No single road to high employment

OECD Directorate for Employment, Labour and Social Affairs

The employment record of the OECD area over the last 10 years paints a mixed picture. On the positive side, employment has grown, by about 1% per year in 1991-2001. Governments appear to have responded to the chronically high unemployment of earlier years by introducing a range of structural reforms. But have they gone far enough?

Probably not. For a start, the encouraging rise in employment of the past decade has come to a halt. True, in some countries jobs have been more resilient in the present downturn compared with earlier recessions. But the fact is that unemployment is on the rise again.

What is more, pockets of labour market inactivity had remained stubbornly high during the high-growth period, and these may be actually aggravating with the economic slowdown. Several groups, in particular, women, older workers, and the disabled, remain sorely underrepresented in the labour force. Worse, the employment rate of low-skilled people declined in the 1990s.

It is time to mobilise these under-represented groups. This would help provide valuable resources to the economy, while also strengthening social cohesion. One lesson learnt from the past 30 years is that policies that discourage labour force participation, like early retirement or disability schemes that make little effort to support reintegration into work, appear to be unsustainable in their current form. Some policies may end up promoting, rather than alleviating, social exclusion. Population ageing provides another justification for urgent reform of such practices.

As this Observer spotlight argues, labour markets need to be dynamic and open if they are to perform well in the context of rapid demographic and technical changes, and intense international competition. But at the same time they need to be inclusive, enabling a wide cross-section of the community, and not just those who are the most able-bodied or best educated, to participate in the world of work.

This is not an altruistic goal, but rather, it is about effective management of human capital and resources. In other words, the aim has to be to build properly functioning labour markets backed up with effective labour and social policies that improve employability and stimulate economic growth.

The current challenges we face in labour markets present governments with an opportunity to reform the mistaken policies of the past that sought unsuccessfully to cut unemployment by taking workers out of the labour force.

Nearly a decade has passed since the OECD proposed its blueprint for labour market reform in the Jobs Strategy. Progress in implementing it has been uneven. At the same time, we have learned quite a lot about what can help employment to increase.

One such lesson is the need to avoid simplistic remedies. It has long been argued that, to ensure that economies create more jobs, countries must accept ever-lower social benefits and, for certain occupations (notably the low-skilled), lower wages. This view is based on the assumption that work has to be sufficiently rewarding compared with receiving benefits. And it assumes that the best way to entice people to work would be to restrict access to benefits and reduce benefit levels. Lower wages, on the other hand, would support labour demand on the part of employers.

Experience of employment reforms over the past decade or so show that things are not so simple in reality. For instance, certain countries such as Denmark and Canada have managed to maintain relatively generous unemployment benefits, while at the same time achieving high employment rates. In 2002, the proportion of the population of working age who had a job in Canada and Denmark was, respectively, 72% and 77%. These figures are higher than those in the UK and the US, which can be regarded as good performers.

Admittedly, Danish and Canadian workers are relatively well qualified – which could contribute to explaining the good overall employment performance. However, it is interesting to note that the employment rate among unskilled workers in Canada and Denmark, at practically 55% and 63% respectively, is also relatively high.

How have these countries achieved these impressive employment levels? One reason is activation strategies. These have made benefit receipt consistent with the obligation on recipients to actively look for work – demonstrating too that recipients of social assistance or other benefits who can work should look for a job.

The most effective way appears to be a mutual obligations approach, whereby employment authorities provide support services, like counselling and training, for job seekers, who in turn commit themselves to search for work. Penalties for inappropriate behaviour can be used as a further incentive of last resort.

Experience also shows that financial incentives are not enough. There are cases where people looking for a job need mobility support (e.g. people living in remote areas) or childcare facilities in the case of young mothers. These services can help people hovering on the margins of the labour market to take a job.

Consideration must also be given to career development issues, like special training services for unemployed workers to help them stay in a new job. All of this makes good sense, so much so in fact, that the US is now considering introducing “customised employment services” for the unemployed, which will include a mobility grant and job-search support.

None of this adds up to a new labour model, but rather, it is a system that has been tried and tested with varying degrees of success in other countries too, like Sweden and Ireland. One upshot is that while the “model” has a cost that may have to be borne by higher taxation, it generates returns in the form of higher employment and better productivity.

Policymakers can ensure consistency between employment goals and the fight against poverty. But the key point is that just as rigid labour markets need more liberalisation, open markets may need more strengthening from social benefits. The exact balance will be different for each country, since in practice, some countries will use a mixture of labour market flexibility policies to dissuade people from depending on benefits and getting a job, and other policies to make work pay. There is no single road to a high employment economy.


OECD (2003), OECD Employment Outlook, Paris.

©OECD Observer No 239, September 2003 

Economic data


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