What should governments do to fix this? The first step is for more governments to temporarily relax rules governing entitlement to unemployment benefits, increase replacement rates and extend the duration of entitlement. To provide unemployment benefits over longer periods of time in the wake of a severe recession with high unemployment makes sense on social as well as economic grounds. If the labour market is weak and demand very low, unemployed workers will need more time to find a job. Moreover, if benefit entitlements are exhausted quickly, that will weaken consumer demand and stall a recovery.
Benefit coverage should also be expanded to include workers in precarious employment, such as those on temporary or part-time contracts. Most of those workers aren't eligible for unemployment benefits at all.
It is well known that a significantly underregulated financial sector provoked this economic crisis. However, the roots of the crisis are far from being purely financial. Structural changes in income distribution, particularly declining wages and surging corporate profits, led to an inequality of income not seen for decades. A number of countries, notably the US, maintained high rates of growth by substituting credit for labour income-a process that was supported by monetary policy and the development of allegedly "innovative" financial instruments. However, the price was heavier private and public indebtedness as well as wider global imbalances.
We have been here before-in fact, each of the previous downturns caused by the banking sector was associated with a subsequent rise in income inequality. But we can't let that happen again. A bold response to the crisis must seek to reverse the growth of income inequality. However, many banks in more than one country are not only awarding bonuses again, but using about 20% of the taxpayers' money used to bail them out to do so. We are calling on members of the OECD and G20 to do more than just condemn that kind of behaviour. Action on jobs will be undermined if there is no reform of the global financial system.
Nor should governments allow the burden of the recession to be borne by those least responsible for the crisis and least able to bear it, namely workers and their families. This economic downturn is likely to tip many more individuals of working age into poverty than ever before, whether through wage cuts or job cuts, or reduced work hours. This could lead to greater anxiety and a fall in public confidence and morale. Clearly, it is of utmost importance to combat the risk of wage deflation. The way to do that is by providing a sufficient wage floor by setting a minimum "living wage", extending the coverage of collective bargaining agreements and strengthening wage-setting institutions.
Effective responses to the employment crisis clearly require interventions to delay or prevent lay-offs, promote training opportunities, and encourage firms to take on staff. Such policies need to be grounded in trust and dialogue with trade unions and employers.
However, there are risks to avoid, notably in the activation policies as recommended by the OECD, and particularly those approaches that involve pushing benefit recipients into work by tightening entitlement criteria, lowering benefit levels and shortening their duration. Activation sounds attractive, but the policy can only work if there are properly resourced and well-managed employment services, not to mention sufficient vacancies. Otherwise, some activation policies will end up forcing the unemployed to accept low salaries and sub-standard working conditions. They may even force some to quit the workforce altogether, which is the reverse of what activation proponents want.
High-road approaches of activation, which only a few governments have applied, link a broader set of active labour market policies to the concept of mutual obligation. These approaches promote and finance training in order to improve the employability of the unemployed-with the understanding that the jobless who benefit from these programmes will actively look for work.
However, evidence suggests that some workfare and activation policies have had harmful side effects, like rising wage inequality, working poverty and more precarious jobs. Moreover, in these "lowroad" approaches the responsibility for protecting individuals from the financial and social risks of unemployment appears to have shifted away from governments and firms to the unemployed individuals and their families. In truth, they are welfare reforms disguised as activation policies, whose effect has, as a leader in the Financial Times recently emphasised, weakened the role of automatic stabilisers by keeping benefits meagre and often time-limited.
The policy simply traps the unemployed in a game of musical chairs. The quickest off the mark (the most employable) would find an empty chair (a job), while others would not. Even if employment services get more resources or if for-profit intermediaries are brought in to help manage the load, nothing would really change. These low-road activation policies would have everyone scurrying faster for a seat, but as in the game, there will never be enough chairs to go around.
In short, helping the unemployed back into work calls for new approaches, which we believe will have implications for the future directions of OECD work on employment.
First and foremost, they should improve the measurement of labour-market performance and revisit the concept of structural reform policies in light of the causes of this recession, and notably the economic and social costs that hire and fire systems clearly bring. They should also re-evaluate the real effect of activation policies, particularly of narrowly defined approaches, and confirm whether rises in employment are really attributed to them. If the upturn takes hold, it will provide a perfect opportunity to do this.
The OECD should also examine how deteriorating job quality acts as a barrier to sustainable growth, as this would strengthen their ongoing work on precarious employment, in-work poverty and growing inequality. And they should further step up co-operation with the ILO and provide support for the ILO Global Jobs Pact and its promotion of decent work.
We need policies that focus on developing the labour market through training and by creating decent work opportunities. The new emphasis on a "train-first" approach to activation programmes rather than "work-first", as suggested by the editorial of the OECD Employment Outlook 2009, is a welcome development. In addition to creating jobs through investment from fiscal stimulus packages, providing temporary funds for public works projects at local and regional levels would be a good way to create proper jobs for those who are desperately seeking employment. Decent jobs, not just more work, will be key to achieving a truly sustainable recovery.