Boosting Jobs and Incomes

Lessons from reassessing the OECD Jobs

Strategy

Outline of presentation

• New developments over the past decade

• The restated OECD Jobs Strategy • Successful policy packages

I. Despite some progress since 1994, employment rates differ significantly across countries…

40

45

50

55

60

65

70

75

80

NewZealand

Canada Australia UnitedStates

Japan Russia Mexico EU-19

2005 1994

OECD average 2005OECD average 1994

...and across groupsEmployment rate for selected groups, 2005

Minimum value Maximum value

0

10

20

30

40

50

60

70

80

90

100

Prime-age men (25-54) Prime-age women (25-54) Older workers (55-64) Low-skilled Youth (15-24)

Labour market “inactivity” has emerged as a major issue

Ratio of inactives to the working-age population

Ratio of unemployment to the working-age population

0

5

10

15

20

25

30

35

40

45

1994 2005 1994 2005 1994 2005 1994 2005

Asia European Union North America Oceania

The “inactive” population of working age is very heterogeneous (housewives, students, early retirees, disabled)

But many state that they can work and wish to do so.

Raising employment is made urgent by ageing populations

Annual labour force growth, with constant participation rates

1.6

0.7

1.3

1.6

0.7

0.6

0.4

0.0

-0.7

0.0

0.2

0.3

2.2

1.60.5

0.8

0.6

-0.6

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

Australia

Canada

Japan

Korea

New Zealand

United States

1975-2005 2005-2015 2015-2025

II. The restated Jobs Strategy: the 4 pillars

A. Set appropriate macroeconomic policy

B. Remove impediments to labour market participation as well as job-search

C. Tackle labour- and product-market obstacles to labour demand

D. Facilitate the development of labour force skills and competencies

How to promote participation?

• High benefit levels reduce work incentives, but this can be offset by well-designed activation policies

• To be effective, activation should be part of a “mutual obligations” approach, backed by moderate benefit sanctions

• Invest in the most cost-effective employment services and eliminate those that do not work

• A new challenge: how to extend mutual obligations/ activation principles to lone parents and the disabled? • What combination of prevention, rehabilitation, re-employment

services and compulsion could help many of these people find work?

Promoting participation (cont’d)

• Phase out early retirement and ensure that pensions do not discourage work

• Family-friendly working arrangements can support employment of women

> Easy availability of quality child care, flexible working arrangements, etc.

• Closer links between school and work are key to help youth have a good start (Germany ‘dual’ system)

How to remove demand-side obstacles while providing workers with security?

• No clear link between overall unemployment and employment protection legislation (EPL). But too-strict EPL affects employment of vulnerable groups, hampers adjustment to shocks

• Countries have tended to relax EPL governing temporary contracts, leaving permanent contracts untouched

> While this may raise employment, it has negative consequences: increases labour market duality, lowers investment in skills

• Recent innovations show other ways to combine flexibility with workers’ security:

> Minimise judicial uncertainty over severance costs (the Dutch example)

> Replace severance pay with portable, individual savings accounts (Austria)

> The Danish example of “Flexicurity” (but is it transferable?)

Removing demand-side barriers (cont’d)

• Two policies have unambiguous effects on labour demand:

– Higher tax-wedges increase unemployment, especially with high minimum wages

– Open and competitive product markets promote employment opportunities

How to promote transitions from informality to formal employment?

• Informal employment or undeclared work is a major issue in several OECD countries– Around 20% of social contributions lost in Italy,

Portugal, Spain as a result of undeclared work– Over 30% in the case of Hungary, Korea, Mexico

• In much of the non-OECD, it is a central issue –vicious circle of high informality, low productivity and weak tax base to fund growth-enhancing programmes

How to reduce informality –key policy issues

• Administrative costs of creating a formal enterprise can be high– In a survey for 11 OECD countries, compliance with regulations

costs 4% of value added (5 times larger costs in small firms!)

• High tax rates on labour vis-à-vis profits for small firms – Key issue: basing taxes on value added (instead of labour input)

would encourage firms to declare work

• Badly-designed employment regulations

• Weak incentives for workers to declare their earnings and/or lack of trust that they will get benefits in return – Well designed social protection may help encourage workers

declare their earnings, and detect informal employment

How to enhance workers’ skills?• Training is associated with better job prospects

• Recognition of prior learning, monitoring of performance of trainers vis-à-vis firms’ demands, may help improve the functioning of training markets

• Governments may also provide financial support, co-financed by firms and workers

• Later retirement increases training incentives for older workers

• Time constraints for individuals can be eased through training leave schemes

• Active involvement of the social partners can help too

New evidence on macro policies and interactions

• Stability-oriented macro policies can:– help ensure that the benefits of structural

reforms are brought forward early – reduce the risk that temporary increases in

unemployment become permanent (but this needs solid initial fiscal conditions)

• There is evidence that policy interactions matter: combined reforms in two areas lead to 12% to 19% lower unemployment than separate reforms

III. Successful policy packages No single road to Rome, but not every road leads

to it!"Market-reliant" countriesa Other successful performersb Other OECD countriesc

Note: The indicators shown in this figure refer to 2003; 2002 for active labour market programmes.

b) Includes Austria, Denmark, Ireland, the Netherlands, Norway and Sweden. The average employment rate for this group in 2003 was 71.9%.c) The average employment rate for this group in 2003 was 61.2%.d) For each of the indicators, OECD average is equal to one.

a) Includes Australia, Canada, Japan, Korea, New Zealand, Switzerland, the United Kingdom and the United States. The average employment rate for this group in 2003 was 70.9%.

0.0

0.5

1.0

1.5

2.0

2.5

Product market regulation Tax wedge Employment protection legislation

(permanent workers)

Generosity ofunemployment benefit system

Active labour market programmes

Ratio to OECD averaged

…but they differ vis-à-vis other policy settingsSuccessful performers have competitive product markets...

OECD follow-up to the JSR and the High-Level Toronto Forum

1. Monitoring of Progress in Implementing Policy Reforms via:

Employment Outlook; Going for Growth; Economic surveys;

2. Thematic Reviews of 12-14 Countries:

School-to-Work Transition Helping the Long-Term Sick/Disabled get into Work

3. Skills and Competences:

Developing a new international survey to measure adult skills (PIAAC)