P

JULY 1993

ORGANISATION FOR E C O N O M I C COOPERATION AND DEVELOPMENT

The OECD Employment Outlook

provides an annual assessment of labour market developments and prospects in Member countries. Each issue contains an overall analysis of the latest labour market trends and short-term forecasts, and examines key labour market developments. Reference statistics are included.

The OECD Employment Outlook is the joint work of members of the Directorate for Education, Employment, Labour and Social Affairs, and is published on the responsibility of the Secretary-General. The assessments of countries' labour market prospects do not necessarily correspond to those of the national authorities concerned.

The Organisation for Economic Co-operation and Development (OECD)

was set up under a Convention signed in Paris on 14th December 1960, which provides that the OECD shall promote policies designed:

- to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy;

- to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development;

- to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations.

The Members of OECD are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD.

Publii. en frangais sous le titre :

OCDE PERSPECTIVES DE LEMPLOI

0 OECD 1993 Applications for permission to reproduce or translate all or part of this

publication should be made to: Head of Publications Service, OECD

2, rue Andre-Pascal, 75775 PARIS CEDEX 16, France.

TABLE OF CONTENTS

Editorial

Growth and employment: a key role for human resource development . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

Part One

MONITORING LABOUR M A R E T PROSPECTS AND DEVELOPMENTS

Chapter 1 Chapter 2

LABOUR MARKET PROSPECTS ACTIVE LABOUR MARKET POLICIES: AND RECENT DEVELOPMENTS ASSESSING MACROECONOMIC

AND MICROECONOMIC EFFECTS A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . B. OECD LABOUR MARKETS: RECENT TRENDS

3 A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 39

AND SHORT-TERM OUTLOOK. . . . . . . . . . . . . . 3 B. LABOUR MARKET BUDGETS AND THEIR ECO- NOMIC EFFEiCTS . . . . . . . . . . . . . . . . . . . . . . . . 39

1. The evolution of active labour market policies . . 39 2. Evolution and structure of programme spending,

1985-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3. Developments since 1990 . . . . . . . . . . . . . . . . . 44

1. Recent economic trends and prospects . . . . . . . . 2. Employment and unemployment . . . . . . . . . . . . 3. Wages, unit labour costs and inflation . . . . . . . . 4. Labour market prospects . . . . . . . . . . . . . . . . .

3 4 6 6

C. DISCOURAGED WORKERS AND INVOLUN- TARY PART-TIME WORK. . . . . . . . . . . . . . . . . .

1. Discouraged workers . . . . . . . . . . . . . . . . . . . . 6 6

C, MACROECONOMIC IMPACT ON EMPLOY- MENT AND WAGES . . . . . . . . . . . . . . . . . . . . . . 44

Y

2. Underemployment and involuntary part-time work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

17

D. TEMPORARY WORK . . . . . . . . . . . . . . . . . . . . . 18 1. What is temporary work? . . . . . . . . . . . . . . . . . 18 2. Number of temporary workers . . . . . . . . . . . . . 19 3. Characteristics of workers employed under tem-

porary contracts. . . . . . . . . . . . . . . . . . . . . . . . 23 4. Industry breakdown of temporary work . . . . . . . 23 5. Labour force flows into and out of temporary

employment . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6. Reasons for employment in temporary work . . . . 27 7. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

E. CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 29

NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Annex 1.A.

3. summary . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sources and definitions of data on discour- aged workers. . . . . . . . . . . . . . . . . . . . . .

BIBLIOGRAPHY.. . . . . . . . . . . . . . . . . . . . . . . . . . . 32

37

1. How programmes might generate macroeconomic effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Difficulties in estimating macroeconomic effects 3. Employment effects . . . . . . . . . . . . . . . . . . . . . 4. Effects on wage formation . . . . . . . . . . . . . . . . 5. Factors influencing the effectiveness of active

programmes . . . . . . . . . . . . . . . . . . . . . . . . . . D. MICROECONOMIC IMPACT EVALUATIONS . . .

1. Methodology and scope of the studies covered . . 2. Public employment services and administration. . 3. Training of unemployed adults and those at risk 4. Training of employed adults . . . . . . . . . . . . . . . 5. Measures for unemployed and disadvantaged

youth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Support of apprenticeship and related forms of

general youth training . . . . . . . . . . . . . . . . . . . 7. Subsidies to regular employment in the private

sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Support of unemployed persons starting enter-

prises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46 47 48 49

53

53

53 54 56 60

61

62

63

64

... 111

9 . Direct job creation (public and non-profit) . . . . . 66

impact studies . . . . . . . . . . . . . . . . . . . . . . . . . 67

67

Annex 2.A: Active labour market policies and the unem-

Public expenditure and new participants in

10 . General observations regarding microeconomic ployment rate . . . . . . . . . . . . . . . . . . . . . 70

E . CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . labour market programmes . . . . . . . . . . . . 71 Annex 2.B:

NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Part Two

KEY ISSUES FOR LABOUR MARKET AND SOCIAL POLICIES

Chapter 3 3 . Tenure differences between men and women . . . 122 4 . Change over time in average enterprise tenure . . 122 5 . Evolving average tenure profiles by age and sex 125 6 . Additional perspectives on how long workers

will remain at the enterprise . . . . . . . . . . . . . . . 128

LONG-TERM UNEMPLOYMENT: SELECTED CAUSES AND REMEDIES

A . INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 83 Box: Eventual tenure estimated by contemporaneous

retention rates 129 . . . . B TRENDS IN LONG-TERM UNEMPLOYMENT 83 . . . . . . . . . . . . . . . . . . . . . . . 1 . Factors affecting measurement . . . . . . . . . . . . . 86 ”

7 . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 2 . Recent trends . . . . . . . . . . . . . . . . . . . . . . . . . 86 3 . Who are the long-term unemployed? . . . . . . . . . 89 4 . Educational attainment of the long-term unem-

ployed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1

. TENURE, TURNOVER. TRAINING AND THE FUNCTIONING OF THE LABOUR MARJSET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

C . LONG-TERM UNEMPLOYMENT AND WAGE FORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

1 . Expected effects of long-term unemployment on wage formation 92

2 . Estimated effect . . . . . . . . . 93

D . FACTORS BEHIND LONG-TERM UNEMPLOY- . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 nt security legislation and long-term

unemployment . . . . . . . . . . . . . . . . . . . . . . . . . 95 2 . Duration effects . . . . . . . . . . . . . . . . . . . . . . . . 103

Box: Some effects of long-term unemployment on individuals

3 . Econometric an

E . THE ROLE OF ACTIVE POLICIES AND TEMPORARY CONTRACTS . . . . . . . . . . . . 108

1 . Active policies . . . . . . . . . . . . . . . . . . . . . . . . 108 2 . Temporary contracts . . . . . . . . . . . . . . . . . . . . 110

F . CONCLUSIONS 11 1

NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

Annex 3.A:

. . . . . . . . . . . . . . . . . . . . . . . . . .

Econometric analysis of long-term unem- ployment . . . . . . . . . . . . . . . . . . . . . . . . 114

BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 16

Chapter 4

1 . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 134

3 . Enterprise formal training. human capital and

4 . Industry and enterprise size as factors in tenure

5 . Employment protection regimes and tenure . . . . . 145

D . SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Annex 4.A

2 . Job.shopping, tenure and turnover . . . . . . . . . . . 134

tenure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

and training . . . . . . . . . . . . . . . . . . . . . . . . . . 139

Sources and definitions of enterprise tenure and training data, and methods used to derive average tenure. historical retention rates and annual job-leaving rates . . . . . . . . . . . . . . 150

BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Chapter 5

EARNINGS INEQUALITY: CHANGES IN THE 1980s

A . INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 157

B . OVERALL CHANGES IN THE DISTRIBUTION OF EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 158

1 . Basic changes in dispersion . . . . . . . . . . . . . . . 158 2 . The “disappearing middle” . . . . . . . . . . . . . . . 165 3 . Data and definitions . . . . . . . . . . . . . . . . . . . . . 165

166 A . INTRODUCTION AND MAIN FINDINGS . . . . . . . 119 1 . The institutional context . . . . . . . . . . . . . . . . . . 166

B . ENTERPRISE TENURE . . . . . . . . . . . . . . . . . . . . 2 . The economic cycle . . . . . . . . . . . . . . . . . . . . . 3 . International migration . . . . . . . . . . . . . . . . . . . 120

167 167

1 . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 120 4 . Changes in the relative supply of different types 2 . General evidence on enterprise tenure . . . . . . . . 120 of workers . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

iv

5. Changes in the demand for employment, by sec- NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 tor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

6. The decline in unionisation. . . . . . . . . . . . . . . . 175 7. Changes in within-group inequality . . . . . . . . . . 176

A~~~~ 5.A: The measurement of inequality . . . . . . . . . 179

D. CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 176 BIBLIOGRAPHY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

LIST OF TABLES

1.1. 1.2.

1.3. 1.4. 1.5.

1.6.

1.7.

1.8.

1.9.

1.10.

1.11.

1.12.

1.13.

1.14.

1.15.

l.A.l.

2.1

2.2. 2.3.

2.4.

2.5.

2.6. 2.7.

2.8. 2.9.

2.10.

2.11.

2.12.

2.A. 1 .

2.B.1.

Growth of real GDP in the OECD area Employment and labour force growth in t area . . . . . . . . . . . . . . . . . . .

in the OECD area . . . . . . . . . . . Business sector labour costs in the OECD area . . Discouraged workers and involuntary part-time employment in selected OECD countries, 1991 . . Distribution of involuntary part-time workers by age and sex, 1991 . . . Involuntary part-time w

Temporary work: fixed-term contract regulations and requirements, 1990 . . . . . . . . . . . . . . . . . . . Temporary work: contract regulations ments through temporary work agencies, 1 Temporary workers as a percentage of tota

Proportion of wage and salary earner nent and temporary employment, by full-time and

Demographic compos earners in temporary employment, 1991 . . . . . . . Temporary employees as a per cent of all

Labour force status one year earlier a employees with a permanent or temp Probability of a change in labour

Shares of discouraged workers by a OECD countries . . . . . . . . . . . . . . . . . . . . . . . . Unemployment rate and active labour market

1981- 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

dent employment, 1983-1991 . . . . . .

part-time status . . . .

employees, by industry, 1983-1991 . . . . . . . . . .

among those unemployed . . . . . . . .

expenditure . . . . . . . . . . . . . Estimates of em nt equ . . . . . . . . . . Cross-country evidence on the wage effects of expenditures on active programmes . . . . . . . . . . Aggregate wage effects of active programmes and selected labour market indicators . . . Wage effects of expenditures on grammes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overview of studies: public employment services Overview of studies: training for unemployed adults and those at risk . . . . . . . . . . . . . . . . . . . Overview of studies: training for employed adults Overview of studies: measures for unemployed and

Overview of studies: subsidies to reg ment in the private sector . . . . . . . . . . . . . . . . . Overview of studies: support of unemployed per- sons starting entreprises . . . . . . . . . . . . . . . . . . Overview non-profit) Layard-Nickell-Jackman regression to explain unemployment and some alternative specifications Public expenditure and participant inflows in labour market programmes in OECD countries . .

disadvantaged youth . . . . . . . . . . . .

4 2.B.2.

5 7 3.1. 8

3.2. 10

3.3. 16

3.4. 17

3.5. 19

3.6. 20

3.7. 21

3.8.

22 3.9.

24 3.10.

25 3.11.

26 3.12. 3.13.

27 3.14.

34 4.1.

44 48 4.2.

50 4.3.

51 4.4.

52 4.5. 55

4.6. 57 60 4.7.

62 4.8.

63 4.9.

65 4.10.

66 4.1 1

70 4.12.

73

Public expenditure and participant inflows in labour market programmes in Central and Eastern European countries . . . . . . . . . . . . . . . . . . . . . . 78 Total unemployment rate and incidence of long- term unemployment . . . . . . . . . . . . . . . . . . . . . 87 Long-term unemployment rate and number of long- term unemployed . . . . . . . . . . 87 Monthly flows into and o

Structure of unemploye of educational attainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Econometric estimates of wage effects of long-term

long-term unemployment . . . . . . . . . . . 88

unemployment . . . . . . . . . . . . . . . . . . . . . .

structural unemployment Authorisation procedures

requirements in OECD countries, 1991 . . . . . . . . 97 Legislated individual severance pay requirements for unfair dismissals in OECD countries, 1991 . . 98

with the long-term unemployed . . . . . . . . . . . . . 109 Temporary contracts and long-term unemployment in France and Spain . . . . . .

employment growth and average tenure . . . . . . . 123 Five-year historical retention rates of workers by age and tenure at starting year t . . . . . . . . . . . . . 130 Eight-year historical retention rates of employees by age and tenure in 1983, United States . Ten-year historical retention ra age and tenure in 1979, Japan Average tenure profiles by level and potential labour force experience . . . . . . . . . 136 Share of young new recruits who received formal

Incidence of formal enterprise training by tenure with current employer. . . .

. . . . . . . . . . . . . size. . . . . . . . . . . . . . . . . 141

by establishment size . . . . . . . . . . . . . . . . . . . . 142 Annual job-leaving rates and the incidence of for- ma1 enterprise training by selected industries 143 Correlation between annual job-leaving rates and the incidence of formal enterprise training, United States 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

V

5.1. General pattern of changes in the dispersion of 5.6. Changes in earnings differentials by education earnings in the 1970s and 1980s . . . . . . . . . . . . 158 among men, during the 1970s and 1980s . . . . . . 171

5.2. Trends in dispersion* 1973-1991 ' ' . ' ' ' 159 5.7, The relative supply of college-educated workers 172 5.3.

5.4. 5.5.

Trends in earnings deciles deflated by the con- sumer price index. . . . . . . . . . . . . . . . . . . . . . . 163 Trends in the numbers of young people . . . . . . . 168 Changes in earnings differentials by age among men . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

5.8. Contributions of changes in employment S t ~ ~ t u r e to changes in dispersion . . . . . . . . . . . . . . . . . . 173

Proportion of the employed with higher education 5.9. levels of attainment by approximate ISIC industry 174

STATISTICAL ANNEX

A. Total employment by sex. . . . . . . . . . . . . . . . . . . . 186 M. Unemployed men . . . . . . . . . . . . . . . . . . . . . . . . . 194 B. Average hours actually worked per person per year 186 N. Unemployed women . . . . . . . . . . . . . . . . . . . . . . . 194

D. Size and composition of part-time employment, tries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 C. Civilian employment by sector . . . . . . . . . . . . . . . . 187 0. youth unemployment rates in sixteen OECD coun-

1973-1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 p, Incidence of long-term unemployment in selected E. Population of working age (15-64) . . . . . . . . . . . . . 190 OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . 196

Q. Incidence of long-term unemployment among men . . 197 F. Total labour force . . . . . . . . . . . . . . . . . . . . . . . . . 190 G. Total labour force - men . . . . . . . . . . . . . . . . . . . . 191 H. Total labour force - women . . . . . . . . . . . . . . . . . . 191

R. Incidence of long-term unemployment among women 197 s. Incidence of long-term unemp~oyment in

I. Labour force participation rates . . . . . . . . . . . . . . . 192 selected OECD countries .................... 198 J. Labour force participation rates by sex . . . . . . . . . . 192 T. Incidence of registered long-term unemployment IS. Standardised unemployment rates in seventeen among men . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . 193 U. Incidence of registered long-term unemployment L. Total unemployment . . . . . . . . . . . . . . . . . . . . . . . 193 among women . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

LIST OF CHARTS

1.1. Male and female share of discouraged workers for 4.1. 17 OECD countries, 1991 . . . . . . . . . . . . . . . . . 11 1990s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

Average tenure profiles by age and sex in the early

1.2. Discouraged workers and unemployment in 4.2. Changes in the average tenure profile of men by age 126 . . . . . . . . . . . . . . . . . . . . . 14 OECD countries 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I

1.3. Percentage of temporary workers in EC countries who could not find permanent work, 1991 . . . . . 28 4.3. Changes in the average tenure profile of women by

age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

2.1.

2.2.

2.3. 2.4.

2.5.

2.6.A.

2.6.B.

Expenditure on active and passive labour market

Expenditures on active programmes as a percent-

Structure of expenditure on active programmes . . Participants in active programmes as a percentage of the labour force . . . . . . . . . . . . . . . . . . . . . . Changes in active programme expenditures and in unemployment rates from 1985 to 1990 . . . . . . . The effects of labour market programmes on

The Beveridge curve . . . . . . . . . . . . . . . . . . . .

measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

age of total labour market expenditures . . . . . . .

labour-market equilibrium . . . . . . . . . . . . . . . . .

4.4.A. Share of workers 20-24 years old with less than 40 five years of tenure who will keep their job at least

five more years . . . . . . . . . . . . . . . . . . . . . . . . 132 42 4.4.B. Share of workers 40-44 years old with five to less 43 than ten years of tenure who will keep their job at

least five more years. . . . . . . . . . . . . . . . . . . . . 132

45 4.5. Short-term turnover and long-term stability . . . . . 133

46 4.6. Average tenure by selected industries. France, Japan and the United States. . . . . . . . . . . . . . . . 140

47 4.7. Formal training incidence and average tenure by 47 industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

4.8. Relationship between average tenure and the maxi- mum months of notice and severance payments to blue-collar workers 147

3.1. Incidence of long-term unemployment and unem- ployment rate. 84 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.2. Dismissal costs and long-term unemployment, 1979-1989.. . . . . . . . . . . . . . . . . . . . . . . . . . . 102

5.1. Changes in ratios of earnings deciles in the 1980s 162 3.3. Estimated contributions of employment protection ~-

legislation and labour market policies to long-term 5.A. I. Illustration of the distinction between polarisation unemployment rate . . . . . . . . . . . . . . . . . . . . . . 107 and inequality . . . . . . . . . . . . . . . . . . . . . . . . . 180

vi

Editorial

GROWTH AND EMPLOYMENT: A KEY ROLE FOR HUMAN RESOURCE DEVELOPMENT

The near-tern outlook for OECD employment and unemployment is bleak as the OECD economy enters its third year of low growth. A moderate recovery may get under way early in 1994, but the OECD-area unemployment rate is likely to continue rising well into next year, equalling its previous post-war high of over 8% per cent. In Europe, the unemployment rate could reach 12 per cent.

A key goal for policy-makers must be to prevent the current steep cyclical rise in unemployment from ratcheting up into a higher level of unemployment that cannot be reversed quickly once recovery comes. Experience shows this to be a considerable risk for many continental European countries.

OECD countries also need to accelerate the upgrading of the knowledge and skill bases of their economies if they are to raise employment and living standards in the face of technological progress and the changing international division of labour.

In order to respond effectively to these challenges, policy needs to exploit the complementarity between sound macroeconomic policies, aimed at creating the right environment for economic agents to take long-term decisions about saving and invest- ing, and structural policies aimed at making labour and product markets more adapt- able. A prime requirement is that labour market policies, social policies and education and training reinforce each other to encourage activity.

Unemployment is expected to continue rising throughout 1993 ...

The labour market outlook. OECD unemployment is projected to rise to 36 mil- lion by the end of the year, up sharply from the cyclical low of 24% million in 1990. The corresponding OECD unemployment rate of ti3/4 per cent would equal the previ- ous post-war high recorded in 1983. Reducing unemployment has, therefore, become a centrai goal of policy for OECD governments.

... despite some modest employment growth, concentrated outside continental Europe.

One encouraging element in this otherwise gloomy picture is that employment is expected to pick up slowly from the second half of this year, reflecting almost entirely gains in North America and Japan. Italy and the United Kingdom are also expected to record some growth in employment. The main area of continuing labour market weakness would, in general, appear to be in continental Europe. A generalised OECD- wide recovery is not expected to get under way before the end of this year or early next year, although its timing is uncertain. Even if the recovery develops as projected, it would take time for this to translate into lower OECD unemployment: Secretariat projections show a slow decline in unemployment setting in only in the second half of 1994.

vii

As unemployment “ratchets up in each cycle, long-term and youth unemployment persist.

Even so, high unemployment is an underestimate of the degree of labour market slack.

There has also been a deterioration in earnings for the low paid and in employment security for many workers in certain countries.

The twofold challenge is to stop today’s cyclical unemployment from becoming structural tomorrow and to move economies towards high- quality jobs ...

The gravity of the labour market situation is heightened by the fact that the current cyclical rise in unemployment comes on top of already high levels of structural unemployment. In many countries, declines in unemployment during the expansion phase of the cycle have not been strong enough to lower unemployment rates to the previous cyclical low. This so-called “ratchet” pattern - strong rises in unemploy- ment in the recession followed by only small declines over several years of expan- sion - is evidenced also by long-term unemployment (see Chapter 3). Although the proportion of long-term unemployed in the total fell in several countries in the late 1980s, it was higher in 1990 than in 1983 in a number of countries, principally in Europe. The persistence of youth unemployment is another indicator of structural difficulties - it remains stubbornly high in many countries, and has increased in several during the current downturn, despite the receding effects of the baby boom.

High and persistent unemployment is the most visible sign of labour market slack. But unemployment is not, in itself, a comprehensive measure of labour market slack and, in setting policies, a range of other indicators of labour market performance must be considered. For example, taking account of discouraged workers would add significantly to measured unemployment (Chapter 1). Similarly, policies to encourage early retirement reduce participation in the labour force of older workers. The mea- sures of non-employment, discussed in the 1992 Employment Outlook, are therefore important indicators for policy-making.

Similarly, two trends in the quality and nature of new jobs are important in assessing labour market performance. First, earnings differentials apparently widened in many OECD countries in the 1980s, in contrast to the 1970s, and very significantly so in the United Kingdom and the United States (Chapter 5). In the latter country, strong employment growth over the last decade has gone hand-in-hand with a fall in real wages for the lowest-paid workers. This has given rise to concerns over whether improved job performance can be bought only at wages which risk creating a class of working poor. Second, part-time and temporary jobs accounted for a large part of the job growth in the 1980s, especially in Europe. Many of these jobs can, directly or indirectly, provide good careers or future prospects, and are clearly a response to changing employer needs and worker preferences. But there are concerns that some offer only sub-standard employment and income security and may not be pathways to rewarding careers. Between 20 and 30 per cent of part-time workers, for example, would prefer a full-time job but cannot find one; in some European countries the proportion of temporary workers seeking permanent jobs is as high as 60 to 80 per cent (Chapter 1).

Policy challenges and responses in the current situation. Against this back- ground of below-trend growth and rising unemployment, policy-makers are facing a twin challenge in terms of improving labour market performance in OECD countries. First, they must prevent the recent and prospective rises in unemployment from ratcheting up into a higher structural unemployment rate once a recovery gets under way - which has been the case over the past three cycles, especially in Europe. Second, they need, over the medium to longer run, to facilitate the on-going shift in

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OECD countries’ production structures - under the influence, inter alia, of technologi- cal change and the growing world integration of goods and factor markets - away from low-skilled, low-wage jobs towards high-skilled, high-wage jobs.

... requiring complementary macroeconomic and structural policies ...

In order to respond to these challenges, a coherent approach is required to macroeconomic and structural policies that seeks to exploit to the maximum the complementarities between these policies. Macroeconomic policies have to provide a predictable non-inflationary environment so that wage and price setters, investors and savers can all take long-run decisions favourable to output and employment growth. In such an environment, it will be easier to build a coalition in favour of pressing ahead rapidly with much needed structural reforms. At the same time, structural reforms can enhance the leverage of macroeconomic policies by making labour and product mar- kets more flexible. In this way, a virtuous circle of mutually supporting reforms can be established, leading to better economic and employment performance.

... in particular through effective human resource development.

One key link in establishing a virtuous circle is the development of a comprehen- sive strategy for human resource development. If such a strategy is articulated and implemented successfully, this will contribute to improved performance in a number of ways. It would:

- offset inflation pressures in the recovery phase by reducing mismatches and

- assist the unemployed, especially key target groups such as young people and

- lay the foundations for continual upskilling of the workforce.

skill shortages;

the long-term unemployed, to compete successfully for jobs; and

There are several interrelated strands to such a strategy encompassing labour market, social and education and training policies. These are developed below.

Active policies for the labour market ...

Active labour market policies. The new framework for labour market policies - which was endorsed by OECD Labour Ministers in 1992 - proposes a progressive shift of resources from passive income support to active measures directed at three main goals - to mobilise labour supply, to develop employment-related skills and to promote efficient labour markets.

... can make competition in the labour market more effective and improve the matching process.. .

Economic theory suggests that active policies can lower structural unemployment through two main routes. First, they can enhance the ability of so-called “outsiders” (e.g. the long-term unemployed or first-time job-seekers) to compete more effectively for jobs, thereby weakening the bargaining strength of “insiders” in wage formation. Second, they can promote more efficient matching between job-seekers and available vacancies. Some limited evidence in support of these hypotheses is presented in Chapter 2. But a full assessment of the macroeconomic impact of active labour market policies is hindered by a lack of data and the difficulty in establishing robust causal links between the policies and labour market outcomes.

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... and have helped participants’ job chances when they are well targeted.. .

There is more evidence on the impact of a wide range of active measures on future re-employment and earnings prospects for programme participants (Chapter 2). A review of programme-level evaluation studies shows that several major labour market programmes have helped to improve job opportunities and future earnings for participants. Many successful programmes share the characteristic of being targeted on specific client categories, or are designed to address specific labour market problems. This applies, in particular, to training programmes. Less favourable results have been reported for certain broadly-targeted programmes, such as training programmes offered to all the unemployed. Some of the most consistently positive results have been reported for intensified placement and counselling efforts, aimed at encouraging effective job-search by the unemployed. Such measures have proved to be very cost- effective, especially when targeted on particular groups, such as workers affected by plant closures or the long-term unemployed. All labour market programmes are sub- ject to some “deadweight” cost - part of the labour market outcomes they are designed to encourage would have occurred even in the absence of the programme - and these effects are particularly strong for some job creation programmes, especially those involving recruitment subsidies. It is, however, possible to reduce deadweight costs by tying the subsidies to incremental hires or by targeting them to particular groups.

... yet the shifi from passive to active measures has been modest.

Evidence from the last few years suggests that rhetoric does not match reality in many OECD countries in terms of the shifts in public spending away from passive income support to active measures. Progress in the implementation of active policies has been only modest to date. It has inevitably been made more difficult by the current downturn. Only a few countries have shifted resources significantly into active poli- cies. While there is evidence that these policies have had positive effects, they are hampered by problems of programme design, implementation and insufficient integra- tion with other policies. The full potential of these policies has yet to be exploited.

Greater coherence between employment and social policies is needed, e.g.: when unemployment beneJits are too high or open-ended, they can add to long-term unemployment: ...

A coherent approach to labour market and social policies. Labour market and social policies have often been seen as intrinsically separate areas. In practice, how- ever, many labour market programmes have some social objectives too, and virtually all social programmes impinge on the incentive structure of the labour market. In many countries, the unemployment benefits system, rather than providing temporary income support to job-seekers while they re-establish themselves in the labour market, has also become a means for longer-term income support. Long, and in some cases virtually open-ended, unemployment benefits have added to the incidence of long-term unemployment in some countries (Chapter 3). Long-term unemployment is a trap: people become marginalised and their job-search is not effective enough to restrain wage demands by the employed. These negative side-effects of unemployment bene- fits systems are ultimately costly both for the long-term unemployed themselves and for society as a whole. A more positive approach would ensure that those out of work for more than a given period are guaranteed the opportunity to engage in activity, for example through training or subsidised employment in either the private or public sectors, which would re-integrate them into the labour force. Some countries already invoke administrative sanctions to encourage greater take-up by the unemployed of such offers.

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... or when programme compensation is at a level that does not encourage job- search; ...

A key feature of programme design is the average level of compensation paid to participants. This varies widely depending on the programme. When setting the level of compensation, it is important to bear in mind its generosity relative to unemploy- ment benefits or average earnings. The aim should be to encourage job-search by programme participants and maintain downward pressure on wages.

... when tax and transfer systems create “dependency traps”; when payroll taxes destroy jobs; ...

Another important interaction between labour market and social policies involves tax and social transfer systems which in many countries interact so as to create “dependency traps”, whereby additional work effort leads to little or no increase in net (after-tax) income because incremental gross earnings are largely, or even fully, offset by marginal income taxes and the reduction, or complete loss, of benefit payments. The financing of social expenditure, which relies heavily on payroll taxes paid by both employers and employees, provides another example. By taxing the use of labour, payroll taxes may reduce employment and raise unemployment. While the empirical evidence is mixed as to whether or not these taxes raise structural unemploy- ment in the long term, there is better evidence that they do raise it over the short to medium term. Moreover, there is also some evidence that the existing structure of payroll taxes acts as a disincentive to the hiring of unskilled, low-wage workers. Switching the financing of social security systems away from payroll taxes to other taxes that have a less unfavourable impact on employment warrants serious considera- tion.

... and when unduly high worker protection adds to long-tern unemployment.

Government regulations concerning hiring and firing are motivated by the desire to protect workers against unfair dismissals and redundancy. However, these regula- tions, especially high dismissal costs, also have other labour market outcomes. They are often cited as a factor which, by raising labour costs, tends to reduce employment opportunities. If dismissal costs are too high, employers may become unduly cautious about hiring new staff from the ranks of the unemployed or those with lower skills or experience. There remains considerable uncertainty over the relationship between dismissal costs and employment levels. However, there is some evidence that the severity of employment protection legislation (as measured for example by severance payments and notice periods) is in some countries positively related to the rate and incidence of long-term unemployment (Chapter 3). In Southern European countries, in particular, dismissal costs and long-term unemployment are both relatively high by international standards. This relationship suggests the need for a reassessment of the benefits and costs of employment protection legislation.

The answer is to ensure that labour market and social policies reinforce one another.

These examples illustrate that treating labour market and social policies as intrin- sically separate is a false dichotomy. These policies are most effective when social provisions and labour market incentives reinforce one another, rather than operating at cross-purposes. It is particularly important to avoid social policies imparting unneces- sary rigidities to labour markets, while failing to achieve their basic distributional objectives sufficiently well to justify the efficiency losses. As a guiding principle, the labour market and social policies that work best are those that jointly enhance and encourage labour force participation, thereby maintaining work incentives. No matter how successful societies may be in carrying out these policies, there will, however,

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Sound education and training is needed to meet the opportunities of technological change.. .

... with initial education sensitive to the requirements of working life.

Enterprise training is uneven and requires public co- ordination, notably to improve market signals.

always be some people who are unable to earn a decent income from work. All modem societies ensure at least a minimum level of income and social protection. In some cases, temporary or permanent subsidies (for example for the disabled) may be necessary in order to achieve this.

Education and training policies. Only a well trained and highly adaptable labour force can provide the capacity to adjust to structural change and exploit the new high- wage employment opportunities created by technological progress. Systemic reform must be directed at achieving greater coherence among the various parts of the learning system, with: sound initial education providing a solid basis for higher level education and training; stronger linkages between academic and vocational studies; a greater flow of information between schools and work; and lifelong learning through further training and retraining of adults.

Policies for initial education must aim at raising the level of student performance, eliminating early school leaving, and improving the performance of under-achievers. Academic studies need to be broadened, orienting them towards work and working life. At the same time, for those students engaged in more vocational studies, greater emphasis needs to be given to acquiring general skills and competences to supplement more specific vocational qualifications. There are major problems in the transition from school to work in most countries, although some countries make good use of apprenticeship schemes, partnerships and other forms of linkage between schools and employers. Major efforts are required to improve the articulation between learning and work through better flows of information and expertise between school and the world of work.

Education and skill development is a joint responsibility of the private sector, education and labour market authorities. Enterprises play a central role in skill devel- opment. But the freedom of workers to take their skills to other employers creates a disincentive for some enterprises to train workers. At the same time, compressed wage differentials may reduce the incentive for workers to invest in enhancing their skills. Thus, markets do not always produce an optimal level of investment in skills. The government can help compensate for such imperfections by improving incentives to both workers and companies to invest in training. The establishment of frameworks for the assessment and recognition of qualifications, and of wage structures flexible enough to reward skill enhancement, will improve incentives for workers. The crea- tion of mechanisms for ensuring that the economic value of qualifications and the investment nature of training are reflected as asset values in company accounts will improve incentives for employers.

Stronger employer-employee attachment is associated with skill training, so needs encouraging.

There is some evidence that the provision of skill training is linked to the length of job tenure within the firm (Chapter 4). Excessive labour turnover is liable to reduce the firm’s stock of specific skills, to discourage employers from investing in training and to disrupt the continuity needed for on-the-job learning. There are very large differences in average job tenures across countries; those with longer employment

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tenures are also those where young people are likely to receive comparatively high levels of training. College-educated workers have longer job tenures than less well educated workers, on average, and there is a tendency for industries in which training is more intense to employ their workers for longer. This general association of longer training with higher average tenures, both between industries and across countries, suggests that a strategy to foster enterprise-based training should attempt to promote longer-lasting attachments between workers and enterprises that are beneficial to both.

So human resource development is an essential element o fan employment strategy, but must be co- ordinated with other elements.

A strategy for growth and employment. This editorial has emphasized the role of a comprehensive human resource development strategy as an integral part of a policy package to boost employment performance. Given the nature of the labour market problems described above, even the best designed human resource development poli- cies would provide only part of the answer. Recognising the complexity of the problems, the Organisation is preparing, at the request of its Council at Ministerial level, a comprehensive strategy to promote sustainable growth and employment for the 1990s. This work, to be completed in 1994, will need to consider action in a number of policy areas, in addition to those outlined above. The list includes: macroeconomic policy and, in particular, its role in providing a stable framework for private-sector decision-making; the development and diffusion of technological change as the princi- pal source of the new skill-intensive jobs; competition, both national and international, as a main mechanism impelling the development, introduction and diffusion of new technologies; wage and price flexibility as a means of widening job opportunities; and the encouragement of private-sector enterprise, in particular the creation of new firms or the transformation of existing ones, in order to reap the benefits from new techno- logical opportunities and create viable jobs.

Paris, 28 June 1993

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