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I am grateful to Maxime for explaining why the OECD's usage of average earnings differs substantially from the more widely accepted definition used in the UK. My mistake was to take at face value what appears on the OECD's tax-benefit calculator page (http://www.oecd.org/document/18/0,3746,en_2649_33933_39717906_1_1_1_1,00.html) where the term 'gross earnings' (and, used synonymously, 'average wage') is used without any caveats or references to this being the earnings, or wage, of an assumed 'average worker' in specific industry sectors. Might I suggest that a clear explanation of this appears on the calculator page itself to avoid confusion to others?
Only after using the calculator to work out the taxes and benefit for this average worker at any of a variety of percentages of the relevant wage/earnings level, does there appear any clue to the results applying to the assumed average worker but, again, no explanation is given on the page itself. There is a link there to the term 'AW' on another webpage but many people might well assume it merely meant 'average wage' rather than specifically to the 'average worker in specific industry sectors'.
Having worked through that muddiness, and putting aside the objections one might have for using the OECD's average wage concept, might I draw attention to further reservations over the benefit calculations, especially for the UK. One of the failings of the DWP's tax-benefit calculations in their, now alas defunct, annual Model Tables was the use of fixed housing costs at all levels of income varying it only by family type. The OECD's tax-benefit model goes some way to overcome this objection but introduces another one: it varies the housing cost by level of income but fixes it by category of family, i.e. it assumes the same (gross) housing expenditure for a single person as for a couple with children at the same income level. This may not be such a big problem if one is only interested in comparing benefits between countries (though clearly housing costs as a percentage of earnings will vary substantially between countries) but it seriously distorts the situation between households within countries.
In relation to the UK, there is a particular issue with regard to how housing costs are treated in the benefit payments calculations from the OECD's model. Even ignoring the validity of using a set percentage of income for housing costs, rather than varying it to take into account the preferences and ability to actually obtain different types of housing at different income levels, there is a misconception as to how the benefit system deals with housing costs in the UK.
Running the OECD's tax-benefit model for an 'average worker' at the chosen percentage of those average earnings gives figures for the gross and net income of the household in work and after becoming unemployed, during the first month of unemployment. So for the UK in 2010, the unemployed income for a single person previously earning 100% of the average is given as including £6283 for housing costs, apparently based on total housing costs of £6859 (20% of the aforementioned £34,297). However, since around three-quarters of the employed in the UK are mortgage-holders rather than renters, then under the our welfare scheme a great many of those becoming unemployed will not receive any help at all with their housing costs during the first month of unemployment (beyond local council taxes) since they are excluded from receiving help with mortgage costs during the first three months of unemployment. This will make a big difference in the calculated net replacement ratios and in the comparisons with other countries with much lower (or higher) rates of owner-occupation.
The OECD's tax-benefit model is a useful tool for researchers concerned with international comparisons in income and poverty distribution, but it clearly needs to be tweaked where and when necessary. I would be interested to hear of other examples of local variations to the assumptions made in the model. Paul Ashton http://www.eastb.freeserve.co.uk/Paul-Ashton/ --- On Fri, 8/6/12, [log in to unmask] <[log in to unmask]> wrote:
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