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Wednesday, February 06, 2008

The OECD Jobs Study

The OECD Jobs Study - Facts, Analysis, Strategies (1994) was a lot less dray than it sounds. It is pretty short (around 60 pages), but very informative and in a very compressed way gives an outlook of unemployment how it has changed in OECD countries over the last decades and how it governments should respond to it. Most of the policy recommendations seem to be geared towards continental European states, even if the report does not directly say this, it feels that way considering the criticism leveled at these states in regard to their employment performance.

Important is a distinction made in the beginning between structural and cyclical unemployment - the latter of which Keynesian policies can smoothen out, the former of which needs to be tackled through microeconomic changes. As the names suggest cyclical unemployment rises and falls with economic recessions and booms, while structural unemployment remains steady no matter the economic performance of the specific country as it is due to institutional arrangements more than anything else.

Over the last few decades diverging trends have been discernible, while the United States has managed to decrease unemployment rates since the 1960s/1970s, the European states' rates have increased over the same time-frame. In general it can also be said that young people are more often unemployed than older ones, countries with strong apprenticeship systems are the exceptions for this rule. I wonder how Germany's position in this regard has changed though, considering the gloomy manner in which 'das Ausbildungssystem' has been discussed over there in the last few years. The second major problem of European states lies in the predominance of long-term unemployment in their systems. Thus, in the EU area (before even the accession of even the EFTA states) more than 40% of general unemployment is long-term (meaning lasting at least 12 months), while for the US it is only 11%. The reason for this wide disparity lies in the low rate of inflow into employment in Europe (coupled with low inflows into unemployment), while the US shows signs of a high rate of flow into employment (and unemployment). The EU area has a problem involving the hiring of employees.

The above-mentioned diverging trends in unemployment rates in the US and EU are explained by an increase in productivity in the EU coupled with non-functioning labor markets (see the hiring problem detailed above). In this context I have to admit that I was wondering about the validity of this study for today, mainly because Ireland, Germany and the Netherlands are three prominent negative outliers for these problematic labor markets, all of whom have significantly reformed since.

Not only have unemployment rates risen though, employment participation rates in most of Europe and Japan have not kept pace with developments in North American and Oceania. This is due mostly to Southern outliers (Italy, Greece, Spain) with traditional low female participation rates and continued encouragement for women to stay at home. Another factor are the early retirement schemes still popular in Germany today, that were used a means to avoid the cliffs of firing-legislation in the 80s and 90s mainly.

Finally, corporatist wage negotiations or Unions in general have prohibited European countries from responding to increased competition (globalization as lame as that argument has become) and pressure on low-skilled through wage adjustments. English-speaking countries have responded through a widening of wage differentials. Adjustment to this move away from demand for low-skilled workers in Central Europe has thus taken place through higher unemployment. While this argument made sense to me, what baffled me was the assumption that wage differentials have not increased in Europe as I know they have at least over the last 20-30 years. Possibly this trend was not as discernible as it is today in 1994. The downside for American workers has been that their real wages have in fact decreased, pointing to the possibility of a trade-off between unemployment and a 'living wage' (and the avoidance of the 'working poor').

The authors of the OECD Study then go on to suggest some remedies for this development in unemployment rates. Firstly, they argue for a stable macroeconomic environment (limiting public debt in order to avoid the crowding out of private investment through high interest rates & low levels of inflation), even while admitting that good macroeconomic policy is necessary but not sufficient for an improvement on the employment front. Thus, structural adjustments are necessary as well. Their suggestions here are:
  • A move away from social security contribution to indirect taxes (TVA), which would increase employment through limiting taxes' impact on the labor market's demand function.

  • An increase in wage differentials would allow adjustments through wages instead of unemployment rates (apparently there is some cross-country evidence for this). As already mentioned above this prompts the question of how to treat the so-called 'working poor', basically this, to me, seems to be a moral question that every society needs to answer for itself and not just an economic one.

  • Unemployment protection should be limited as it also provides a disincentive for companies to hire employees.

  • Labor market policies need to become active (and not passive as in providing income for the unemployed), to provide education, training and improve job skills in general. This especially in light of the fact that the life-long job has become a thing of the past in most OECD countries (Japan still being an exception to some extent).

  • In general education measures need to be improved, especially for children from disadvantaged parts of the societies, to counter the increased loss of low-skilled jobs. This applies to pre-primary, primary, secondary and tertiary education.

  • Finally, unemployment benefits should be lowered to provide greater incentives to take on a new job.

All in all, most of the analysis and suggestions seem very solid and sensible. Some of the questions I feel should not be left only for economists to discussed, as the level of solidarity of a society, the wage-level of its lowest paid workers and such, should not be considered under economic merit alone.

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