Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005



ANNEX 1: CONSTRUCTION OF THE POLICY REFORM DATABASE

In order to construct an annual database of structural reforms to be used in probit
regressions, it would seem natural to collect information for each country regarding when
major reforms were voted. However, not only is such an approach difficult - especially for
reforms that were carried out prior the first publication of the
OECD Jobs Study in 1994 - but
more importantly it suffers from two important limitations: while our focus should be clearly
on major reforms, there is no straightforward criterion
a priori to distinguish them from small
ones; certain reforms start small before getting big over the years and therefore can not be
associated with any specific year. One example is the slow but quasi continuous decline in tax
wedges in Denmark between the late 1980s and the mid-1990s or in Finland since the mid-
1990s.

Here these two limitations are dealt with as follows. First, in order to identify major
reforms, we rely exclusively on
a posteriori criteria: a major reform in a given policy area
(
e.g. product markets) is one that is accompanied by a “substantial” change in a corresponding
quantitative policy indicator (
e.g. the OECD indicator of product market regulation). This
approach was already taken to construct the reform intensity indexes presented in Section 4,
but only to a limited extent since more qualitative information was also taken into account.
Second, if the “substantial” change in the policy indicator does not occur in a particular year
but rather is spread over a longer period, then all the corresponding years are assumed to have
been reform years. This is implicitly consistent with the view that a country engaged in a
reform process has the possibility to opt out every year, so that the continuation of a reform
process can by itself be regarded as a “reform”.

We restrict our analysis to five key policy areas for which straightforward
quantitative indicators can be used to assess the magnitude of policy reforms. These are
unemployment benefit systems, labour taxes, employment protection legislation, product
market regulation and retirement schemes, for which the quantitative indicators used are,
respectively: the OECD summary measure of benefit replacement rates (an average of
replacement rates across various earnings levels, family situations and durations of
unemployment); an average of OECD measures of the wedge between labour cost and take-
home pay across two situations (a single worker and a couple with a dependent spouse and
two children, at average earnings levels in both cases); the OECD summary index of
employment protection legislation; the OECD summary index of product market regulation in
seven non-manufacturing industries; an average of OECD measures of implicit tax rates on
continued work - which sum up deviations from actuarial neutrality - in old-age pension
systems and early retirement schemes across thee situations (at ages 55 and 60 in early
retirement schemes, and at age 60 in old-age pension schemes, for a single worker with

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