World Economic Outlook (WEO) 2004 (Helbling et al., 2004, Appendix 3.1. for details on
sources and construction). The 20 OECD countries covered are: Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, New Zealand,
Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and United States. The time
series start in 1975 and extend to 1998 for labour and product markets, to 2000 for the tax system
and to 2002 for financial markets.
All indicators are normalized to range from 0 to 1 where an increasing value signals a declining
degree of restriction. They are calculated as an unweighted average of sector-specific indicators
depicting different dimension of regulatory intervention.
The regulation indicator for the financial sector takes account of the existence of credit controls,
interest rate controls and restrictions on international financial transactions. Thus, this indicator
does not include regulatory issues linked to reporting and financial stability oriented monitoring
of the financial sector which, certainly, would show very different time trends.
The labour market indicator is constructed on the basis of the Labour Market Institutions Database
developed by Nickel and Nunziata (2001) and is the aggregate of sub-indicators on employment
protection, benefit replacement rates and benefit duration. It excludes information on wage
centralization since for numerous countries there is no time variance for related variables.
The product market indicator was constructed by Nicoletti and Scarpetta (2003) and combines
indicators on barriers to entry, public ownership, market structure, vertical integration of networks
and final consumer services, and price controls for the following non-manufacturing sectors: gas,
electricity, post, telecommunications, passenger air transport, railways and road freights. It thus
covers the sectors which used to be characterised by heavy government involvement and
protected monopolies/oligopolies in the past.
The tax system indicator is based on the following variables: top marginal income tax rate, the
total tax revenue share of indirect taxes, the labour and capital income tax ratio and the absolute
difference between labour and capital income tax ratios. The authors argue that these indicators
are good summary proxies for the growth and employment reducing distortions associated with
the tax system (Helbling et. al, 2004, p. 133/134). Note that the design of the tax variable implies
that it is largely driven by the structure of the tax system and less by the overall size of tax
revenues (and hence the size of the public sector).
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