to those born in the early 1970s. (The figure refers to men; our findings for women are qualitatively similar, albeit less strong.)

Gini coefficients of UAX for cohorts 1935-1972, men only

gini

Source: Research Data Centre of the German Pension Insurance System (FDZ-RV), own calculations using weighted data.

In quantitative terms, the intergenerational change that we have detected is considerable. Take for instance the cohort born in 1935 (fathers) and the cohort born in 1963 (sons). The Gini-coefficient of the UA-45 distribution for the fathers equals almost 0.13. The Gini-coefficient of the UA-45 distribution for the sons equals 0.23. This implies a rise of inequality by 85 % and substituting the 1963 cohort with the 1972 cohort yields a rise of inequality by about 100 %. This marks a deep difference between the baby-boom generation and its parents.

Our rich dataset allows us to detect further striking intergenerational change in terms of labor-market outcomes. An important dimension of it relates to pay uncertainty – i.e. the extent to which employees of different cohorts could count on the labor market in order to achieve stable living standards. Statistically, pay uncertainty can be measured by the transitory variance of wages measured when the cohort was 40-years-old. The earnings histories of the baby-boomers and their fathers reveal that pay uncertainty has doubled from one generation to the next.

Another striking intergenerational mutation pertains to exclusion from the labor market. This can be captured by the fraction of a cohort that experienced more than twelve months of unemployment before reaching age 40. For those born in 1935, only 2.3 % of them experienced more than one year of unemployment before they turned 40. For the cohort born in 1963, 28.2 % had that experience. This means that in contrast to their fathers, a substantial fraction of the baby-boom cohort lacked a full integration in the labor market.

In sum, from one generation to the next, Germany has moved from having a rather homogeneous workforce to having a quite heterogeneous one. Compared to their parents, German baby-boomers are substantially more unequal in terms of long-term earnings, are subject to a much stronger pay uncertainty, and are considerably more likely to experience long spells of unemployment. Arguably, this intergenerational change has lowered the cohesion of the workforce and its members’ feeling of sharing a common fate – with potentially far-reaching social and political implications.

Useful links

Income inequality from a lifetime perspective, Giacomo Corneo, Freie Universität Berlin School of Business & Economics Discussion Paper, Economics, 2014/30

OECD work on income inequality and poverty

OECD Income distribution database

OECD Earnings database