OECD governments face a tough employment challenge. If employment patterns do not change, population ageing will imply a sharp deceleration of labour force growth during the next three decades – including absolute declines in nearly one-half of the OECD countries. This will threaten the solvency of important social programmes and create a drag on living standards.
But this scenario is not a fatality, provided that policies can be found to encourage a greater share of working-age persons to enter the labour market and ensure that they find good opportunities for employment and career advancement.
Policies to raise employment would be of interest even if OECD societies were not growing older. Public services are expensive to fund, as are some benefits. So, the idea goes, let’s get as many people as possible off benefits and into work and everyone will win (see article by David Grubb). Not only would this relieve the burden on public finances, but it would also help productivity and general wealth. Social objectives could also be furthered, such as reducing poverty and social isolation. With higher employment, several problems would be solved at a stroke.
How might this be done? Lowering unemployment is an essential start, but this must be complemented by strategies for attracting more non-employed people into the world of work. In fact, rising labour market participation (and not lower unemployment) is the main factor behind employment gains and this will be even truer in the future.
The employment-to-population ratio rose during 1991-2001 in two-thirds of all OECD countries and this reflected the combined impact of reductions in both unemployment and inactivity rates. The relative contributions varied, but rising participation was more often the larger factor. For example, in the European Union, the fall in inactivity contributed three times as much as the fall in the unemployment rate to the 2.4 percentage point increase in employment.
Policymakers have lengthy experience with tackling unemployment, but are much less certain about how to encourage higher participation in the labour market. A good place to begin is to focus attention on groups that are clearly under-represented in the workforce, such as women, persons with limited skills and older workers nearing the legal retirement age. All of these groups have much lower employment rates than, say, prime-age men (25 to 54-yearolds), who are near-fully employed and generally not in need of particular attention.
A comparison of employment patterns in different countries helps to clarify the potential for increasing employment. Aggregate employment rates for OECD countries differ by up to 40 percentage points – ranging from 45% to 85% of the working-age population. Most of this variation reflects differences in employment rates for people on the margins of the labour market, including women, older workers and persons with low educational attainment or partial disabilities. But while their employment rates are lower than for prime-age men in most countries, it is nonetheless high in some countries, like the US and especially the Nordic countries. Such examples can provide useful guidance for how other countries might improve their employment performance.
A complex web of factors influences whether people choose to look for work. Take women, for instance. Their employment position improved in the 1990s, but much of this was in part-time and temporary work, including in Britain and the US. There is no doubt that determined measures to activate more under-represented females would pay off. Many say that they would like to work and probably would do so if they had better, more affordable, childcare or child-oriented working conditions, for instance. Female employment remains about 20 percentage points behind men and women account for two-thirds of all working age non-employment.
The pool of older people also offers great potential, in particular among those from 55-64 years old. Their non-employment rate was around 50% in 2001, double that of prime-age individuals. And they account for a third of total non-employment. Some are “retired”, but quite a few more cite illness or disability for their inactivity. (Sometimes disability and other social benefits are themselves a route to early retirement.) Another sizeable group of older people are inactive because they are caring for an elderly spouse or other relative. Some might not want to work, even part-time or from home, but many might be brought back into the workforce (or encouraged to delay or phase in their retirement), given the right financial, legal and workplace incentives.
As for the unskilled, their employment rate was about 50% in 2001, compared with 80% for workers holding a tertiary degree. And fully 45% of working-age persons in the low-education group were neither working nor looking for a job in 2001, compared with between 24% and 15% for more highly-educated individuals. Clearly, a lack of education discourages these groups from joining the workforce. More should be done to correct this.
Disability accounts for a fifth of working age non-employment. Many disabled people are able to work, given the proper support. Employment rates for the disabled are in the 40-50% range in most OECD countries, though below 25% in Spain and Poland, and over 60% in Norway and Switzerland. The very wide variation between countries suggests room for improvement in some cases.
If policies succeed in encouraging more people to participate in the labour market, can they be enticed to stay there and not drop out? An indication can be provided by examining the employment prospects of working-age people who were not working in a recent year: persons who were not employed in the mid-1990s spent an average of three to four of the next five years outside employment in Europe and the US. Even if many of these people had occasional forays into the job market, attaching them permanently to the workforce is not easy and they might be considered as being in a non-employment trap. People in such traps may see little incentive to persevere in the hunt and probably require special assistance in the labour market.
Apart from non-employment traps, many workers are ensnared in so-called “low-pay traps” too. These are problematic because they act as a disincentive for people to persevere in the workforce, as well as being responsible for wasting human resources, productivity and value. Of course, upward mobility into higher pay is the rule for most people, and over a quarter of low-paid workers in 1994 (40% for men) earned at least 80% of the median wage four years later. But the prospects for women, the least educated workers and older workers were less good.
Curious as it may seem, too much mobility between jobs is not necessarily a good thing for these people. Mobility may help the careers of the better paid, but for people moving between low-paid jobs and non-employment it simply leads to greater instability, with little opportunity for career development. In both Europe and the United States, persons on low pay in an initial year spent nearly four of the next five years in either low-paid employment or non-employment on average. This fraction is even higher for women, less educated workers (particularly in the US) and older workers (especially in Europe).
Clearly, governments should do all they can to mobilise these under-represented groups and improve their chances for moving up the job ladder. This would help resolve challenges posed by population ageing, but also poverty. Most often, those out of work or in low-paid employment can turn to other family earners or alternative income, but still, the risk of chronic poverty is substantially higher for those prone to joblessness or low-paid work. This is particularly true of the US: whereas fewer than 5% of working-age persons continuously employed during a five-year period are long-term poor in the US, the risk of long-term poverty rises to 32% for persons who are never employed; these risks are present in Europe too, but far less so, at 3% and 13%, respectively. And the risk of long-term poverty for people in continuously low-paid work over five years is 41% in the US, compared with 13% in Europe. This risk escalates for low-educated persons and immigrants.
Some, particularly in business, argue that while it may be possible to increase the labour force activity of under-represented groups, their low productivity makes them uncompetitive, say, compared to not hiring them or paying someone else overtime. Part of this attitude reflects problems with activation programmes in their early stages. At least initially, some unskilled workers and mothers will be less productive. Adjustment takes time. But workplaces should also adapt and governments can help persuade them to do so, with incentives and pressure (see article by Anne St. Martin and Peter Whiteford).
Policies that encourage jobless individuals to find entry-level jobs quickly are an essential component of a strategy aimed at raising labour participation and employment. However, many of the individuals “activated” by such policies will have difficulty remaining in their jobs or moving up career ladders. How to tackle this is as yet unclear, but this is not a reason for holding back. In any case, activation itself may improve longer-term job prospects as workers gain confidence and learn by doing. Policy could then focus on those (one hopes) smaller groups that remain caught outside the labour force or in low-paid, unstable jobs.
One lesson learnt from the experience of the past 30 years is that while policies that discourage labour force participation – whether early retirement or disability schemes that make little effort to support reintegration into work – may have served a purpose in the past, they now appear to be unsustainable. They may end up promoting, rather than alleviating, social exclusion. This is something no one can afford.
©OECD Observer No 239, September 2003