Jobs Strategy: Policy choices that work

A new revised OECD Jobs Strategy is due for release in June 2006. It will review progress in improving labour markets since the first jobs study was issued in 1994. Key lessons have been learned.

A decade ago, when the OECD Jobs Strategy was first launched, unemployment was high and persistent in several OECD countries. Since then, a number of them have made significant progress to reduce joblessness. At the same time, the challenges for labour market policies have become broader, with greater recognition of the importance of high employment and better working conditions for good living standards.

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Another development since the original Jobs Strategy is the environment in which today’s employment challenges are set. Rapid technological advances and globalisation, with its huge extra workforce notably in China and India, make it all the more important for workers in OECD countries to be ready and able to adjust quickly to new challenges and stiffer competition. And then there is the looming issue of population ageing, which threatens to reduce living standards unless action is taken. Some of the basic characteristics that make up strong labour markets are timeless, however: high employment, low unemployment and high productivity, with ease of movement of skilled, confident workers from all backgrounds among dynamic, high valued-added sectors and the capacity to absorb and adjust to shocks. Add to the package an ongoing ability to attract and retain fixed investment, whether domestic or foreign, and broadly speaking this is how most governments would like their labour markets to function.

Only a handful of OECD countries can claim to fulfil this broad characterisation, and even the very best have weaknesses that need addressing, such as appropriate skills.

Too many countries remain hampered by old arrangements that, however sensible they once may have seemed, now damage the job prospects of many people. Whether excessive non-wage costs, red tape in hiring and firing or an absence of effective measures to help the jobless regain employment, such rules affect young and unskilled workers, as well as older, skilled employees. The upshot is to deny the entire economy its full productive potential, causing unemployment, underperformance in productivity and weak growth. This drives up social costs.

Breaking this circle requires determined government policies. The revised Jobs Strategy aims to help that process by showing which experiences work and which do not.

The experience

OECD area unemployment has fallen since 1994 and those countries that embraced the recommendations of the Jobs Strategy have done particularly well. Nevertheless, so have those that have adopted Nordic-type approaches, such as Denmark’s much discussed “flexicurity” hybrid which combines relatively easy hire-fire with strong backup for, and obligations on, jobseekers. Austria and the Netherlands have adopted a similar approach. But countries that have not reformed enough, including France, Germany and Italy, as well as some central and east European countries, have performed least well. Their unemployment is high and employment rates relatively low, despite strong global growth (see graph).

Nor is the employment rate of prime age men the main reason for the gap in overall performance–indeed, it is high in most OECD countries– but rather the performance of two sub-groups: women and older workers. Female participation rates have generally increased and the trend decline in labour force participation of older workers (55-64) appears to have been reversed in some countries. But in Germany and Italy, female participation is relatively low, whereas in France this is the case for workers over 55.

Welcome as recent improvements are, most economies remain unprepared for the looming challenge of ageing, even if the “greying” of OECD societies will affect some countries like the US, Canada, some of the Nordics, Australia and New Zealand less than others.

Meanwhile, young workers are another category where joblessness has been too high–three times higher on average than for prime-age men. Longer careers in education explain some of this, though not the weak employment performance of 16-18-year-olds with less than upper-secondary education.

Policy benefits

A key lesson since the 1994 Jobs Strategy concerns the role of so-called “activation/mutual obligations” measures. These can improve re-employment chances of those out of work. If governments respect jobseekers’ “rights” by providing effective re-employment services, counselling, training and financial incentives to help them get back to work, benefit recipients must take steps to seek work and improve their employability. Moderate sanctions are needed in cases where these obligations are not met. This approach has been implemented successfully in a high-benefit regimes such as those found in the Nordic countries, and in lower-benefit regimes such as those in English-speaking countries.

In other words, barriers to job markets must be removed, and well-designed social support measures that facilitate employment should not be seen as an obstacle.

While new lessons have been learned since 1994, experience has also confirmed several points. For a start, some social benefits can entail work disincentives. Too many people in some countries are on sickness, disability and lone-parent benefits, for instance, and pension and other benefits tend to encourage early retirement. Yet, many of these people could and often want to work. Governments should tighten up entry to these schemes and develop ways of activating people on such inactive benefits.

The evidence also shows that high payroll taxes and social charges prevent job creation for low-productivity workers. The rise in the cost of private health plans seen in a few countries does not help either. Several countries have cut employers’ social security contributions on low-wage employment and some have reported more hiring of such workers. But this has to be balanced against the cost of such schemes to the public purse.

Another of the original Jobs Strategy’s recommendations for reforming wage-setting institutions also remains valid. Real wages that do not adjust to supply and demand pressures hurt employment. Though decentralised and centralised wage bargaining clearly offers more flexibility than sectoral agreements, change in this area has been slow.

Labour markets are just one side of the coin, of course. Product markets count too, and a consistent finding over the years has been the negative effect on employment of anti-competitive regulations.

Proper labour- and product-market policies need to be supported by sound macroeconomic policy that encourages investment and growth, and reduces cyclical fluctuations in the economy.

Finally, better skills will help workers adjust to change. Policy should help promote investment in human capital, while also addressing existing learning inequalities.

No single package

In short, experience over the past two decades shows that there is no single combination of policies for good labour market performance.

High employment can be achieved by combining low levels of welfare benefits and limited taxation, as well as light employment protection legislation and few collective agreements. The price is relatively wide income disparities.

Good performance can also come from a system based on co-ordinated collective bargaining and social dialogue, with generous welfare benefits and serious activation services for jobseekers, as well as employment protection legislation which helps labour market dynamism while also providing security to workers. Income disparities are lower, though the costs for the public purse are higher.

The revised Jobs Strategy is a comprehensive package, and is based on the tried and tested experience of OECD members. Whether it gets implemented largely depends on political will, skill and judgement. Reform has to be implemented firmly to realise the benefits for citizens at large. However, even in those countries in serious need of change, there may be resistance to reform, regardless of the wider advantages reform might bring.

Yet inaction is not an option. The key message for everyone is that good labour market performance is essential for maintaining and raising living standards. And it can deliver high employment, security and growth. At a time of intensifying global competition and ageing, this is good news indeed.

References

OECD (June 2006), Boosting Jobs and Incomes: Policy Lessons from Reassessing the OECD Jobs Strategy, Paris.* Available free online.

OECD (2006), OECD Employment Outlook, Paris

OECD (2006, 2005), Going for Growth, Paris

*Citation corrected 20 April 2007.

©OECD Observer No 255, May 2006




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