OECD Economic Surveys: United States 2024

Ben Westmore

The economy continues the robust recovery seen since the COVID-19 pandemic, despite a significant tightening in monetary policy. The expansion has been coupled with improved economic opportunities for low wage workers, helping lean against the long-standing high level of income inequality. Inflationary pressures have eased as supply and demand have become better aligned, although services inflation remains elevated. The fiscal deficit has widened since before the pandemic.

A structural slowing in real GDP growth over recent decades has reflected weakening productivity growth, coupled with population ageing that has only been slightly offset by net immigration. While business conditions are generally favourable and innovation is high, competition appears to have weakened and skills need to be developed to keep pace with changing labour market needs. Despite women’s labour force participation recovering strongly from the pandemic, the gender participation gap is high compared with peer countries. Trade policies have become restrictive and new industrial policies have focused more on increasing domestic production in some sectors. A significant policy effort is underway to boost infrastructure investment (Box 1.4).

There has been a major acceleration of efforts to meet climate targets. A wide range of measures has been deployed, focusing on incentives supported by regulation. These will speed up emission reductions, notably in the energy sector, but additional efforts are likely to be needed to reach targets.

General government debt as a share of GDP increased to around 120% of GDP in 2023, its highest level since World War II, and it is expected to continue rising markedly over the coming decades under current policies as the population ages (Chapter 2). Achieving fiscal sustainability would make the economy less vulnerable to future economic shocks and ensure that key roles of government that support social welfare, including healthcare and social security, are maintained.

Against this backdrop, the main messages of the Survey are:

• The economy has continued to expand at a solid pace, pushing up wages and drawing people into the labour market and price pressures have weakened. Monetary policy should ease only when there are clearer signs that inflation will durably return to target. The public finances need to be put on a prudent path by closer alignment of spending and taxes. A multi-year fiscal adjustment should begin that includes spending changes, notably achieving savings on pensions and healthcare, and raises taxation, particularly on capital incomes, would narrow the deficit. A more medium-term oriented and less complicated federal budgeting process would support this.

• Productivity enhancing reforms that promote competition, including through maintaining international trade openness, should be complemented with measures that improve opportunities for accumulating necessary skills and the ability of women to participate fully in the labour market.

• Efforts to reduce greenhouse gas emissions have accelerated, but further policy measures are likely to be needed to achieve emission reduction targets. Policy options include broadly based carbon pricing, taxes and sectoral policies. Additional measures are needed to support displaced workers from fossil fuel industries and for climate adaptation.

Economic growth has been surprisingly robust, continuing a sustained period of expansion only interrupted by the COVID-19 pandemic (Figure 1.1, Panel A). The post-pandemic recovery has been strong, although there are some signs that the pace is now slowing, partly due to tighter monetary policy (Figure 1.1, Panel C). Personal Consumption Expenditure (PCE) inflation peaked at around 7% in 2022, lower than in the euro area where the energy shock was larger. Core inflation has been relatively high in the United States due to stronger domestic demand, though increased supply has helped bring inflation down (Figure 1.1, Panel D).

Growth has been driven by strong consumption growth, which has averaged 2½% in annualised real terms since the end of 2019. The shift during the pandemic from consumption of services to durable goods has shown limited signs of unwinding (Figure 1.2, Panel A). The persistence of working from home could be a factor, given such employees are less likely to consume services (Council of Economic Advisers, 2024a): around 30% of employees worked from home in 2023, compared with 7% prior to the pandemic (Barrero, et. al. 2023). Persistent strong growth in consumption has been aided by a robust labour market and wage growth. An estimate of household excess savings, which uses the 2015-19 average household saving rate as a benchmark, suggests households are also gradually drawing down the savings accrued during the pandemic (Figure 1.2, Panel B).

The growth of real private fixed investment has slowed since the pandemic, with weaker growth of business investment and a correction in housing investment following a post-pandemic surge. However, spending on intellectual property continues to rise strongly and is now 33% higher than immediately prior to the pandemic (Figure 1.3, Panel A). Private investment in buildings and structures accelerated through 2023. A key driving force has been a boom in manufacturing investment (Figure 1.3, Panel B). This entirely reflects an increase in construction activity in the computer/electronic/electrical industry, with capacity expansions in semiconductor manufacturing amid global shortages and firms reshoring supply chains (Figure 1.3, Panel C). Domestic policy incentives for semiconductor investment were introduced in 2022 with the CHIPS and Science Act, though the extent to which these are already inducing additional manufacturing investment is unclear. The expansion of manufacturing facilities may portend stronger investment in equipment and intangibles as these plants enter operation (Council of Economic Advisers, 2024a).

Higher domestic demand has been partly accommodated by strong growth in imports: by the first quarter of 2024, import volumes were 15.6% higher than prior to the pandemic and the current account deficit had widened by one percentage point to around 3% of GDP (Figure 1.4, Panel B). In part, this has been due to the shift in consumer demand towards goods, with strong contributions to import growth over this period from a range of items including passenger cars, pharmaceuticals and household appliances. Goods exports have also risen and are now back in line with the pre-pandemic trend, though around one third of the expansion since Q4 2019 has been attributable to energy products. A ramp up in investment in shale oil over the past decade, combined with strong energy demand from major trading partners in the wake of Russia’s war of aggression on Ukraine, has meant the United States has shifted to being a net energy exporter since 2019. China now accounts for a smaller share of the goods trade balance than in 2018 when more restrictive bilateral trade policies were first enacted (Figure 1.4, Panel A). Imports have been sourced from elsewhere in response: goods imports from Mexico and Vietnam have increased by 44% and 171% respectively over the same period.

The recovery from the pandemic was marked by strong supply chain pressures for certain goods, reflecting pent up demand, excess demand for computer chips and disruptions to global shipping. However, indicators of supply chain bottlenecks, such as delivery times reported by state-based manufacturing surveys, have since declined to around long-run average levels. This accords with the Global Supply Chain Pressure Index, published by the Federal Reserve Bank of New York, which fell from 4.35 standard deviations of its average value in December 2021 to return to around long-run average levels since early 2023.

Labour supply was slower to recover from the pandemic relative to labour demand, leading to an imbalance in the labour market. However, the gap has been narrowing since 2022 as labour supply has steadily risen, despite population ageing (Figure 1.5, Panel A). The labour market participation rate of prime age workers (25-54 years old) is now above the pre-pandemic level (Figure 1.5, Panel B), offsetting a rise in the old age dependency ratio (those aged 64+ as a proportion of those aged 15-64) from 24.1% in 2019 to 26.4% in 2022. Higher prime age labour force participation largely reflects increased participation of women, particularly those who report having a disability (Figure 1.5, Panel C). This may reflect very strong labour demand and the increase in the share of workers able to work from home. However, a general increase in the share of the working age population reporting disabilities since the pandemic suggests that some of the increase may reflect those already employed becoming disabled (Andara, et. al. 2024). Very strong immigration between 2020 and 2023 has boosted the labour force participation rate because a higher share of immigrants are of working age compared with the general population. One estimate highlights that net immigration significantly reduced the aggregate vacancy-to-unemployment ratio in this period (Duzhak, 2023). The Congressional Budget Office (CBO) currently estimates that net immigration rose from 400 000 people in 2019 to 3.3 million people in 2023 (Figure 1.5, Panel D). Much of this estimated increase has been from the “other‑foreign‑national” category, which includes those who entered the country illegally, those who remained in the country after a temporary visa expired and those who entered the country lawfully but are awaiting proceedings in immigration court (CBO, 2024a). The unemployment rate has increased from a low of 3.4% in April 2023 to hover in the 3.7-4% range since August 2023, but indicators of labour market tightness remain elevated.

Wages have grown strongly since the pandemic, with a surge in the average hourly wage during the pandemic and sustained increases in the following years. However, pressure on wages has been abating as the labour market has come into better balance. This has accorded with a significant slowing in nominal wage growth of those switching jobs: from 7.7% in year-on-year terms in early 2023 to 5.6% in March 2024 (Figure 1.6, Panel A). A key development during the pandemic and earlier years was the relatively fast nominal wage growth for those in the lower half of the income distribution (Figure 1.6, Panel B). This may reflect the scarcity of labour relative to demand for these workers, with job vacancy rates relatively high in some lower wage sectors such as hospitality. Growth in the Employment Cost Index remains slightly elevated compared with the pace over the past few decades, but wage increases have been broadly in line with that expected based on historical relationships with employment growth. Strong measured labour productivity growth in 2023, including compared to most other OECD countries, also helped reduce growth in unit labour costs.

Personal Consumption Expenditure (PCE) inflation declined from a peak of 7.1% in June 2022 to 2.7% in April 2024. The initial rise in headline inflation was driven by the interaction of limited supply and strong demand following the pandemic, but these tensions have now eased. An estimate from the Federal Reserve Bank of San Francisco suggests that the contribution of supply factors to annual PCE inflation had fallen from around 3 percentage points in March 2022 to around 1.1 percentage point (Figure 1.7, Panel A). The energy price shock following Russia’s war against Ukraine was much less significant in the United States than in European countries (Figure 1.7, Panel B) and an appreciation in the US dollar exchange rate has dampened import prices. Falling inflation and continued wage growth has resulted in real wage gains since mid-2022. Nonetheless, core services inflation (excluding housing) remains around 3½% in year-on-year terms, higher than prior to the pandemic (Figure 1.7, Panel C). Inflation in housing rents is contributing to elevated inflation (Figure 1.8, Panel D) and slower growth in rents on new leases has yet to fully flow through to housing inflation in the Consumer Price Index. Foreign travel prices and financial services rose rapidly in the first quarter of 2024, partially reflecting higher jet fuel prices and stronger equity prices. Core inflation is now slightly above the midpoint observed in OECD countries (Figure 1.7, Panel E).

Real GDP will continue to grow in 2024 and into 2025, though at a slower pace than in the second half of 2023 (Table 1.1). Growth will be supported by consumer spending and continued strength in the labour market, with the unemployment rate expected to remain at low levels by historical standards. Private investment will continue to increase at a solid pace, supported by government policy incentives, strong net immigration and an assumed easing in monetary policy that begins in the second half of 2024: the Federal Funds Rate is assumed to fall to the 3¾-4% range by the end of 2025. Wage growth is anticipated to continue to ease as the labour market further rebalances. This, along with easing housing inflation, will support a further decline in core inflation in the second half of 2024.

The growth outlook could surprise on the downside if core inflation remains elevated, delaying any potential monetary policy easing and raising financial risks. However, an upside risk is that productivity growth surprises on the upside, potentially fuelled by new advances in Artificial Intelligence. There are a range of lower probability vulnerabilities that could have a substantial impact on the economic outlook if they transpire (Table 1.2). These include an escalation of geopolitical tensions or a ratcheting up of trade tensions with major trading partners that would amplify uncertainty and disrupt supply chains. In addition, as in other countries and despite significant investments in cyber-security, a large-scale cyber‑attack could disrupt business operations or shutdown domestic infrastructure vital for the functioning of the economy.

The Federal Open Market Committee rapidly raised interest rates once inflation began to surge. The Federal Funds Rate was increased by 5.25 percentage points between February 2022 and July 2023 to reach the target range of 5.25-5.5%, the highest level in 23 years, and market interest rates rose sharply in response (Figure 1.8, Panel A). This marked the end of a period since the financial crisis mostly characterised by a zero policy rate and periods of central bank asset purchases. The tightening of monetary policy has credibly signalled the central bank’s commitment to low inflation and has helped dampen demand.

Long-term interest rates as measured by 10-year Treasury yields have risen sharply since their trough in 2022 and now stand around 4½ percent, their highest level since 2008 (Figure 1.8, Panel A). These upward movements seem largely to reflect higher expectations for real interest rates, rather than inflation expectations or movements in term premia. While there is significant uncertainty about the neutral rate, a reference level to gauge the stance of monetary policy, current policy is clearly restrictive. The most recent average estimate of the long-run Federal Funds Rate by Federal Reserve Board members, thought to be a proxy for the neutral rate, was below 3%. That is, over 2½ percentage points below the current Federal Funds Rate. An index of Financial Conditions published by the Board of Governors of the Federal Reserve Board (Ajello, et. al. 2023) estimates that the level of the Federal Funds rate and an appreciation of the exchange rate have tightened financial conditions since May 2022 (Figure 1.8, Panel B).

It would be appropriate to ease monetary policy if core inflation continues to ease as anticipated and it is clear that inflation is durably moderating to meet the 2% target. Achieving both objectives of the Federal Reserve’s mandate, annual inflation averaging 2% and a maximum level of employment, will require carefully weighing the risks in both directions. Easing monetary policy too quickly risks inflation remaining persistently above target, while an overly restrictive stance of monetary policy would damp economic activity and employment demand.

The process of quantitative tightening has so far generally been smooth as the Federal Reserve shrinks the size of its balance sheet. Total assets of the Federal Reserve were reduced by 18.5% (or USD1.65 trillion) between May 2022 and June 2024 as bond holdings matured without being replaced. The process appears to have had a very modest positive impact on short-term government bond yields (Du, et. al. 2024) and the planned pace of further quantitative tightening appears appropriate. As the Federal Reserve has reduced its security holdings, purchases by domestic nonbanks in the “household” sector – which includes hedge funds – have increased.

Despite the rise in interest rates, residential real estate prices remain high compared with incomes. As in many other countries, prices surged following the pandemic, fuelled by strong pandemic savings, a structural shift in the demand for housing and low interest rates. While prices stabilised and then fell as interest rates started to rise, they have since regained this ground. Structural underbuilding (Weinstock, 2023), as well as a reluctance of homeowners to move, have added to price pressures. Existing home sales were 30.3% lower in April 2024 compared to the same month in 2021 as some households with fixed-rate mortgages taken out in the decade prior to the pandemic have little incentive to sell given that a new mortgage would come with a much higher interest rate. Fixed-rate mortgages comprise the vast majority of dwelling loans; over 90% in 2022. Some other OECD countries have recently experienced a larger house price correction, following a more modest run-up in prices (Figure 1.9, Panel A).

Equity market valuations are well above pre-pandemic levels, despite having fallen back somewhat as market interest rates began to rise. The cyclically-adjusted price-to-earnings ratio of the S&P500 has risen steadily since early 2023 and remains high by historical standards (Figure 1.9, Panel B). Much of the recent run-up has been due to rising valuations of large companies in the technology sector, as investors have focused on the potential growth opportunities associated with artificial intelligence. Based on a standard discount cash flow model, the rise in the S&P 500 has been largely due to increased risk appetite by investors (IMF, 2023). An ongoing risk is that a reassessment of the economic outlook could result in a sudden unwinding of positions.

The general government deficit was around 8% of GDP in 2023. This was over one percentage point higher than before the pandemic, highlighting that current spending and investment by the government has continued to support the economy. Following an unwinding of pandemic support measures and unusually strong tax revenues in 2022, state and local government spending accelerated in 2023 as strong budget positions allowed them to increase employment (Figure 1.10). Policies announced as part of the Inflation Reduction Act have also increased spending, with current estimates putting the fiscal cost at around 0.4% of GDP each year (University of Pennsylvania, 2023).

The stance of fiscal policy is anticipated to modestly tighten in 2024, with the underlying structural primary budget deficit projected to fall by 0.8 percentage points. This mostly reflects a decline in public spending as a share of GDP, supported by some specific measures including the reassessment of the eligibility of Medicaid enrollees by states (CBO, 2024b). The expected near-term improvement of the fiscal balance is based on the assumption that measures under the Fiscal Responsibility Act of 2023, which established caps on discretionary funding (which accounted for 28% of total outlays in 2023) for 2024 and 2025, will be implemented. However, past instances of setting caps on discretionary funding have had mixed success: while discretionary funding caps were in place between 2012 and 2021 (following the Budget Control Act of 2011), they were regularly increased through acts of Congress in the latter part of this period (Committee for a Responsible Federal Budget, 2022).

A larger and more sustained fiscal consolidation is needed from the 2025 fiscal year to help rebalance demand and begin putting the public finances on a more prudent path. While the large required consolidation should be implemented steadily over a number of years to limit the impact on the economy, some front loading of consolidation is appropriate in light of the underlying strength of the economy and lingering inflationary pressures. Doing so would also modestly reduce overall future borrowing requirements. In terms of sequencing, increases in personal and corporate tax revenues could be a first step given that such measures have been found to slow economic growth in the short-term while narrowing income inequality (Cournede et. al. 2014). In any case, personal tax rates under the Tax Cuts and Jobs Act are set to expire at the end of the 2025 calendar year, as are elements of the corporate and estate tax schedules. On the expenditure side, spending restraint should be the immediate priority, while longer term reforms are put in place to lower health and social security spending on a permanent basis (Chapter 3).

The rapid increase in short- and long-term interest rates, together with risks in some sectors of the economy, has presented challenges for the financial system, although overall it appears to have remained robust. Stress in the regional banking sector in March 2023 developed after large valuation losses on government debt holdings triggered a deposit run on several institutions (Box 1.1). Disruptions in the financial sector have been limited since then, but close regulatory monitoring of asset prices relative to fundamentals, financial system leverage and the funding risks faced by financial institutions remain a priority and several important reforms are underway.

The market for United States Treasury securities plays a key role in the domestic and global financial system as a source of dollar funding, a safe haven for assets and to set a global risk-free benchmark for returns. However, it has become more volatile and bears close monitoring. It is the largest and most liquid market for government securities in the world and developments in the market can have significant international spillovers. In the US context, it plays a key role in financing the government and implementing monetary policy (Grothe et. al. 2023). Episodes of market dysfunction in 2019 and 2020 required emergency intervention from regulators. At the same time, the stock of Treasury securities has grown rapidly and will become a much larger share of all debt securities in the United States, rising from 16% in 2007 to 44% in 2023 (Figure 1.11). The authorities have proposed reforms to the operation of the Treasury market (Box 1.2). These include requirements for market participants who behave as dealers to be registered with the regulator and an expansion in the scope of transactions that need to pass through a central clearing house. By improving transparency and market integrity, these reforms could encourage further participation in the Treasury market, increasing liquidity. However, there will be additional costs for participants of the new arrangements.

Rising interest rates have slowed credit to households and businesses. Nonfinancial sector debt fell from 165% of GDP in 2021 to 152% in 2023. Overall, both business and household balance sheets remain strong, but pockets of stress have emerged. In the household sector, a rising share of credit card and auto loans have transitioned into serious delinquency (over 90 days past due) since the first quarter of 2022 (Figure 1.12, Panel A), reaching the highest level since 2012. Younger borrowers have accounted for much of the rise in delinquencies in both types of credit (Figure 1.12, Panel B). This age group of borrowers benefitted from a pause in student debt repayments enacted by the federal government through the pandemic, though repayments recommenced in October 2023. Nonfinancial businesses have been able to buffer the tightening in monetary policy due to a high share of long-term fixed-rate debt. Nonetheless, fixed rate debt is much less common for smaller listed companies than larger ones.

There has been a slight pick-up in delinquency rates for commercial real estate, especially in the office sector, though the aggregate sectoral delinquency rate for loans over 90 days past due remains low: around 1% compared to around 8% following the global financial crisis (Figure 1.13). Real commercial real estate values fell 16.2% from the first quarter of 2022 to the first quarter of 2024 (Figure 1.13), a sharper decline than observed in past monetary policy tightening cycles (IMF, 2024a). As well as higher interest rates, structural trends that accelerated during the pandemic, such as working from home and online shopping, have affected returns. Office vacancy rates rose to around 20% by early 2024, the highest on record, and the low levels of transactions in the office market suggest that prices may not yet fully reflect the sector’s weak fundamentals (Board of Governors of the Federal Reserve System, 2024a). This may be a reason why delinquency rates in the sector have not increased further. Any additional deterioration in the value of commercial real estate could have a particularly significant negative impact on smaller and regional banks, as they are almost five times more exposed to the sector than larger banks (IMF, 2024a).

The banking system overall appears to be well capitalised and profitable. Domestic banks rely only modestly on short-term wholesale funding and have continued to maintain sizable holdings of high-quality liquid assets. Return on equity in the banking sector is high relative to the period since the financial crisis (Figure 1.14, Panel A). Rising interest rates resulted in the sectoral net interest margin increasing by 0.8 percentage points between 2021 and 2023 (Figure 1.14, Panel A). The overall Common Equity Tier 1 capital ratio (CET1) has been trending higher. The aggregate CET1 ratio for global systemically important US banks reached a decade high in the fourth quarter of 2023 and is above the ratio for other US banks (Board of Governors of the Federal Reserve System, 2024b). The rise in delinquencies has resulted in an increase in the net charge-off rate on bank balance sheets, though it is now only back to the pre-pandemic level after a period of being at historic lows. The rise in the net charge off rate has so far been contained to personal loans, with no discernible increase in 2023 in charge-offs in the real estate and commercial and industrial loan categories (Figure 1.14, Panel B).

There are still significant notional securities losses on bank balance sheets from long-term fixed rate debt securities due to higher interest rates (Figure 1.15). These were the catalyst for the bank failures observed in early 2023 (Box 1.1). As of the final quarter of 2023, banks’ balance sheets showed declines in fair value of USD204 billion in available-for-sale securities and USD274 billion in held-to-maturity securities (Figure 1.15). These numbers are large compared to bank capital and will affect future bank profitability, as well as creating a vulnerability if banks needed to sell these assets. A new regulatory proposal would require unrealised capital gains and losses on “available-for-sale” securities to be included in calculations of regulatory capital for institutions with over USD100 billion in assets (Barr, 2023). This partly responds to the recent bank collapses and would better ensure that capital requirements reflect the risks on bank balance sheets, thereby encouraging more prudent risk management. Unrealised gains and losses for securities classified as “held-to-maturity” would continue to be excluded for regulatory purposes. The authorities should ensure the new regulations do not result in more securities being classified as held-to-maturity as institutions seek to avoid holding more capital.

Proposed regulatory changes also include implementation of some aspects of the Basel III requirements. This includes reducing the ability for banks to use internal models to calculate capital requirements. Certain aspects of the proposal go beyond Basel III requirements, such as the risk-weighting of residential mortgages (Labonte and Scott, 2023). The proposal is estimated to result in a relatively large increase in Tier 1 capital requirements of 16% on average, compared with estimated impacts on capital requirements from Basel III implementation of 3% in the UK and 10% in the EU (Prudential Regulation Authority, 2023).

Direct lending by nonbanks to businesses, so‑called private credit, has grown rapidly. Private credit in the United States has increased at an average annual rate of 20% over the past five years, equivalent to over 9% of the stock of bank credit in 2023 (IMF, 2024b). Such credit is mostly extended to firms that are too large or risky to borrow from banks and too small for public markets (IMF, 2024b). The attractiveness for investors is the relatively high floating rates associated with private credit loans, which are also generally senior in the capital structure, while borrowers benefit from faster execution, greater flexibility and limited disclosure requirements relative to bank borrowing and public markets (FSOC, 2023). Redemption risks are somewhat mitigated by long-term financing arrangements and the use of leverage appears to be modest. However, private credit loans are typically at floating rates, meaning heightened exposure to increases in interest rates. Furthermore, light regulatory oversight and limited disclosure contributes to the opacity of these lending activities. Further efforts to collect data on private credit, as advocated by the Financial Stability Oversight Council (FSOC, 2023), would provide insights into linkages with other parts of the financial system and help identify potential financial risks.

US labour productivity per hour is among the highest in the OECD which, together with high aggregate employment, sustains the highest per capita living standards in GDP terms among major economies. However, average real GDP growth has slowed in subsequent growth cycles from the start of the 1990’s: stepping down from 3.4% in the 1990’s to 2.6% in the years leading up to the financial crisis to 1.8% from then until the pandemic (Figure 1.16, Panel A). This slowdown in GDP growth primarily reflects slowing trend labour productivity growth, together with a weaker contribution from labour as the population has aged and more of the available workers are already integrated in the labour force. Weaker productivity growth reflects a declining aggregate investment rate, as well as slower growth of multifactor productivity. At the industry level, most of the productivity slowdown since 2001 came from more modest contributions from the ICT, manufacturing and wholesale and retail trade industries (Figure 1.16, Panel B). While measured aggregate productivity growth has been highly volatile in recent years around the pandemic, both productivity and employment are now back to around the pre-pandemic trend and there may be upside risks to productivity in the years ahead as adoption of new technologies advances.

Productivity prospects for the United States benefit from framework conditions that favour a dynamic and productive economy. Administrative requirements on start-ups are low and employment protection legislation is less stringent than in any other OECD country, encouraging the formation of new businesses and resource reallocation (OECD, 2020a). Managerial capital is strong (Bloom et. al. 2012), supported by some of the world’s top universities, and the US is a global leader in domestic research and development intensity. The domestic economy benefits from deep integration with global markets: it was the recipient for over one third of all FDI inflows into OECD countries in 2022 and was the largest source of outward FDI. These factors interact to encourage technological innovations as well as their domestic application in ways that enhance productivity.

Revitalising productivity growth can help the economy adjust to the ongoing headwinds from the ageing population and contribute to further overall raising living standards. However, this needs to be achieved in a way that does not exacerbate the already high level of income inequality. The ratio of disposable income of the richest 10% of the population to that of the poorest 10% of the population is one of the highest in the OECD (Figure 1.17). Similarly, the relative poverty rate is close to the highest of the OECD, with 18% of the population in 2022 living below a poverty line of half the median household income. There is evidence that tax and transfer policies introduced during the pandemic substantially reduced income inequality (CBO, 2024c) and the relatively fast pace of nominal wage growth of the lowest income workers since the pandemic should have also helped (Figure 1.16, further above). However, despite these favourable developments, recent inflationary pressures are likely to have had a large impact on lower income households who spend a larger share of their income on energy and food and who are less able to absorb higher living costs (Stockburger, et. al. 2023).

The government has introduced a series of new industrial policies designed to raise economic performance, but also targeting environmental, social and other objectives (Box 1.4). Major legislative pieces have been the Infrastructure Investment and Jobs Act (2021), the Inflation Reduction Act (2022) and the Chips and Science Act (2022). The purpose of each package has differed, but common objectives have been creating resilient supply chains, enhancing national security and promoting the convergence of disadvantaged communities. This has often been through measures that promote domestic production of certain goods.

Well-designed industrial policies can have large benefits, especially when used to tackle challenges markets cannot address on their own. However, along with significant fiscal costs, such policies can create market distortions that negatively impact innovation and the availability and prices of goods and services. Costs can be particularly high when measures effectively limit competition and increase protectionism (OECD, 2024c). In this context, strong evaluation frameworks are needed to distinguish the efficacy of the industrial policy measures being implemented and to adjust them as needed. In determining if industrial policies are the most effective and efficient policy intervention, these evaluation frameworks should clearly identify the trade-offs that exist between economic objectives and other priorities such as national security. In cases where industrial policy interventions are deemed appropriate, other government policy reforms will be needed to ensure they achieve their greatest effect. These include providing supportive physical infrastructure, keeping markets open and competitive, enabling the accumulation and application of relevant skills and making better use of the skills of women.

America’s infrastructure lags behind in many areas, even if it has world leading infrastructure in some domains, such as commercial freight. There is rapid ageing of the public infrastructure stock, including highways, streets and transport (Figure 1.18). Public infrastructure investment has trended down over time and has been far lower as a share of GDP than in most OECD countries. The need to increase public spending on transport infrastructure has been emphasised repeatedly in past OECD United States Economic Surveys. Improving the stock of public physical infrastructure would raise productivity, both through higher value-added of infrastructure sectors such as utilities, telecommunications and transport and indirectly through the positive productivity impact on downstream sectors that use these services as intermediate input. To begin addressing infrastructure challenges, the authorities enacted the Infrastructure Investment and Jobs Act in November 2021 (Box 1.4). Even so, the productivity payoff from infrastructure spending is highly uncertain and depends critically on the frameworks determining the selection and implementation of projects (Demmou and Franco, 2020).

There are longstanding infrastructure governance challenges in the United States which risk reducing the efficiency of public infrastructure spending. In particular, the OECD Infrastructure Governance Indicators identify shortcomings related to long-term strategic vision for infrastructure (OECD, 2023a). This partly reflects the absence of a national long-term cross‑sectoral infrastructure plan. High level plans such as these can ensure new infrastructure spending decisions are aligned with strategic objectives and account for spillovers between sectors and jurisdictions. They can also establish mechanisms for coordination between levels of government, which has been an ongoing challenge for infrastructure planning in the United States (Demsas, 2021).

A key element for sustainably reviving productivity growth is maintaining a competitive and open business environment. Doing so encourages the adoption of superior managerial practices and the diffusion of existing technologies to laggard firms, underpinning their catch-up to the national frontier (OECD, 2015). It also promotes the transmission of productivity gains to real wages by compressing product market rents that tend to accrue to capital (OECD, 2018).

The structural decline in productivity growth from the early 1990s has been accompanied by indications that competition is weakening. These include a slowdown in firm entry rates (Akcigit and Ates, 2019), a rise in the prices firms charge above their marginal costs (De Loecker and Eeckhout, 2017) and a fall in the pace of resource reallocation that has been broadly based across industries (Figure 1.19, Panel A and B). This has coincided with signs of a slowdown in the diffusion of existing technologies and practices to laggard firms: the dispersion of productivity growth between firms within sectors rose steadily between 1987 and 2020, a trend observed for 74% of the 86 industry sectors captured by Bureau of Labor Statistics data. More recently, there are signs that the pandemic may have been the catalyst for a revival in business dynamism. High propensity business applications, those with attributes consistent with a high propensity of turning into a business with payroll, jumped at the onset of the pandemic and remain elevated (Figure 1.19, Panel D; Decker and Haltiwanger, 2023). This has been accompanied by an increase in the number of business establishments (Council of Economic Advisers, 2024b).

The authorities have prioritised improving the policy framework to foster competition in the business sector. In 2021, the President issued the Executive Order on Promoting Competition in the American Economy, marking a whole of government effort to promote competition, directing executive agencies and encouraging independent agencies to intensify their efforts (The White House, 2021a). Some areas of focus include promoting competition in digital markets, given network effects mean these markets can be prone to incumbents creating dominant positions, and reducing barriers to labour mobility. The use of occupational licensing restrictions (as discussed in depth in the 2020 OECD Economic Survey of the United States) and non-compete and “no-poach” agreements is a concern. In April 2024, the Federal Trade Commission issued a rule prohibiting companies from enforcing existing noncompete contracts on employees other than senior executives (which account for 0.75% of all employees) or imposing any new non-competes (Federal Trade Commission, 2024). The rule is estimated to cover 80% of the private workforce. This reduction in these restrictions is welcome and should support job mobility.

New guidelines for evaluating mergers were published in December 2023 in response to a direction in the Executive Order. These introduced more stringent thresholds for rendering a transaction presumptively illegal. Concerning vertical mergers, the guidelines specify that there will be basis to challenge a merger where one of the parties has a market share greater than 50%. Other novel aspects of the guidelines include the consideration of a merger’s impact on the market power of firm employees and the sequence of merger activity leading up to a proposed deal, given such a pattern could entrench market concentration. Close scrutiny of merger behaviour in certain sectors characterised by increasing market concentration and relatively high prices is needed, including the communications sector (Corrado and Ukhaneva, 2016; OECD, 2021a). Indeed, the communications sector has become more concentrated in recent years, following merger activity that was approved by regulators (OECD, 2021a). At the same time, minimum monthly retail prices for communications packages in the United States are very high by OECD standards (Figure 1.20). Federal regulators have noted the need to enhance antitrust enforcement compared to the approach of recent decades (Khan, 2023). In addition, the recommendation from past Economic Surveys for the authorities to continue to adapt antitrust policy settings to new trends in digitalisation, financial innovation and globalisation (OECD, 2020b) remains relevant.

While rising digitalisation can create challenges for maintaining open and competitive markets, it also brings opportunities for new competitors. Allowing consumers more control of their data is a promising area for promoting the growth of young high potential firms. Greater data portability by consumers can reduce switching costs and better enable comparison services in markets with complex pricing structures. There may be large consumer benefits to greater data portability in certain sectors such as health care, energy and financial services. Slow progress has been made in implementing “open banking”. However, the Consumer Financial Protection Bureau expects to finalise a proposed Personal Financial Data Rights rule by Autumn 2024. The proposed rule accords with a recommendation from the previous OECD Economic Survey (Table 1.4) and would require companies to share customers data (at the customers direction) with other companies offering better products. Promoting competition in the banking sector may be especially worthwhile given significant consolidation over recent decades and evidence that larger lenders in certain products, such as credit cards, charge significantly higher interest rates (Consumer Financial Protection Bureau, 2024).

Recent advances in Artificial Intelligence (AI), and generative AI systems specifically, should be accompanied by regulatory oversight to ensure these technologies do not restrict openness and competitive markets. Some of the attributes of current AI ecosystems pose risks for competition. For instance, there may be large economies of scale and network effects as the predictive performance of AI models improves as the volume of data inputs expands (OECD, 2024b). In addition, the significant computing power required to train advanced AI systems, including foundation models, creates high fixed costs which advantages incumbent and well-capitalised firms. There is also the potential for AI-driven recommender systems to be designed in a way that increases market concentration, for example through retail platforms developing their own AI-driven recommender systems that self-preference. A tenet of the OECD AI Principles is developing regulatory frameworks that encourage competition in AI development (OECD, 2024a). Given that the United States is at the global forefront of AI development (Figure 1.21), it will be key in establishing appropriate guardrails and regulatory frameworks promoting the trustworthy use of the technology. Doing so expeditiously is important given the speed with which the technology is advancing and diffusing throughout economies. Recent regulatory developments (Box 1.5) are initial steps that will have international spillovers for other OECD jurisdictions and are expected to continue.

Maintaining open markets and a rules-based international trading system is a key channel to promote a competitive and dynamic domestic business environment and allow firms to benefit from the development of global value chains. As well as encouraging innovation, both through sharpening business incentives and facilitating knowledge spillovers from abroad, openness reduces the prices paid by consumers and provides greater choice. However, geopolitical fragmentation, concerns about harmful non-market practices in other countries, a desire to support domestic industry and concerns about the distributional consequences of globalisation have resulted in trade policies becoming more restrictive in the United States and in other OECD countries in recent years. While such measures may be justified in the presence of clear market failures or other objectives such as national security or increasing supply-chain resilience, they risk imposing significant economic costs.

The net number of restrictive trade policy interventions implemented by the United States has risen since 2018. This largely reflects an increase in the number of trade policy interventions related to China (Figure 1.22, Panel A). National security has been cited by the US authorities as the key concern for imposing these restrictions. The average bilateral tariff rate on imports from China increased from 3.1% in January 2018 to 21% in January 2019, before edging down to 19.3% after the signing of the Phase One agreement with China in January 2020 (Figure 1.22, Panel B). In May 2024, the administration announced future increases to import tariffs on a short list of items from China, comprising steel and aluminium, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes and medical products. The proportion of United States imports from China subject to tariffs rose from 0.8% in July 2018 to 66% by September 2019 (Bown, 2023). While trade with China has fallen since these policies were implemented, a major impact of this policy was to cause trade diversion, with Chinese imports replaced with imports from other countries, lengthening global supply chains and adding to costs (Bown, 2022). Some of these imports may rely on significant inputs from China. With respect to other markets, import tariffs were imposed on a narrower range of products: steel, aluminium, solar panels and washing machines. However, agreements have been made in recent years that have reduced the stringency of some of these measures. These include the replacement of certain steel and aluminium tariffs with tariff rate quotas for EU countries, exemptions from solar panel tariffs for four South East Asian nations and the expiration of washing machine tariffs in February 2023. Average bilateral tariff rates on imports from countries outside of China have overall remained low (Figure 1.22, Panel B). Nonetheless, those tariff increases that have occurred have raised prices for American consumers and input costs for businesses (Amiti et. al. 2019; Fajgelbaum et. al. 2019). Recent estimates suggest that undoing the tariffs put in place in 2018 and 2019 could raise the level of output by 4% over three years (Boer and Rieth, 2024).

The United States has also imposed some export controls and toughened the foreign investment review processes, also on national security grounds. Recent export restrictions have primarily focused on equipment and technology for advanced semiconductor manufacturing destined for countries of concern, which includes China. Such restrictions were updated in October 2022 and further tightened in October 2023. With respect to the long-standing foreign investment review processes, the administration issued an Executive Order in August 2023 that adds several national security factors for the Committee on Foreign Investment in the United States (CFIUS) to consider during its review process (The White House, 2023b). In April 2024, the U.S. Department of Treasury issued a regulatory proposal that would strengthen certain CFIUS procedures and sharpen its penalty and enforcement authorities (Department of the Treasury, 2024). While reinforced foreign investment review provisions are aimed at addressing threats to national security from countries of concern, investments from all foreign sources are being more closely scrutinised in sectors of the economy considered to have strategic importance, such as steel. The concentration of critical minerals in countries of concern is also being addressed through a combination of trade agreements (for example, the U.S.-Japan Critical Minerals Agreement) and enhanced domestic capability for production, stockpiling and recycling of critical minerals (The White House, 2022b),

Aspects of new industrial policies aimed at bolstering U.S. industries may have anti-competitive effects, both in providing subsidies to US-based production and due to specific conditions imposed to qualify for support. Local content requirements have become more common for eligibility for government incentives in the United States. For example, full eligibility of the consumer Clean Vehicle Tax Credit introduced as part of the IRA requires: i) a minimum proportion of battery components to be manufactured or assembled in North America (rising from 40% in 2023 to 80% after 2026), ii) a minimum proportion of critical mineral inputs to be extracted or processed in the United States or in a country with which the United States has a free trade agreement (rising from 50% in 2023 to 100% after 2028) and iii) final assembly of the vehicle in North America. “Buy American” requirements, which require certain goods purchased with federal funds be manufactured primarily in the United States, were also expanded to a broader range of goods as part of the 2021 Infrastructure Investment and Jobs Act. These local content requirements may impose significant economic costs by reducing competition in the domestic market and leading to a switch to domestic goods of inferior quality and higher price than the imports they substitute (OECD, 2019). They could ultimately complicate the sourcing of key inputs for the climate transition. OECD modelling has highlighted that countries imposing local content requirements suffer a broad loss in international competitiveness, illustrated by a reduction in exports in sectors not directly targeted by the provision (Stone, et. al. 2015).

Taken together, these changes amount to a significant shift in US trade and investment policies, although overall the US economy remains relatively open to trade and foreign investment. National security motivations can be invoked across a broad range of areas, and restrictions to date have been applied in some cases to other OECD members. The shift in approach creates a more uncertain and complicated operating environment for businesses. There is a risk of invoking retaliatory policy responses by trade partners, as has already been seen, as well as encouraging other countries to develop their own policies to favour domestic production and undermining the rules-based multilateral trading system, leading to an amplification of the fragmentation of global supply chains. Since 2019, the United States has declined to appoint members to the WTO’s highest dispute resolution body. National security or other concerns need to be carefully assessed and weighed against the potential negative economic impact on the economy.

An effective anti-corruption framework supports a strong business environment. Corruption – the abuse of public office for private gain – discourages business dynamism, reducing investment and innovation, and weighs on growth prospects (Jin, 2021). It also undermines equality of opportunity and erodes trust in government. The perception of corruption is low in the United States, but remains somewhat higher than in most other G7 countries (Figure 1.23, Panel A). According to the Varieties of Democracy Project, the main areas of weakness compared with peer countries relate to public sector embezzlement and legislature corruption (Figure 1.23, Panel B).

The United States is a top performer in several areas of the OECD Public Integrity Indicators, including measures to promote transparency and integrity in lobbying (Figure 1.23, Panel D). The disclosure requirements in the Lobbying Disclosure Act are some of the most comprehensive in the OECD, and the Foreign Agents Registration Act remains a pioneering piece of legislation for combatting foreign interference. In practice, investigations into violations of these regulations occur regularly. Similarly, the US has strong regulations to prevent conflicts of interest, submission rates of interest declarations are high, content verification of interest declarations occurs frequently, and investigations into non-compliance are commonplace. However, there is scope for improvement in other areas. In 2021, the US adopted its first anti-corruption strategy and a corresponding action plan was published in 2023. However, it primarily focuses on combatting corruption abroad rather than domestically. It also does not contain outcome level indicators to assess the impact of the envisioned measures. Furthermore, while the US has strong legislation for requesting access to public information, many key datasets are not proactively published. For example, there is no database containing consolidated versions of all primary laws or aggregated data on lobbying and agendas of cabinet meetings and cabinet secretaries are not published. Compared to other OECD countries, regulations related to political finance are relatively weak. This reflects the fact that there is currently no complete ban on anonymous donations and no maximum threshold for personal contributions to candidates’ personal campaigns (OECD, 2024d). Since 2010, campaigns have increasingly relied on support from independent expenditure-only committees (also commonly referred to as “super political action committees” or “Super PACs”), entities that are permitted to raise and spend unlimited funds on election campaigns, as long as their activities are independent of candidates. In an OECD context, Super PACs are unique and novel instruments, and a review of their impact on the political finance system and evaluation of relevant regulations would be useful to help mitigate potential risks of undue influence by special interests on public policy making.

In terms of tax transparency, which reduces the scope for tax evasion, the United States is largely compliant and similar to other G7 countries (Figure 1.24, Panel A). With respect to the effectiveness of anti-money laundering measures, the United States performs better or at least equivalent to other G7 countries (Figure 1.24, Panel B). However, concerning the technical compliance of anti-money laundering measures, the Financial Action Task Force judged the United States non-compliant in four areas as of March 2020: transparency and beneficial ownership of legal persons, customer due diligence, other measures and regulation and supervision of designated non-financial businesses and progressions (Financial Action Task Force, 2020). Looking forward, achieving continued progress in technical compliance in all anti-money laundering measures should be a priority. The Corporate Transparency Act, which requires certain U.S. and foreign companies to report beneficial ownership information to the Financial Crimes Enforcement Network, became effective at the start of 2024 and has been recognised as an improvement by the Financial Action Task Force (Financial Action Task Force, 2024). The legislation was declared unconstitutional by one District Court in March 2024, though reliefs only apply to the named plaintiffs (the members of the National Small Business Association).

Policies that equip individuals with the skills needed in a fast-changing work environment will help boost future productivity. The influence of an ageing society, digitalisation and the climate transition will shape the pattern of labour demand. Employment projections by the Bureau of Labor Statistics suggest that the biggest employment gains over the coming decade will be in the health and professional services industries (Figure 1.25, Panel A). Rising demand for health workers reflects in part the influence of an ageing society. Strong demand from professional services is mostly due to an anticipated increase in need for software developers in the computer system design industry (Figure 1.25, Panel B). Labour demand is projected to be especially strong for workers in occupations in the highest wage quintile (Figure 1.25, Panel A). Consistent with this, most of the new employment needs will be for workers with educational attainment corresponding to a Bachelor degree or higher (Figure 1.25, Panel B). If there were to be inadequate supply of workers with the skills needed to fill these jobs, wages at the upper end of the income distribution would adjust higher, exacerbating income inequality. Consequently, along with programmes that specifically respond to identified skill needs, broader education policies that support skill accumulation and pathways into higher level degrees are a priority.

Student test scores in the Programme for International Student Assessment in 2022 were broadly in line with the OECD average across the disciplines of mathematics, reading and science, but weaker than in the best performers or neighbouring Canada (Figure 1.26). Test scores have been trending down since the early 2000s in mathematics but have been stable in reading and trending higher in science. Performance gaps between socio-economic groups are relatively large in the United States, with advantaged students outperforming disadvantaged students by 102 points in mathematics compared with a gap of 93 points in the average OECD country. To put this in perspective, the average 15-year old student in a PISA-participating country is estimated to gain around 20 points in one school year (OECD, 2023b).

Learning losses for school students were significant through the pandemic, with significant school closures (UNESCO). This was reflected in a decline in student test scores in the National Assessment of Educational Progress (NAEP): between 2019 and 2022, the simple average learning loss across the 51 states was equivalent to 0.6 grade levels in mathematics and 0.3 grade levels in reading (Figure 1.27, Panel A). For the 13 states that report NAEP scores by socioeconomic status, the decline in average test scores were most pronounced for economically disadvantaged students (Figure 1.27, Panel B). Test scores from 2023 recovered somewhat, with the average score rising by 0.2 grade levels in both mathematics and reading. However, the recovery was weaker for economically-disadvantaged students.

To address pandemic learning losses and facilitate the safe operation of in-person schooling, supplementary federal funding of around USD190 billion (0.8% of GDP) has been provided through the Elementary and Secondary School Emergency Relief Fund. The funds are disbursed to districts based on their incidence of poverty (Fahle et. Al., 2024). However, this funding will fully expire by September 2024, which is likely to create financial pressure on some schools with a high proportion of lower socio-economic students. There is a need to minimise the adverse impact of the expiry of these funds on students from lower socioeconomic backgrounds through further measures at both the federal, state and local level to accelerate their learning.

Chronic school absenteeism has also become more common across all states compared with prior to the pandemic (Figure 1.28). Analysis by the Council of Economic Advisers suggests that increased absenteeism is associated with a 16-27% decline in NAEP test scores in mathematics and a 36-45% decline in reading (Council of Economic Advisers, 2023). This accords with OECD studies that highlight a significant association between truancy and a decline in PISA scores, when controlling for student and school socioeconomic profile (OECD, 2018). Beyond test scores, heightened school absenteeism has been associated with weaker future labour market prospects and poorer outcomes along other dimensions of wellbeing such as health (Council of Economic Advisers, 2023). The administration is appropriately urging states to strengthen accountability for addressing chronic absenteeism at the district level and work to support specifically tailored strategies to improve family engagement with schools (Biden-Harris Administration, 2024).

Enrolment rates in higher education have fallen, despite the projected increase in demand for graduates in the coming years. Between 2010 and 2019, enrolments in degree-granting post-secondary institutions fell by 6.6% and then by a further 5.3% between 2019 and 2022. This has largely reflected declining enrolments in 2-year college degree programs. The fall in enrolment rates has been most visible for males (Figure 1.29, Panel A), particularly those that are White or Hispanic (Figure 1.29, Panel B). Nearly all states currently have a post-secondary attainment goal to improve the average education levels of their residents and develop a highly-educated workforce (Lumina Foundation, 2024). Given that cost of higher education is the major barrier to participation (Gallup and Lumina Foundation, 2023), policy measures that relieve higher education costs could benefit higher education enrolment, though measures such as student debt relief can be fiscally costly (CBO, 2022a) and regressive (Looney, 2022).

A priority should be continuing to engage with former students who stopped higher education without earning a credential (so called “stopped out” students). As of July 2021, there were 40.4 million such people in the United States (National Student Clearinghouse, 2023). About 2.9 million of these were “potential completers”, who had already made at least two years of academic progress, with the majority of these aged in their early 20s (National Student Clearinghouse, 2023). Given a significant wage premium for post-secondary attainment (Bengali, et. al. 2023), the marginal benefits to these students of completing their remaining credits could be high. There is scope to increase the re‑enrolment rates of these students, with only around 6% re-enrolling in the 2021/22 academic year. In addition, many of the students who drop-out of higher education are close to finishing. One study using administrative data from Florida and Ohio showed that one-third of all dropouts completed at least three-quarters of the credits typically required (Mabel and Britton, 2018).

The major efforts to develop industrial policies need to be flanked by measures that ensure the skilled workforce is available to accommodate expanded investment in the selected areas. For example, estimates suggest significant shortages in the semiconductor industry of technicians (-26,400 by 2030), engineers (-27,300) and computer scientists (-13,400) (Semiconductor Industry Association and Oxford Economics, 2023). Education needs for each of these jobs differ. Most technicians require a certificate or associate degree, and they can obtain these credentials within six months to two years. In contrast, engineers and computer scientists typically require at least a four-year postsecondary degree. Provisions in the CHIPS and Science Act should help address shortages of technicians in the semiconductor industry, such as the introduction of several Workforce Hubs attached to semiconductor manufacturers (The White House, 2023c). It will be more challenging to fill skill gaps for engineers and computer scientists.

Foreign-born individuals are a potential source of engineering and computer science graduates. Permanent migration flows to the United States relative to population are low compared to the OECD average (0.31% in 2022, compared with 1% for the OECD and 1.1% for Canada; Figure 1.30) and a comparatively high proportion of permanent immigrants are non-work-related (OECD, 2023c). The United States is almost alone among OECD countries in imposing numerical limits on both temporary and permanent migration options for graduates with STEM masters and PhD’s and migration for employment in general. Furthermore, the numerical caps and preference categories date back to 1990, meaning that economic admissions are disconnected from the reality of the labour market. Employment visa categories such as the H-1B visa and the temporary O-1 visa do not currently give any priority to STEM graduates. Looking forward, regulatory and legislative change should aim to better align the temporary and permanent economic categories with the needs of the labour market and introduce flexibility to adapt to changing economic conditions.

There is scope to better engage women in the labour market by further reducing the barriers to their full participation. This could increase the number of workers, but also productivity growth by making the best use of their skills. Previous evidence suggests that up to 40% of aggregate productivity growth in the United States between 1960 and 2010 was explained by reducing occupational barriers to women and black men (Hsieh et. al. 2019). As discussed earlier, the labour force participation rate of women has recovered markedly in recent years and is now above the pre-pandemic level (Figure 1.5, Panel B). However, viewed in a longer-term context, gains in female labour force participation have largely stalled since the mid-1990s (Figure 1.31, Panel A). The working age female participation rate remains well below that in peer countries such as Canada (83% as at 2022) or top performers such as Sweden (90.4%). The gender participation gap for those aged over 20 is apparent across ethnic groups, but is most pronounced for the Hispanic and Latino population (Figure 1.31, Panel B). The participation gender gap prevails despite women in the United States having higher levels of educational attainment than men (proxied by the combined proportion having attained upper secondary and tertiary education). This is particularly the case for tertiary education, with 54% of women compared with 45.9% of men aged 25-64 holding a degree as of 2022.

The gender wage gap for a full-time employee at median earnings has declined over time. Nonetheless, the gap remains high compared with other OECD countries (Figure 1.32) and it has narrowed only slightly over the past decade. A variety of factors explain the persistence of the gender wage gap: differences in occupations and industries between men and women are salient, as well as career interruptions and shorter hours for women in high skilled occupations (Blau and Kahn, 2016). Underpinning these factors are gender norms and unequal distribution of caring duties between genders.

The cost and availability of childcare is a reason for relatively low labour market integration of women in the United States. Estimates suggest that women’s earnings decline by 31% after having a child, while the earnings of men are largely unaffected (Kleven, et. al. 2019). This compares to earnings penalties for women of 21% in Denmark and 26% in Sweden. The net fee for most parents for the use of formal childcare centres is high by international comparison (Figure 1.33), resulting in very high participation tax wedges for second earners when using childcare services: a job earning 67% of the average wage has a participation tax rate of 81% compared with 48% on average in the OECD. High childcare costs reflect low public investment, rather than stringent regulations that impose costs on providers, though single parents with low earnings are eligible for substantial public childcare support (Figure 1.33; OECD, 2022b). Availability of childcare can be limited. Analysis at the census tract level has found that 51% of Americans live in a “childcare desert”, meaning areas with little or no licensed childcare centres (Center for American Progress, 2018). Consequently, enrolment rates of 3-5 year olds is low by OECD standards and has not improved since 2005 (OECD, 2022b).

A long-standing issue has been a large gap between the proportion of families eligible for Child Care and Development Fund subsidies and those receiving them. This payment is the primary source of federal funding to states for subsidies that help low-income families afford childcare. Department of Health and Human Services estimates found that just 16% of federally-eligible children received childcare subsidies in 2019 (GAO, 2023). This reflects both insufficient funding to cover the eligible population and some eligible families not applying. Low take-up could be because families are not aware of the programme, find it too difficult to apply, are unable to use the subsidy at their chosen provider or are unable to afford the co-payment (GAO, 2023).

The United States is the only country in the OECD without paid maternity leave at the national level, and one of just nine OECD countries that does not have paid leave for fathers (OECD, 2023d). Parental leave systems support mothers staying in work and labour market re-entry after childbirth. Currently, families rely on a patchwork of supports. Eleven states have passed paid family and medical leave laws and there is a federal entitlement for unpaid leave for 12 work weeks around childbirth, though less than 60% of employees are eligible. Most private American employers do not provide paid parental and businesses that do so tend not to provide it to low-wage workers: around 24% of private employees have access to paid family leave but only 6% of those in the lowest income decile (Center for American Progress, 2023). To support the labour market participation of women, many OECD countries have been expanding parental leave policies in recent years, including by introducing provisions that support more equal sharing of caring duties between partners. For example, in Canada, a new employment insurance parental sharing benefit was introduced in 2019, which grants parents additional five weeks of benefits when parental leave is shared in such a way that one parent does not receive more than 35 weeks of parental benefits (OECD, 2023d).

The administration has announced ambitious policy targets for decarbonising the economy as part of international efforts defined in the 2015 Paris Agreement. The Nationally Determined Contribution target is to reduce greenhouse gas emissions by 50-52% below 2005 levels by 2030 (Figure 1.34, Panel A). In addition, a goal of net zero greenhouse gas emissions by 2050 has been set. This is underpinned by specific sectoral targets, including 100% clean electricity by 2035 and half of all new light-duty cars sold in 2030 being zero emission vehicles. Nearly half the states also have their own emission reduction targets, but this is not the case in many emissions-intensive states (Box 1.6).

Progress has been made to reduce greenhouse gas emissions in recent decades, but they remain high. Total emissions declined by 15% between 2005 and 2022 (Figure 1.34, Panel A). Over three quarters of this decline was attributable to a fall in emissions from the electric power sector as coal has gradually been replaced as an energy source (Environmental Protection Agency, 2024). Nonetheless, emissions per capita are the fourth highest in the OECD on a production basis (Figure 1.34, Panel B) and declines in emissions in sectors outside of energy have so far been limited. Achieving carbon reduction goals is critical for the global climate transition given that the United States currently accounts for 13% of global emissions on a production basis and closer to 15% on a consumption basis (Figure 1.34, Panel C).

Clean energy investment has picked up sharply in recent years, but from a low level. Projects have been quite widely dispersed across states, but most noticeable in the South (e.g. South Carolina, Tennessee, Kentucky) and the West (e.g. Montana, Wyoming; Figure 1.35, Panel A). Installation of clean energy technologies by households and businesses (“retail” in Figure 1.35, Panel B) has been especially strong, driven by a fourfold increase in investment in zero-emission vehicles between 2019 and 2023. Clean manufacturing investment has also grown rapidly, due to investment in battery manufacturing rising from around USD2 billion per quarter in the first half of 2022 to over USD10 billion per quarter by the end of 2023. Clean energy and industry investment has also been rising, but at a slower pace (Figure 1.35, Panel B).

Following many years of modest policy measures to address climate change, there has been a major acceleration in policy efforts in the United States. The IRA and Infrastructure Investment and Jobs Act contained substantial climate measures focused on decarbonising the energy and transport sectors (Table 1.6; OECD, 2023e). In addition, there are other sector‑based decarbonisation policies.

The policies currently in place will help markedly reduce greenhouse gas emissions in the period to 2030. Simulations suggest emissions will fall by 30-43% by 2030 under current policy settings (EPA, 2023b; Ramseur, 2023), depending on model design and assumptions regarding deployment constraints and technology costs. Given the reliance on tax credits in the IRA and that these are uncapped, the impact on emissions, as well as the cost, will depend on the take up of the credits. Modelling of emissions trajectories with and without IRA measures highlight the significant contribution of this legislation to planned mitigation (Figure 1.37, Panel A), notably in the electricity sector (Figure 1.37, Panel B). Recent regulations for vehicle emissions will contribute further to meeting the climate goals. Nonetheless, current policies are unlikely to be enough to meet the 2030 target or achieve net zero emissions by 2050. Scenario analysis suggests that this will be especially the case in an environment of lower‑than‑expected natural gas prices (EPA, 2023b). In addition to fully implementing current policies, further mitigation policies are thus likely to be needed. Policy measures at the federal level will be key to meeting national targets and minimising carbon leakage across states with diverse climate policies (Box 1.6).

The climate policy approach taken to date has focused heavily on subsidies combined with regulation at a sectoral level rather than carbon pricing (Table 1.6). A focus on subsidies has largely reflected political economy concerns and may make policy efforts more durable to changing political realities by creating constituencies that directly benefit through receiving subsidies. However, compared with capping emissions and allowing trading, the existing policy approach has a more uncertain impact on emission reductions, reflected in the wide range of estimates of the impact of current policies. Subsidies can boost overall demand for energy, in an environment where energy consumption per capita is high compared with other countries. It also does not incentivise marginal abatement costs to be equalised across different uses and may lead to high fiscal costs at a time when the US government budget deficit and debt are high (Chapter 2).

A greater reliance on carbon pricing could help achieve climate objectives in a less costly and more efficient way. There are already cap and trade systems in thirteen states, though the price per tonne of CO₂ is relatively low. The clearing price at a Regional Greenhouse Gas Initiative auction on 6 December 2023 was USD13.85 per tonne for CO₂ emissions allowances, compared to a carbon price of 60 euro per tonne in the EU ETS or the estimated social cost of carbon for the United States of USD120-340 per tonne (depending on the discount rate applied, Box 1.7). Only a small share of total emissions are priced overall (Figure 1.38).

Introducing a national cap and trade system would take time, with lower prices in an initial phase that gradually increase. Another approach would be to introduce a tax on emissions. Recent modelling has focused on a carbon fee that rises from USD15 per tonne of CO₂ to USD65 per tonne of CO₂ by 2035 with a carve out for retail gasoline sales, which are already subject to taxation at the federal level (Bistline et. al. 2024). A fee of this magnitude would be substantially below the recently estimated social cost of carbon. Estimates suggest that it would lower carbon emissions 45-47% below 2005 levels by 2030.

A broad-based carbon fee is appealing from an economic perspective as it would be a cost-effective means to achieving emission reductions (D’Arcangelo, et. al. 2022). It would also yield fiscal revenues during the transition and be helpful in providing clear and consistent signals to firms and households about choices and incentives that impact the climate. Nonetheless, uncompensated carbon pricing can be regressive because low-income households tend to spend a higher share of their income on electricity and their demand for it is inelastic (D’Arcangelo, et. al. 2022). A survey undertaken in 2021 highlighted a relative public preference for subsidies as a climate policy (Figure 1.39, Panel A), but most respondents were in favour of the introduction of a carbon tax if the revenues were used to fund environmental infrastructure or low carbon technologies (Figure 1.39, Panel B). A different survey undertaken in 2022 found carbon pricing was at least as popular in the United States as in most large European countries, though also found that it was less popular as a mitigation option than subsidies for low-carbon technologies (Dabla-Norris, et. al. 2023).

Effective decarbonisation should rely on non-price‑based instruments, in addition to pricing measures (D’Arcangelo et al., 2022). Non-price‑based policies at the sectoral level are especially important in areas where mitigation behaviour is less sensitive to price signals. In some instances, carbon pricing measures can interact with non-pricing measures to reinforce their efficacy in reducing emissions. For example, carbon pricing that makes internal combustion engine vehicles more expensive to operate can give an added boost to the take up of new public transport options. Progress in emission reduction across the energy, transport, industry, buildings and agriculture sectors has been uneven so far and there are a variety of sectoral reform options to achieve further mitigation.

Emissions from the energy sector fell by 35.9% between 2005 and 2022, at which time the sector accounted for around one quarter of US emissions. This has been aided by the gradual transition towards cleaner energy, though fossil fuels still account for around 80% of total energy supply. Current policies to achieve emission reductions in the energy sector are primarily federal government tax credits for renewable and clean energy production and investment, which were expanded as part of the IRA (Table 1.6), together with regulations. Based on initial cost estimates, these tax credits make up over one third of the value of IRA climate provisions (Bistline, et. al. 2023), though that proportion could be considerably larger given that the credits are uncapped (Committee for a Responsible Federal Budget, 2023). The tax credits can be taken as cash by tax exempt and governmental entities (i.e. “Direct Pay”) and are transferrable to third parties for cash (important for entities with low tax bills). The tax credits subsidise the significant capital costs associated with renewable energy (D’Arcangelo, et. al. 2022) and help renewables maintain cost competitiveness with gas in an environment with limited carbon pricing.

In addition, new carbon pollution standards for coal and gas-fired power plants have been finalised and public loans are available for new clean energy projects and the repurposing of existing fossil fuel infrastructure. There is also a nuclear production tax credit which, by encouraging greater nuclear generation capacity, will help support energy grids in accommodating the intermittency of renewable sources. At the state level, thirty states and the District of Columbia have either a renewable portfolio standard or a clean energy standard. These measures require a share of electricity generation to be from low carbon sources, with the proportion typically increasing over time and utilities able to comply with the standards through tradeable credits. As discussed, some states also have emission trading schemes in place for the electricity sector (Figure 1.38).

Modelling results suggest that the combination of federal and subnational government policies and private sector commitments puts the energy sector on an emission reduction trajectory consistent with achieving net zero emissions by 2050 (NASEM, 2023). However, the challenge will be connecting the required new electricity capacity: three modelling exercises suggest that annual capacity additions will need to rise from 32.3 GW in 2023 to be in the range of 60 to 127 GW in 2024 to remain on track (Energy Innovation, the REPEAT Project at Princeton University, and Rhodium Group; Figure 1.40). Further ahead, national transmission capacity must increase by two to five times by 2050 to connect often remotely located renewable sources to the grid (Larson et. al. 2021). However, average interconnection queue times, the time for a project requesting connection to the grid to begin commercial operations, have increased from less than two years for projects built in 2008 to five years for projects built in 2022 (Berkeley Lab, 2023).

The federal permitting system is a source of substantial delays to the connection of new electricity capacity. For completed transmission and renewable generation projects in 2022, the median time for an Environmental Impact Statement was 3.5 years (Sud, et. al. 2023). There were also significant delays in obtaining other permits, such as those from the Bureau of Land Management. The authorities have established initiatives to promote closer coordination between agencies undertaking environmental reviews for renewable energy projects, assistance for developers to provide early information so that permitting processes can be accelerated and stronger coordination between federal and subnational governments (The White House, 2022c). Such initiatives are important steps. To further promote the streamlining of permitting processes without undermining the review quality, the authorities should introduce time limits for permitting projects in pre-designated areas determined to have low environmental sensitivity. Faced with similar challenges, the European Union issued a directive in 2023 for member states to introduce permitting time limits for some renewable energy projects and simplified environmental assessments (Box 1.8).

Direct emissions from transport declined by 6.9% between 2005 and 2022, by which time the sector accounted for 29% of US emissions. Most sectoral emissions stem from passenger cars and light duty trucks. Existing emission reduction policies include consumer tax credits for the purchase of new or used clean vehicles. The credits are targeted by household income and car price thresholds and their design has been adjusted to allow them to be effectively refundable by allowing transferability to the vehicle dealer. However, the consumer tax credits are accompanied by stringent local content requirements. In response to concerns from major trading partners about these requirements, the United States Department of Treasury announced in December 2022 that electric vehicles leased by consumers can also qualify for up to USD7500 in commercial clean vehicle tax credits. The commercial clean vehicle tax credits do not have local content requirements, meaning foreign vehicles are more readily eligible. The share of leased electric vehicles rose from around 10% at the time of the Treasury announcement to above 30% in December 2023 (Cox Automotive, 2024). However, the commercial clean vehicle tax credit is weakly targeted compared with the consumer credit, as eligibility is not contingent on meeting the household income cap and car price threshold. Investment in public transport has increased with USD90 billion allocated under the Infrastructure Investment and Jobs Act and battery charging networks are being bolstered through direct public spending and the availability of a tax credit for households and businesses installing charging capacity. Fuel excise taxes on gasoline and diesel at both the federal and state level are a means of pricing emissions in the transport sector and incentivise the shift towards low emission vehicles.

There has been a significant tightening in vehicle emission standards for light-duty, medium-duty and heavy-duty vehicles for the 2027-32 model years. These standards require a certain level of efficiency across the fleet of cars sold by a manufacturer and increase in stringency each year. The recent tightening in standards accords with a recommendation in the previous OECD Economic Survey of the United States (OECD, 2022b; Table 1.8). While the performance standards are technologically neutral, the Environmental Protection Agency estimates they will increase the penetration of battery electric vehicles in 2032 from 39% under a “no action” scenario to 67% (EPA, 2023a). New fuel economy standards have also been finalised. These will increase fuel economy (the distance vehicles must travel on a gallon of fuel) by 2% per year for passenger cars with model years 2027-31, 2% per year for light trucks with model years 2029-31 and 10% per year for heavy-duty pickup trucks and vans with model years 2030-32. At the state level, several states have Low Carbon Fuel Standards and there are Zero Emission Vehicle Programmes in 11 states accounting for around one third of the car fleet, which oblige automakers to sell a certain number of electric and fuel cell vehicles.

The pace of diffusion of low emission vehicles is in line with modelled pathways, though penetration varies greatly by region: while California had 232 electric vehicles registered per 10,000 population in 2022, North Dakota and Mississippi recorded just eight per 10,000 population. Modelling exercises suggest that current policies could be sufficient to achieve the administration’s target for electric vehicles to comprise 50% of all light duty cars sold in 2030 (Bistline et. al. 2023). However, the range of modelled outcomes is broad and will depend on consumer demand. The rapid rollout of electric vehicles will require good availability of charging infrastructure for potential buyers (Consumer Reports, 2022). Other countries with relatively high electric vehicle penetration had greater availability of charging infrastructure in the early stages of their market than currently available in the United States (Figure 1.41). The number of public charging ports has grown rapidly, to around 183,000 according to the Joint Office of Energy and Transportation. However, there is estimated to be a need for at least 3 million public chargers by 2030 to facilitate the required electric vehicle fleet (NASEM, 2023). Charging infrastructure should benefit from the recent Federal Highway Administration announcement of new standards for federally funded electric vehicle chargers to ensure consistency, reliability and compatibility across the country (IEA, 2023).

Additional demand side policies that support the take up of low emission vehicles would help reduce transport emissions further. As discussed in Chapter 2, the federal excise tax on motor fuels has not increased since 1993. Motor fuel taxes in the United States are far below the norm in most other OECD countries. As well as raising fiscal revenue, increasing this levy would improve the relative attractiveness of low emission vehicles compared with those using motor fuels. Ongoing efforts should also be made to expand public engagement programmes that help consumers better recognise the cost savings of a low emissions vehicle over the vehicle lifetime.

Further investment in public transportation, including greening the fleet, would also help reduce transport emissions. However, a barrier to consumers adopting public transport is that it is only a realistic alternative to cars in compact urban areas with a high density of infrastructure services and shorter trip distances (OECD, 2022c). Urban sprawl in the United States is high compared with most OECD countries (OECD, 2018b) which may reflect the fact that most developable land is zoned exclusively for detached single-family housing. Modelling suggests that large-scale land use reforms that promote densification could reduce direct emissions from car use and associated upstream emissions by a collective 70 million tonnes per year (around 4% of total emissions from transport; Korn, et. al. 2024).

Emissions from the industrial sector declined by 9% between 2005 and 2022, at which point it accounted for just over 20% of overall carbon emissions. The sector represents a diverse range of products and processes with varying emissions intensity, with the manufacturing of cement, chemicals, iron and steel relatively carbon intensive. Recent policies to promote industrial decarbonisation have focused on supporting research and development in specific technologies, primarily hydrogen and carbon capture use and storage, which benefits from a tax credit established in 2008 that was increased and expanded in 2020. This is complemented by funding through the Infrastructure Investment and Jobs Act for 10 hydrogen hubs of producers, consumers and local connective infrastructure, reinforced by plans for a demand-side public support mechanism to provide greater market certainty (Department of Energy, 2023). In the petroleum and natural gas sector, pricing measures were introduced in the IRA in the form of methane emission charges for large emitters. The United States joined the Global Methane Pledge in October 2022, a voluntary commitment by 123 countries to collectively reduce global methane emissions across all sectors by at least 30% below 2020 levels by 2030.

To decarbonise the industrial sector, the Department of Energy has identified four pillars to be pursued in parallel: 1) energy efficiency, 2) industrial electrification, 3) low-carbon fuels, feedstocks and energy sources, and 4) carbon capture, utilisation and storage. It has presented a path to achieving net zero emissions by 2050 in the sector with emissions falling by 29% between 2005 and 2030 (U.S. Department of Energy, 2022). However, modelling suggests that recent policy measures would only result in about half the needed abatement (NASEM, 2023). Around three-quarters of the cumulative direct industrial CO₂ emissions reductions are expected to come from the deployment of pre-commercial technologies or technology types for which some designs or components are not yet mature (IEA, 2020). Recent policy support for developing low carbon fuels, such as hydrogen and carbon capture and storage technologies, has been increased. However, R&D spending has accounted for a very low share of recent low-carbon technology support (OECD, 2023e). Given under-provision of R&D by private markets due to the public good properties of new knowledge, support for R&D investment for industrial decarbonisation is required, not least as knowledge spillovers from clean technologies can be particularly large (Dechezlepretre et. al. 2013). Such spillovers are likely to partially accrue to other OECD countries, benefitting the global climate transition.

The industrial sector has received more limited policy support for encouraging energy efficiency improvements in industry and industrial electrification, which could have a more near-term impact on reducing emissions than R&D spending (NASEM, 2023). In improving energy efficiency, some OECD countries such as Denmark, Finland, Ireland, Netherlands, Sweden and the United Kingdom have introduced long-term agreements under which companies commit to specified energy savings in return for tax incentives (Waide, 2016). However, these come with a fiscal cost. Given large differences in energy intensity within industrial subsectors in the United States, a tradeable performance standard for each industrial subsector could be introduced. This would be a flexible mechanism, that does not prescribe the method of improved energy efficiency, with the ability to buy and sell credits to incentivise innovation (Krupnick et. al., 2021).

The process of industrial electrification in the United States is occurring, but fossil fuels still accounted for 78% of energy used in 2022 (Figure 1.42). Efforts to demonstrate new electrification opportunities, such as industrial heat pumps, and building the workforce needed to support these technologies can support greater electrification. There may also be a need for government subsidies for fuel costs and the capital costs of fuel switching or carbon pricing to make electrification cost competitive with natural gas (NASEM, 2023). In the Netherlands, the combination of Sustainable Energy Transition Incentive Scheme subsidies and a carbon levy on industrial emissions has started to make electrification of industrial heat processes cost competitive (OECD, 2021b).

Direct emissions from residential and commercial buildings increased by 6.4% between 2005 and 2022, by which time they accounted for 12.5% of total greenhouse gas emissions. When electricity use from buildings is included, energy consumption in buildings contributes over 30% of total emissions. Emissions from buildings could be reduced by improvements in energy efficiency or substituting appliances using fossil fuels with those using electricity. Some tax credits for homeowners support improved energy efficiency in new and existing houses (e.g. Energy Efficient Home Improvement Credit), as well as the installation of residential clean energy (e.g. Residential Clean Energy Credit). Low-income households can obtain funding for home energy efficiency improvements through the Weatherization Assistance Programme, though the annual number of recipients is low. The IRA allocated funding for incentivising state and local governments to adopt the latest building energy codes.

Emissions are anticipated to fall in the period to 2030 under current policies, but not sufficiently fast to be consistent with a net zero pathway (Jenkins et. al. 2022). Implementing electric heating systems that are energy efficient is a fundamental step in decarbonising the sector. For example, heat pumps are three-to-five-times more efficient than natural gas boilers and many models also provide cooling (IEA, 2022). More generally, further efforts are needed to sharpen the incentives for decarbonising the existing building stock. States have building energy codes, but these are mostly applied only to new construction. Some regions in OECD countries apply these to the existing housing stock (OECD, 2022c), such as Emilia-Romagna (Italy) and Toronto (Canada). In such instances, the building energy code becomes applicable when building owners undertake renovations at a certain scale or when the building is rented or sold (OECD, 2022c).

Emissions from the agriculture sector have been broadly flat, accounting for around 10% of total greenhouse gas emissions in 2022. Agricultural subsidy and extension services are the main policies currently used to support mitigation. These include the Environmental Quality Incentives Program, which provides funding for conservation practices such as cover crops, and the Regional Conservation Partnership Program, which provides technical and financial assistance to farmers for conservation. Overall, policy efforts to decarbonise the agricultural sector have so far been limited. The highest emitting agricultural activities are from soil management (primarily from fertiliser use) and enteric fermentation (a digestive process from ruminant livestock that produces methane; Figure 1.43). There is no agriculture-specific emissions reduction target in the United States, unlike in other OECD countries such as most of the EU member states, Canada, New Zealand and the United Kingdom (OECD, 2022d). Such a target could be helpful to focus mitigation efforts, measure progress and send an important signal to the industry.

Reducing emissions in agriculture will require further investment in emissions-reducing technologies and their deployment. Greater research and development on sectoral emission reduction approaches would benefit domestic mitigation efforts. Public support for agricultural R&D and innovation is currently low compared with other OECD countries such as Canada, Australia and EU members (OECD, 2022d). It is challenging to tax emissions or establish emissions trading schemes in the agriculture sector, given the difficulty of measuring emissions that do not arise from fossil fuel use, such as methane emissions from livestock, but some countries such as Denmark have moved in this direction.

The climate transition will reshape the United States energy industry and other sectors of the economy. Renewable energy projects comprised 96% of electricity capacity additions in interconnection queues at the end of 2022 (Figure 1.44, Panel A). There are substantial net medium-term benefits for employment in the United States from the climate transition (Shrestha et al. 2022; Foster et. al. 2023; Mayfield et. al. 2023), with anticipated new jobs in construction, manufacturing and service industries (Mahajan et al. 2022). However, new clean energy capacity will often not be in the same location as the previous fossil fuel industries (NASEM, 2023), despite efforts by the administration to design certain industrial policies to promote clean energy investment in energy communities (Box 1.4). Many states, such as West Virginia, Kentucky and Michigan that have a relatively high share of fossil fuel employment, have seen limited clean energy investment so far (Figure 1.44, Panel B).

Comprehensive and well targeted programmes to ease the transition for areas with a high concentration of fossil fuel jobs are needed. Studies of past labour market shocks in the United States show large lifetime earning losses for workers losing jobs and limited labour mobility to regions with better job prospects (Raimi, 2022). The individuals more prone to migrate during these episodes have been the younger and more educated (Hanson, 2023). This highlights the need for place-based policies to complement measures that reduce barriers to labour mobility. A key aspect is reskilling and up-skilling programmes for the local labour force (Botta, 2019; Causa, et. al. 2021). Spending on active labour market policies is low in the United States compared to other OECD countries (OECD, 2022b) and should be scaled up for those negatively impacted by the climate transition. This could be coupled with extended unemployment insurance duration for workers from fossil fuel industries who enrol in skill development or higher education programmes, thereby giving them time to reskill and transition to a high-quality job. OECD countries including Germany (Ruhr region), Canada (Alberta) and the United Kingdom have introduced job-search and training schemes to assist workers from fossil fuel industries find green opportunities with equivalent skill needs (D’Arcangelo, et. al. 2022).

Climate change and higher climate variability increase the risks of climate hazards, affecting the frequency, intensity, extent and duration of extreme weather and climate events (Maes et. al., 2022). Compared to other OECD countries, the United States has particularly large exposure to the climate-related hazards of extreme temperatures, tropical cyclones and wildfires (Maes et. al., 2022). The frequency of disaster events has already rapidly risen. The average number of disaster events per year with losses exceeding USD1 billion (in real terms) doubled from the first decade of the 2000s to the 2019-2023 period (Figure 1.45). Such events are expected to occur with increasing frequency going forward, with the loss burden disproportionately falling on lower-income and some marginalised groups. For instance, higher proportions of Native American, Hispanic and African American populations live in places prone to extreme wildfire, heat, floods, and permafrost thaw (USGCRP, 2023). Estimates suggest that the physical impacts of climate change have potential for long-lasting negative effects on economic growth and increasing economic inequality (Hsiang, et. al. 2017).

As in most OECD countries, the policy response to increased severe weather events has so far largely focused on emergency response and disaster recovery. The main source of support has been the Federal Emergency Management Agency Disaster Relief Fund, with spending from the fund having increased substantially since 2005 (CBO, 2022b). While allocating funds for such activities will remain important, the costs can be mitigated through well designed adaptation and risk prevention policies.

The Environmental Protection Agency published a Climate Adaptation Plan in 2014 which was updated in 2021, and each government agency is now mandated to develop its own climate resilience and adaptation plan. By the end of 2023, 23 federal agencies had such plans and 24 states either had a plan or were developing one. However, adaptation plans across jurisdictions are rarely coordinated (USGCRP, 2023). One factor that may help guide plans across agencies and states is the National Climate Resilience Framework, published by the administration in September 2023 (The White House, 2023d). While developing this framework and the various adaptation plans are important first steps, current policies are insufficient to both reduce current climate-related risks and keep pace with future changes in the climate (The White House, 2023d).

An array of different adaptation policy measures will be needed to mitigate physical climate risks. Recent OECD work has placed these into four different categories: economic instruments, regulations, information provision and direct provision of public goods (OECD, 2024e). These policies are often complementary and there are already examples of each type of policy being employed in certain contexts in the United States.

Economic instruments include financial incentives that reduce financial barriers for adopting climate resilient technologies given positive externalities from the investment. An example is the Colorado Wildfire Mitigation Deduction that provides owners tax credits for wildfire mitigation practices. Risk-based premiums in the insurance market can have a similar effect (OECD, 2023f). However, stringent regulation of insurance premiums in some states can be an impediment to such pricing. While designed to protect consumers from high‑cost insurance products, stringent regulations of insurance premiums can limit the ability for insurers to align premiums with expected losses in those areas with high climate risk. Some large insurers have now withdrawn from disaster-prone states such as California and Florida (Gall, 2023). In turn, this has reduced insurance availability, leaving some households and businesses more vulnerable to climate-related disasters. Consideration should be given to other ways to protect consumers against unaffordable insurance premiums without blunting pricing signals for climate risk, such as support for risk reduction and adaptation activities.

Regulations can be an effective adaptation approach when firms and individuals are unresponsive to price signals, when pricing policies may be politically difficult to implement or to overcome coordination failures (OECD, 2024e). A key regulatory measure can be land-use policies that restrict development in areas with elevated climate risk. For example, the absence of land-use regulations informed by wildfire risk assessments has been coupled with strong population growth in at-risk areas in the United States (Radeloff et. al., 2018). In Portugal, construction is forbidden in areas characterised by “high” and “very high” wildfire hazard (OECD, 2023f). Other examples of regulatory policies are building codes that set minimum requirements that increase the resilience of buildings to climate risk. The Infrastructure Investment and Jobs Act included grants to cities and states that undertake such measures.

Information provision is important in enhancing awareness of exposure to climate risk to inform decision-making. A Climate Risk and Resilience Portal has been developed through a public-private partnership that provides free, granular climate data, allowing the public to view mid-century and end-of-century climate projections at the county level. Further measures that promote climate-related disclosures by businesses are being introduced. In March 2024, the Securities and Exchange Commission adopted final rules requiring firms to include certain climate-related information in their registration statements and annual reports, in line with Financial Stability Board Taskforce for Climate-Related Disclosure recommendations. These should be complemented with further efforts to quantify the economic and physical risks from climate change. For instance, large areas of the United States have not yet been mapped for flood risk (The White House, 2023d). There is the potential that the proliferation of information on climate risks exacerbates inequalities if it leads to private underinvestment in communities vulnerable to climate risk, given these communities tend to be more socio-economically disadvantaged (EPA, 2021). Initiatives such as Justice40 - which targets 40% of the overall benefits of certain Federal climate, clean energy, affordable and sustainable housing and other investments flowing to disadvantaged communities - can be important to lean against these forces.

Direct public funding for specific adaptation measures will also be needed. This is especially the case where large positive externalities result in under provision by the private sector (OECD, 2024e). Climate-resilient infrastructure will often require some direct involvement from the government, though care should be taken not to crowd-out private investment. The Infrastructure Investment and Jobs Act included USD8.25 billion for wildfire management and various initiatives for coastal protection infrastructure, though further public support for such infrastructure will be needed as the physical impacts of climate change become more visible. There may also be a role for direct government support in overcoming the coverage protection gaps in insurance markets through establishing catastrophe risk insurance programs. An example is the Australian Cyclone Reinsurance Pool (Box 1.9). Nonetheless, any such interventions can come with material fiscal costs and would need to be preceded by a thorough assessment of protection gaps and potential financial vulnerabilities related to exposures to climate risks.

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