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Symposium 2008

Proposal - Creating Employment

The Challenge

Many people in the developed world are not participating in the growth of the world economy. In some countries, unemployment remains high, whereas others suffer from the problems of the working poo ...

Many people in the developed world are not participating in the growth of the world economy. In some countries, unemployment remains high, whereas others suffer from the problems of the working poor. What are the most effective policies for creating employment – particularly in well-paid, satisfying jobs – in OECD countries?

A bit of perspective

  • Higher employment will boost output and real income. It is also usually good for government budgets. Hence a need to ensure that government policies do not unnecessarily create barriers to employment.
  • It does not follow that policy should aim to maximise employment at any price. First, the ideal is for people to be free to choose how much they wish to work so as to maximise their welfare based on appropriate incentives. Second, the pursuit of legitimate policy objectives – for example in the social field – may skew incentives away from work. In such cases, policy design should be aimed at minimising trade-offs between conflicting policy objectives but may not be able to completely eliminate them.
  • Employment has a number of dimensions that have all been elucidated by OECD analysis. The remarks below focus on the number of persons employed and the number of hours they work. The skill dimension of employment is also very important for real income – and possibly for work satisfaction – but is largely left aside in what follows due to space constraints.
  • The following first highlights barriers to labour supply in five fields and subsequently discusses how to ensure that there will be demand for an added supply of labour.


Removing barriers to labour supply

  • Actuarially unfair public pension systems, early retirement schemes and lenient rules for older recipients of unemployment benefits all skew people’s incentives in the direction of ceasing to work at an early age. Across OECD countries, the employment of older workers is strongly related to the strength of such incentives. With rising longevity, (further) reforms in this area is not just a question of removing barriers to employment but also about ensuring fiscal sustainability.
  • Despite general improvements in health status, disability rates have been increasing in many OECD countries over past decades and now exceed unemployment rates in quite a few. Lax entry conditions to disability schemes, limited subsequent control, weak efforts at rehabilitation, and insufficient opportunities for people with reduced work capacity to seek and get a job are among the barriers to labour supply in this area.
  • With improved education, women’s participation in labour markets is approaching that of men in many countries. That said, there are still barriers to female participation arising from tax systems or related to child-care.
  • Specific groups, including ethnic minorities or second-generation immigrants, have low participation rates in many countries. Educational failure and associated low earnings capacity, discrimination, and insufficient work-focus in public transfer programmes are among the reasons why such groups may be discouraged from participating.
  • Average working hours supplied vary substantially across countries. In some cases low hours may reflect deliberate choices, but evidence shows that the incentives arising from tax systems have a major influence as well.

Ensuring that demand meets supply

  • It is crucial that an added supply of labour is not just reflected in higher unemployment. The policies to achieve this and, indeed, to boost employment by reducing unemployment where it is currently high, are largely well-known. A basis for all structural policy efforts in this field are macroeconomic policies to keep employment at its maximum sustainable level, i.e. without generating rising inflation. In this regard, features of unemployment benefit systems and active labour market policies help determine to what extent an added labour supply is “effective”.
  • Demand for workers with relatively low skills may be penalised by overly high labour costs. Barriers in this area include wage floors – either statutory minimum wages or de facto minima driven by public transfers. However, wages sufficiently low to clear the market may not be socially acceptable and ways to alleviate the trade-off between social and employment objectives include in-work benefits and labour subsidies. These are, however, not without problems of their own.
  • Labour demand, especially for atypical workers, may also be held back by overly stringent job protection rules.
  • Policies to strengthen competition in product markets help to ensure that labour demand responds more strongly to increases in supply.
  • More generally, to reduce unemployment and keep it low, it is important that policies do not get in the way of, and indeed sometimes assist, the on-going dynamic adjustment in the labour market in response to general developments in an economy. This calls for adequate wage flexibility and mobility of labour – affected by factors such as unemployment benefits and housing policies – but also training opportunities and job search assistance.

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