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Why is it so hard to set coherent priorities?

by Anders Reutersward, OECD

References:OECD Jobs Strategy (1994, revised in late 90s)On-going reassessment of the Jobs Strategy

Objectives: see editorial of Employment Outlook 2004 Numerous studies of particular issues e.g.:

Employment Outlook 2004: chapters about Employment protection legislation Policies to formalise informal employment

Employment Outlook 2005: chapters about Labour market programmes and activation strategies Performance management in public employment services

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The OECD Jobs Strategy: Enhance the business climate and competition

– Sustainable growth: non-inflationary macroeconomic policy supported by structural reforms.

– Enhance product market competition: reduce monopolistic tendencies and insider-outsider mechanisms.

– Remove administrative obstacles to enterprise creation and expansion.

– Foster and diffuse technological know-how.

– More flexible working-time.

– More flexible wages and labour costs.

– Reform employment security where it inhibits job creation.

Develop activation policies for the jobless -- reduce dependency on social benefits

– Strengthen ALMPs (active labour market policies) and make them more effective.

– Reform unemployment insurance and other social benefits for the working age. They should promote equity goals, but with less negative effects on labour supply.

– Improve skills: wide-ranging changes in education and training.

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Reasons to reassess the OECD Jobs Strategy

Unemployment has declined in many countries. Why not everywhere?Relatively good performance in countries that

– Improved the business climate -- more flexible wages and working time, less rigid job security, less red tape (E.g. US, Australia, New Zealand, Ireland)

– Developed activation programmes, requiring benefit recipients to accept mutual obligations (English-speaking countries, Netherlands, Denmark)

Challenges ahead, especially ageing

– A key objective should be to raise employment via higher labour force participation, not only reduce unemployment (Cf. the EU’s “Lisbon” targets)

– Marginal labour market groups require flexible job conditions • The elderly and the disabled • Parents with small children• Students

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Employment/population ratios in 2004A. Youth: 15 to 24 B. Prime age: 25 to 54 C. Elderly: 55 to 64

M F M F M F

Netherlands 67 66 Denmark 87 81 Sweden 72 67Denmark 63 59 Sweden 85 81 Japan 78 49UK 62 58 Netherlands 90 75 Denmark 69 54Australia 60 59 Austria 87 76 USA 66 54Canada 58 58 Czech Rep. 89 73 Korea 72 46USA 56 52 Canada 86 77 UK 65 47Austria 54 46 Portugal 87 75 Mexico 80 32Mexico 61 30 Finland 84 78 Canada 62 46Ireland 48 41 UK 88 74 Australia 62 42Sweden 42 43 Germany 84 75 Finland 52 50Germany 45 39 France 87 72 Portugal 59 43Japan 39 41 USA 86 72 Ireland 65 34Spain 44 32 Japan 92 65 Netherlands 56 33Finland 37 39 Belgium 86 69 Czech Rep. 57 29Portugal 41 33 Australia 86 69 Spain 59 25Turkey 42 21 Ireland 88 66 Greece 56 24Korea 25 36 Slovak Rep. 80 69 Germany 49 30France 33 26 Greece 90 58 France 42 33Czech Rep. 32 25 Hungary 80 67 Turkey 47 20Belgium 30 26 Korea 88 58 Hungary 38 25Greece 33 22 Spain 86 59 Italy 42 20Italy 31 23 Italy 87 58 Belgium 39 21Slovak Rep. 28 25 Mexico 94 48 Poland 36 21Hungary 26 21 Poland 74 63 Austria 37 19Poland 23 17 Turkey 81 26 Slovak Rep. 44 13

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Efficiency and social equity: Apparent goal conflicts and policy trade-offs

Are wide wage gaps inevitable? – Skill-based wage differences have become more important

for labour allocation and productivity

– Low-skilled wages may have to fall. Relatively strong employment growth in countries that permit low wages

– But competition can reduce other wage differences if they have non-economic causes (e.g. tradition)

Equal opportunities, upward mobility?– Risk of lock-in effects in low-wage jobs

– Job conditions should favour life-long learning

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Job security and flexibility EPL (employment protection legislation) makes many prime-age and older

workers more secure Some degree of job stability favours job-specific human capital formation However, strict EPL creates entry problems for youths and women Less strict EPL makes it easier for employers to hire workers

EPL reforms should aim at:

Balance between security and flexibility (a bit of both in all jobs) Less segmentation between temporary and “permanent” job markets

Some countries only liberalised fixed-term contracts

This led to job creation, but at the price of a more segmented labour market

Reduced informal employment EPL doesn’t work well unless acceptable to employers and workers

Rules about indefinite contracts should be suitable for most “normal” jobs

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EPL and unemployment insurance (UI)

Some dismissal protection combined with UI and employment services provide the best response to enterprise restructuring…

… provided that product market competition ensures a dynamic economy

If employment services and active measures are well organised, generous cash benefits are preferable to excessively strict EPL

Do generous cash benefits discourage job search?

Yes, a little. This negative effect has been found relatively small – but not negligible

“Activation” based on “mutual obligations” has proved relatively effective

The more generous cash benefits, the greater need for activation

Activation should involve “sticks” (threat of benefit withdrawal) and “carrots” (high-quality services) to promote job-search

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Activation of working-age persons with social assistance benefits (general welfare)

Job-search must be mandatory -- as for UI

Providing job-search assistance to welfare recipients has been found cost-effective in many studies

However, some benefit recipients are very hard to place in jobs

With tough job-search requirements, some beneficiaries tend to withdraw their claims and fall into poverty

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How to deal with the informal economy?

Informality is largely a tax problem. Need for better enforcement of taxes and social insurance contributions

In addition, try to limit the cost of formal employment (taxes and social insurance, cumbersome administration…)

In many less-developed countries, informality appears related to deep labour market segmentation

Low-productive, short-term and casual jobs; small chances of skill improvement

As per-capita incomes rise, policies should aim at a gradual extension of formal employment institutions to the whole labour force

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In sum…

Many policy instruments interact and complement each other

The Strategy should therefore be understood as a package

But there is no single solution for all countries

Cf. the relatively high employment growth achieved by partly different means in some countries:

– USA, New Zealand: moderate to low cash benefits, tough but low-cost “activation” measures, liberal EPL

– Denmark, Netherlands: generous cash benefits, tough and expensive “activation” programs, liberal EPL

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Thank you