Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct
Digital technology depends on energy, and that energy depends on minerals. Take cobalt, for instance. Use of this ferromagnetic metal can be traced back to Ancient Egypt when it was used to taint ceramics. Today cobalt is an integral part of rechargeable lithium-ion batteries that go into smartphones, lap tops and electric vehicles. The market for rechargeable lithium-ion batteries is expected to more than double to USD 77 billion by 2024. Hence, for the “fourth industrial revolution” to succeed and to meet our important climate goals, we need cobalt–but at what cost?
Recent press reports decry children, sometimes as young as 5 years old, working in cobalt mining under terrible conditions in the Democratic Republic of the Congo (DRC). These mines operate outside legal frameworks, without formal social, health or worker protection.
If your company operates in this sector, whether making or using cobalt-dependent batteries, or the digital products they go into, and no matter where that cobalt enters in your supply chains, you cannot afford to take these press reports lightly. So, what can you do? The DRC produces more than 60% of the world’s cobalt. Of this, most comes from large scale industrial mines, but around 30% comes from illegal mines where there is a marked risk of child labour being used. Given the DRC’s huge market share, it is likely that some of its cobalt is present in your supply chain.
But how can you be sure? It is not easy. True, the OECD Guidelines for Multinational Enterprises call on companies to scrutinise their supply chains for human rights, labour, environmental and corruption impacts, but these supply chains are incredibly complex and long. How to know where the cobalt comes from? After all, the buyer of the Congolese cobalt affected by child labour, may in this case be a Chinese cobalt smelter, which would be several links up the supply chain and completely unknown to your firm: a sub-sub-sub-sub-supplier, if you like.
To be fair, the OECD’s due diligence standard acknowledges that companies on the end of long supply chains cannot realistically know the mine of origin for all the metals in their product, but they should at least try to identify the smelters. But even if you manage to identify this smelter, what can you do to reduce your risk?
There are several avenues to consider. You could join an industry association that, collectively, as the largest buyers of lithium batteries, has leverage over the cobalt smelters, pushing them to use international standards to source cobalt responsibly and prevent child labour; an example is the Responsible Cobalt Initiative. The industry association may reach out to government officials in China, for instance, to get their support in aligning the cobalt smelters with responsible international standards.
However, the main responsibility for due diligence regarding supply chains rests with your firm. The OECD can help, with a set of practical actions due to be published in 2017, which will explain in simple terms how to tackle the risks of the worst forms of child labour in the minerals supply chain.
Not all informality is bad per se. Roughly a fifth of the DRC’s population relies on this type of mining, despite the terrible conditions. So walking away from the DRC is not the answer either, even if it were feasible given the DRC’s share of production and the limited control you can hope to have over upstream suppliers. Clearly, the aim of any upstanding digital firm, both for moral and business reasons, is to work towards the prevention of child labour. Achieving this requires a collective effort to formalise and legalise the informal mining sector, remove children from the mines, and develop schools instead. This requires a herculean effort, and while companies can show intolerance to child labour and encouragement to tackle it, they cannot achieve change without working closely with the DRC government, local civil society and communities, as well as donors, to address the root causes of child labour. Only then can the cobalt supply chains be cleaned up for good.
Meanwhile, international organisations like ours can help put in place the conditions for progress. For instance, the China-OECD joint programme of work includes co-operation on responsible mineral supply chains. Indeed, the OECD has helped the China Chamber of Commerce of Metals Minerals and Chemicals Importers and Exporters (CCCMC), a Chinese industry association, set up the Responsible Cobalt Initiative. This includes international technology companies, battery manufacturers and Chinese smelters, working alongside the new Inter-ministerial Commission on Child Labour of the Congolese government, using the OECD Due Diligence Standards for Responsible Mineral Supply Chains.
It shows how crucial engagement with governments and players across the spectrum can be to prevent risks, improve welfare and protect integrity and human rights.
The digital revolution is so promising in many ways, and is a harbinger of a cleaner world. The onus is on us all to work ever harder together to ensure what goes into our technology respects the highest standards. Our technology will be even smarter, and fairer, as a result.
Links and further reading
By the same author:
“Corporate leaders: Your supply chain is your responsibility”, in OECD Observer No 299, Q2 2014
Frankel, Todd (2016), “The Cobalt Pipeline: Tracing the path from deadly hand-dug mines in Congo to consumers’ phones and laptops”, in The Washington Post, 30 September
Practical actions for companies to identify and address the worst forms of child labour in the minerals supply chain
Don’t miss: 11th Forum on Responsible Mineral Supply Chains, 2-4 May 2017
©OECD Insights April 2017
Bill Below, OECD Directorate for Public Governance
Staff reductions, salary cuts, the loss of benefits and truncated career opportunities blow a cold wind over the motivation of employees fortunate enough to survive downsizing. At the very moment when the affected company needs its remaining staff to take on the work of others, accept new roles and work longer hours for less, those employees undergo an overwhelming gamut of emotions affecting work performance: anger, resentment, job insecurity, low job satisfaction and a loss of trust. After all, a psychological contract has been broken as surely as watching your boss rip up your actual contract in front of you. Being one of the “lucky” ones doesn’t diminish the distress. Survivors’ emotions are so strong workforce specialists call them “sicknesses”—and they can be crippling, not just for those experiencing them, but for the organisation itself.
Good luck with that
The best employers understand this and take measures to help staff prepare for and work through the emotional turmoil of painful change. It’s not about altruism. Future performance will depend on management’s ability to minimise trauma and inspire support for the newly-shaped organisation. That’s why leading private sector firms prepare strategic plans in advance, set up cross-functional working groups, help managers with their people and communication skills and have detailed implementation and communication plans ready. They follow up with post-downsize employee care programmes and skills development to help staff adjust to new roles. And the public sector? Not enough, according to Engaging Public Employees for a High-Performing Civil Service (OECD 2016).
Handle with care
Yet, even with all the bells and whistles, downsizing efforts often fail to improve levels of efficiency, effectiveness, productivity and, in the private sector, profitability. That bodes poorly for countries hoping to relieve fiscal pressure with a “pure downsizing” approach. And research suggests there are many of them. From 2008 to 2013 the majority of OECD countries cut civil service budgets, 75% reduced or froze public wages and 62% cut training investments. During this period, public sector downsizing efforts included a full range of instruments (see chart). Despite the tenuous relationship between layoffs and productivity gains, 14 countries cited enhanced productivity as the desired strategic outcome of personnel reductions—without necessarily accounting for how that productivity would be accomplished. The data show that dismissals ranked fifth on a list of seven instruments, and were used more frequently than both decentralising government agencies and privatisation. Meanwhile, recruitment freezes and non-replacement of retiring staff, the first and second preferred downsizing instruments, while less violent, impose costs on organisations, including loss of institutional memory, loss of trust, a more concentrated workload, and in the case of hiring freezes, a lack of fresh thinking and experience entering the organisation.
Among survivors, reduced compensation probably has the most far-reaching impact on motivation, performance, perceptions of fairness and the quality of work. Cuts to compensation took different forms in different countries, from suspension of performance bonuses or top ups for holiday seasons, to decreases in overtime pay and simple wage cuts. Reductions can be temporary or part of ongoing public sector reform. For example, Germany no longer takes seniority into account in middle and top management and has adopted certain performance pay criteria, allowing high performers to rise faster to new levels.
One thing is sure: the old notion of a safe job in the civil service is profoundly changing: eight countries reported more personnel cuts in their central public administrations than in the private sector, five countries reported that it has become easier to dismiss public employees, and four countries reported that they have eased civil service job protections. The trend looks set to continue, to judge by the response to the survey question, “Will budgetary constraints and the subsequent need for stabilising national economies be an extra impetus to abolish employment as civil servants?” Over half of the 23 responding countries answered with “very much” or “somewhat”.
“Putting a man on the moon”
To help countries progress towards more effective management of human capital in the public sector, evidence-based tools are needed. The authors of the report look at employee engagement as a key performance indicator and a way forward. Engagement is the sweet spot where an individual’s personal values, goals and motivations align with those of the organisation. It helps gear their behaviour towards achieving goals, innovating more and working energetically albeit in paced, sustainable ways (so reducing the incidence of burnout).
The report analyses the use of employee surveys in monitoring public sector engagement. While a majority (21) of countries surveyed reported measuring employee engagement in some form, only a handful use the data regularly to support decision making—for now, at least. This is not enough, and policymakers involved in public sector reform should take heed.
The value of employee engagement has been illustrated by a story about President Kennedy’s 1962 visit to NASA following the announcement of his ambitious goals for manned spaceflight. After asking various engineers what they did, the president then turned to a janitor in the room and posed the same question. The janitor answered: “I’m helping put a man on the moon!” Engagement is about being in step with the bigger picture (although NASA’s morale was severely tested later that decade when budgetary plenty was replaced by unprecedented retrenchment). The good news is, engagement correlates to individual and organisational performance. Engaged employees are productive employees—an intriguing relationship at a time when governments strive to find a workable measure of public sector productivity.
Counting on goodwill
Inciting employees to connect to the bigger picture requires a culture of engagement. That means beefing up management skills and HR processes to levels found in well-run private sector firms. It also means attracting and retaining the best and the brightest. While many talented people turn to the public sector out of a belief in public service, counting on goodwill alone will only take government employers so far. When the dust settles, they will need to provide an attractive mix of job stability, compensation, engagement and professional growth opportunities—lessons that have gone unheeded by policymakers eager for the illusory gains of “fire and forget” downsizing.
Links and further reading
OECD (2016), Engaging Public Employees for a High-Performing Civil Service, http://oe.cd/HRM
This report was prepared by Daniel Gerson based on papers by Cristoph Demmke and Beatrix Behrens.
Public Employment and Management, www.oecd.org/gov/pem
OECD Directorate for Public Governance, www.oecd.org/gov
Hideki Takada and Rob Youngman, OECD Environment Directorate
We know decarbonisation will require a massive shift of investment away from fossil fuel and into such areas as renewable energy, energy efficiency in buildings and industry, electric vehicles and public transport. A key challenge for policy makers is to understand how to make best use of available policy levers to help accelerate this shift towards low-carbon investment. This includes facilitating the financing of low-carbon investment, including financing through equity investment or – on the debt side – through bank loans and bonds.
Green bonds have gained considerable prominence in recent years as one way to finance the transition to a low-carbon economy. These bonds are an instrument which is used to finance green projects that deliver environmental benefits. The green bond market is still young – it got started only ten years ago – but has experienced rapid growth. With growing market appetite for such bonds, annual issuance rose from just USD 3 billion in 2011 to USD 95 billion in 2016. Many initial green bond issuances were made by public finance institutions such as the European Investment Bank and the World Bank.
Green bonds have become increasingly popular amongst banks, corporates, and national and local governments to finance green projects. In 2016 Apple issued a USD 1.5 billion green bond backing renewable energy for data centres, energy efficiency and green materials, becoming the first technology company to issue a green bond. Other landmark issuances in 2016 included Poland’s sovereign issuance – making it the first country to issue green bonds to fund projects that address climate change. Last year also saw the first municipal green bond issuance in Latin America (Mexico City), which raised USD 50 million to pay for energy-efficient lighting, transit upgrades and water infrastructure. This year, in January, the French government announced the largest sovereign green bond issuance to date – EUR 7 billion – to fund the energy transition.
Why do green bonds trigger such interest?
Bond finance is a natural fit for low-carbon investments such as renewable energy infrastructure, which is characterised by high up-front capital costs and long-dated income streams. They also can offer several benefits to both bond issuers and investors. For example, by issuing green bonds, bond issuers diversify and expand their funding sources by attracting investors who would not normally purchase their bonds. “Over-subscription” of green bonds – i.e. cases where demand exceeds the amount of bonds being issued – can also provide benefits. For example, excess demand for the French sovereign green bond issuance (EUR 23 billion versus the EUR 7 billion actually issued) allowed the government to raise several times more capital than initially targeted. Issuers can also gain reputational benefits by highlighting their green activities. At the same time, green bonds can help investors satisfy ESG (environment, social and governance) objectives while also securing risk adjusted returns.
The new OECD report Mobilising Bond Markets for a Low-Carbon Transition, published today, takes a closer look at the importance of green bonds and policy actions to promote further growth of this market. The report also provides a unique quantitative framework for analysing potential bond market evolution and the contribution it can make to financing key low-carbon sectors: renewable energy, energy efficiency and low-emission vehicles. The analysis provides a projection of the four major markets (China, the European Union, Japan and the United States) between 2015 and 2035 under a two degree scenario identified by the International Energy Agency. The results of the analysis suggest that by 2035 green bonds have the potential to scale to USD 4.7-5.6 trillion in outstanding securities and USD 620-720 billion in annual issuance for these key three sectors in the four markets.
While these figures may seem large on an absolute basis, they are small (approximately 4%) relative to the scale of debt securities markets in general – in 2014 USD 19 trillion of bonds were issued in the four markets and USD 97 trillion of outstanding debt securities were held globally. In these deep pools of capital, there is plenty of room for the green bond market to grow.
The OECD report finds that bond markets have the potential to play a significant role in the transition to a low-carbon economy. Nevertheless, as the green bond market evolves, it faces a range of challenges and barriers. Greater transparency may be needed to avoid confusion, inefficiency and the risk of “greenwashing” where bonds are sold as “green bonds” but projects financed by those bonds do not deliver expected green benefits. Policy makers are faced with the challenge of developing green guidelines and standards and, in particular, defining international rules without imposing overly stringent requirements that could raise issuance costs. Striking a balance between securing market confidence and reducing green transaction costs will be critical and the right set of policies will be crucial. In addition, while the green bond market can facilitate the financing of projects, it cannot itself create a pipeline of bankable projects. Governments will need to set ambitious policies to ensure low-carbon investment needs are met. Ultimately, credible and consistent energy and climate policy and attractiveness of low-carbon projects will be the drivers of investment.
For a closer look at the potential contribution of the green bond market to the low-carbon transition and policy options see: Mobilising Bond Markets for a Low-Carbon Transition just released today.
Join us on 28 April at 13:30 CEST to discuss Green Finance and Investment at our next free OECD Green Talks LIVE webinar. For more information and to register: http://bit.ly/GreenTalks
Alexandre Santacreu, policy analyst for road safety at the International Transport Forum and project manager of the Safer City Streets network. Today’s post is also being published on the ITF blog Transport Policy Matters
Every minute of every day, someone loses their life in a traffic crash on a city street. With cities growing rapidly and urban motor traffic also increasing dramatically in many cities, the situation is likely to get worse, not better in years to come.
More and more city authorities are realising that dangerous traffic conditions on their streets have a toll that goes beyond the human tragedy and economic loss caused by road deaths and crash injuries. Dangerous traffic makes people feel unsafe, and people who feel unsafe will refrain from doing normal things – letting their children walk to school or cycling to work, for instance.
Thus, high level of urban road safety is more and more seen as a critical component of a liveable city. It improves citizens’ quality of life, it increases choices, it opens up opportunities. Ultimately, safer city streets are about enhanced personal freedom.
Safer streets equal more liveable cities
This was recognised in the United Nation’s Sustainable Development Goals in 2016. There, governments agreed (in goal number 11) to “make cities and human settlements inclusive, safe, resilient and sustainable” and as part of that committed to “improving road safety,… with special attention to the needs of those in vulnerable situations”.
The link between the different objectives is easy to spot: improving road safety makes cities not only safer, but also more sustainable because it enables people to walk or cycle without having to fear for their lives. It also makes them more inclusive because those who cannot afford cars can be mobile without running lethal risks.
But in practical terms, what can mayors and city authorities do to enhance traffic safety in their city? One obvious answer is: Do not reinvent the wheel – learn from what others are already doing. Many good practices for urban road safety exist around the world and only wait to be copied. A second, maybe less obvious answer is: Get your data in shape. Measure what is happening on your streets and how it changes, so you can base policy decisions on evidence, not assumptions.
When cities learn from each other
These two thoughts are the driving ideas behind Safer City Streets, the global traffic safety network for liveable cities. Little more than six months after its launched in October 2016, a total of 38 cities are working together in the Safer City Streets network, ranging from Astana in Kazhakstan to Zürich in Switzerland and including global metropolises such as New York City, Mexico City, Rio de Janeiro, London, Berlin, Melbourne, Buenos Aires, Montreal and many others.
The Safer City Streets network, which holds its first meeting in Paris on 20 and 21 April (with more than 50 participants expected to attend), provides the first global platform for cities and their road safety experts to exchange experiences and discuss ideas. At the heart of Safer City Streets activity will be efforts to improve the collection of data about urban road crashes to enable cities to compare themselves with others and base policy decisions on reliable evidence. A methodology for the database has already been developed and many of the cities have started feed it in their numbers.
The flying start has been helped by the fact that Safer City Streets itself is building on previous experience: It is modeled on the highly successful International Traffic Safety Data and Analysis Group (IRTAD), the International Transport Forum’s permanent working group on road safety which brings together countries and national road safety stakeholders. Fittingly, the annual IRTAD meeting is held back-to-back with the inaugural meeting of Safer City Streets – which will also include a joint workshop with POLIS, a network of European cities and regions, on how to bring cities from both networks together in order to find the best solutions for data collection.
Cities who are interested in finding out more about Safer City Streets are invited to contact the author. They should also know that membership of Safer City Streets is currently free thanks to a very generous grant from the Fédération International de l’Automobile (FIA).
The Sahel and West Africa had a good agricultural season, so why does food insecurity persist?
Ousman Tall, Sahel and West Africa Club Secretariat (SWAC/OECD)
Every year the identification, analysis and mapping of areas at risk and populations affected by food and nutrition insecurity in the Sahel and West Africa are carried out. Conducted within the Food Crisis Prevention Network (RPCA), this process is co-ordinated by the Permanent Inter-State Committee for Drought Control in the Sahel (CILSS). It analyses country-level information of the 17 countries in the region using a harmonised, common framework called the Cadre harmonisé (CH). The CH analysis is based mainly on annual agricultural production and information from household and market surveys. Developed by West African actors, using international standards, the strength of the CH lies in its broad objectivity, consensual analysis and the incorporation of a wide range of stakeholder analyses.
The 2016-17 agro-pastoral season just ended in the Sahel and West Africa region and the agricultural and food situations are generally satisfactory. The CH analysis shows good rainfall and hydrological situations as well as crops and livestock production. Cereal and tuber production is estimated at 67.2 million metric tonnes and 166.7 metric tonnes constituting 17% and 15% increases compared to the past five year averages, respectively. Despite these gains, approximately 9.6 million people are in a food security crisis situation. The report published following the March 2017 RPCA Experts’ meeting in Dakar and based on the CH analysis, highlights some of the causes of food and nutrition insecurity to include prices, markets and the conflict along the Lake Chad basin. Building upon the report, there is a need to further expand on some of the other conjectural factors that affected food and nutrition security during the 2016-17 season.
The global economy has been faced with weak aggregate demand, decreasing commodity prices and high financial market volatility. There is a sharp decline in the prices of commodities such as rubber, crude oil, iron ore and gold that has led to substantial cuts in export values and fiscal revenues in the region. This has led to the depreciation of local currencies in Ghana, Guinea, Liberia, Nigeria and Sierra Leone; amid increasing rates of inflation. The Nigerian economy which represents over 65 % of West Africa’s GDP has been particularly affected by the continuous depreciation of the Naira, which has negatively impacted the economy of the region. Nigeria’s population is more than 167 million, representing over half of the total population in the region. With 60% of this population living below the poverty line, a general depreciation of the Naira leads to increased food prices and affects households’ access to food. This was the situation during the 2016-17 agricultural campaign.
The promotion of regional trade and markets in West Africa and the Sahel has helped to stimulate agricultural development and food security. National policies promoting regional integration have also helped to strengthen trade across the region through advocacy for the free movement of goods and services. Integrated markets and trade across the region have led to increased economies of scale in production, especially in the agricultural sector where surpluses produced by smallholder farmers are linked to local and regional markets. However, regional integration has been hindered by a number of constraints including inefficient transportation and trade barriers along corridors and at borders, resulting in high transaction costs and, inevitably, high food prices.
Rapid urbanisation is also impeding the attainment of food security in the region. In West Africa, it is projected that the urban population will reach 400 million in 2050. The youthful population is migrating to urban areas, leaving behind an ageing farming population in an agrarian economy that is highly labour intensive. The agriculture and food systems have not transformed adequately enough to take advantage of the youthful population migrating into urban areas. This is becoming a serious social and economic issue for most countries in the region. Unfortunately, information on the nature of the food insecurity situation in urban areas is limited due to the focus of the food security analysis on food availability and other rural indicators.
The RPCA has developed the efficient tools and platform needed for the analysis and discussion of food security in the Sahel and West Africa. The CH has been expanded from its use in the Sahel to gradually incorporate the rest of West Africa. Nigeria is the last country to be incorporated in the CH analysis, with 16 of its 36 States covered. The next challenge is to analyse other structural and conjectural drivers of food and nutrition security from a national and regional perspective in order to better explain why a large number of the population is always food insecure despite good agricultural campaigns. Policy makers need to broaden the food security interventions beyond food availability to include other dimensions of food security: access, utilisation and stability.
Emily Hewlett, OECD Health Division
Winston Churchill famously called it the ‘black dog’. “It is that absence of being able to envisage that you will ever be cheerful again. The absence of hope. That very deadened feeling, which is so very different from feeling sad,” said JK Rowling. “I don’t want to see anyone. I lie in the bedroom with the curtains drawn and nothingness washing over me like a sluggish wave… I am inadequate and stupid, without worth. I might as well be dead” wrote Margaret Atwood, in Cat’s Eye.
They were talking all about depression.
Across the world, millions of people are struggling with their own black dog. The OECD estimates that one in two people experience a mental illness in their lifetime, and some 20% of the working-age population is experiencing mental ill-health at any given time[i]. According to the WHO, depression is now the leading cause of ill-health and disability worldwide; globally, more than 300 million people are living with depression[ii]. While some people experience depression only briefly, others find themselves battling the black dog for long periods, or find it returning again and again. And when people are suffering from a mental disorder, it has big consequences across their lives: when people are living with mental ill-health they have poorer educational outcomes and a higher risk of dropping out of school[iii]; they are more likely to be dismissed from work and 2-3 times more likely to be unemployed[iv]; and in serious cases depression can lead to people harming themselves, or even dying from suicide[v].
The good news is that there are some very effective ways to help prevent mental illness and promote mental wellbeing, to treat depression and other disorders, and to support people who are living with mental ill-health. For instance, actions to prevent depression and anxiety can bring life-long economic benefits to mothers and children, while certain workplace interventions could reduce the cost of lost productivity – notably sickness absence and presenteeism – by up to a third[vi]. We know, too, that evidence-based services – like psychological therapies, early intervention approaches, or pharmacological therapies – can facilitate and speed-up recovery from depression. And we know that if employers and workplaces can provide a supportive environment, and thoughtfully facilitate return to work after a sickness absence for depression, then this can be good for the individual’s mental health and good for workplace productivity.
However, places where these effective, evidence-based policies have been rolled out are the exception, not the norm. People with depression too often face unsupportive or disengaged schools or workplaces, find inadequate treatment provision or long-waits to get help, and are still weighed down by a heavy burden of stigma. Today, on World Health Day, policy makers across the world must commit to putting care for depression and mental illness at the centre of their health systems, and their health policy priorities. More needs to be done.
We need better information, to understand what works, and where countries are falling short; at OECD, we are particularly keen to further improve, international benchmarking of data and policies so as to drive improvements across countries. We need innovation to find the effective, novel, adaptable and affordable policies that work, for depression and for all mental disorders. And we need implementation, so that better policies for depression can already start transforming peoples’ lives.
More needs to be done, and we should start today.
[i] OECD (2015), Fit Mind, Fit Job: From Evidence to Practice in Mental Health and Work, Mental Health and
Work, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264228283-en
[v] OECD (2015), Health at a Glance 2015: OECD Indicators, OECD Publishing, Paris. http://dx.doi.org/10.1787/health_glance-2015-en
[vi] OECD (Forthcoming, 2017), Understanding Effective Approaches to Promoting Mental Health and Preventing Mental Illness.
Pascal Saint-Amans, Director, OECD Centre for Tax Policy and Administration and Andreas Schleicher, Director, OECD Directorate of Education and Skills. Today’s post is also being published on the OECD Education and Skills Today blog
Investing in skills is crucial for fostering inclusive economic growth and creating strong societies. In an increasingly connected world, skills are particularly important for citizens to get the most out of new forms of capital, such as big data and robotics. More and more, policy makers are recognising that rapid change in technologies and work practices mean that people will have to continually upgrade their skills throughout their lives.
This new reality raises many questions for governments, firms and individuals, including: who is to pay for all these skills investments? In many OECD countries, student debt is rising, and in many others, public debts are persistently high. How can policy makers decide on the right financing mix for students and governments?
This is where taxes have an important role to play. In a nutshell, delivering educational services will depend on taxes, and good tax income will depend on good educational services. A new OECD Tax Policy Study, Taxation and Skills, released today, highlights the role of the tax system in ensuring that the right financial incentives are provided for investments in skills. This means making sure that governments, individuals and firms all share the costs and the benefits of better skills.
In addition to raising the revenue to finance government spending on skills, every OECD country uses the tax system to provide support for skills investments. Provisions such as tax credits, tax deductions and reduced tax rates on student income help governments support skills investments both early on and later in life. Sharing the costs in this way can make investing in skills more affordable, although these tax provisions need to be well-designed.
Besides helping share costs, the tax system divides the returns to skills between governments and students. When investments in skills yield returns, it means that individuals get higher wages, and governments get more tax revenue.
The results published today show that these returns to skills are substantial. In almost every country examined, both students and governments earn a sound return on skills investments. In some countries, however, policies could be improved to better share the returns to skills between individuals, firms and governments. Rising earnings premiums paid to skilled workers across OECD countries means that the returns to skills may grow into the future. This means better wages for individuals, more profits for firms and more sustainable public finances for governments, a win all around.
In spite of these high returns, many workers do not have the right financial incentives to make the necessary investments in their skills to succeed throughout their lives. Unlike physical assets, like property and equipment, human capital cannot be used as collateral for borrowing to finance investments. This impedes access to credit for individuals’ skills investments. Firms may also underinvest in skills because they worry that newly skilled workers may be poached by competitors. Often, individuals and firms do not have access to the right information to make informed choices about how they can invest in their skills.
Designing tax and spending policies to encourage skills investments is crucial. Useful policy approaches can include refundable tax credits for lifelong learning, income-contingent loans for tertiary education, or extra tax deductions for firms that invest in their workers’ skills.
OECD governments are increasingly looking at how policies can be designed to raise productivity, innovation and growth. We hear a lot about how tax systems can encourage investments in physical capital and innovative technologies through R&D tax credits and other measures. The report released today shows the importance of tax policies that are equally geared towards incentivising investments in human capital.