| Series Title | The Economist |
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| Series Details | No.8383, 10.7.04 |
| Publication Date | 10/07/2004 |
| Content Type | Journal | Series | Blog, News |
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The OECD softens its line on labour-market reform ECONOMISTS have a well-deserved reputation as killjoys. They have long enjoyed pointing out the unintended consequences of government policies. Think of almost any programme, and an economist will pop up with a list of ways in which it will come back to haunt its political sponsors. Take labour markets, which are especially rich in rules and regulations that are intended to help people but can often hurt them. Generous unemployment benefits, for instance, may provide a welcome safety net for people who lose their jobs, but they have costs too, not only in the taxes needed to finance them but also in perverse incentives for the unemployed to avoid work. Laws requiring big severance payments for sacked workers help people hang on to jobs, but also make firms less likely to hire in the first place. High minimum wages make some workers better off, but at the cost of reducing the overall supply of jobs and leaving some would-be workers out in the cold. Until recently, the OECD, a club of mostly rich-country governments, could be relied on to make exactly such points and plead for reform, even though many of its members have often been slow to take its advice. Since it crafted its “Jobs Strategy” ten years ago, its reports on members' economies and its annual Employment Outlook have followed a consistent line: cut unemployment benefits; restrict the eligibility for disability insurance; reduce or remove minimum wages and restrictions on hours worked, such as France's 35-hour week; and trim generous severance benefits. While this often earned the OECD the ire of its member governments, the organisation felt free to deliver uncomfortable economic messages. However, the Employment Outlook published on July 7th shies away from the fire-and-brimstone approach. This year and next the Outlook is dedicated to reassessing the OECD's previous line. This year's says that employment policies should take account of other “social objectives”, such as “a better reconciliation of work and family life” and “equity outcomes in line with national preferences”. This sounds much less hard-headed. Although unemployment has fallen over the past decade in many countries, it is scarcely a thing of the past, especially in continental Europe. Despite an improving global economy, the OECD still forecasts an unemployment rate of 7% across its members in the coming year. And this figure only counts those who are actively seeking work. Many European countries have a disappointingly high proportion of working-age adults who are not in the labour force at all. Troublingly, however, too few countries have made the wide-ranging reforms advocated by the OECD. Often, the laggards have been those that need them most, such as France and Germany. In several countries, the most that governments have done is to loosen protection for temporary workers, while leaving restrictions on firing permanent staff virtually untouched. But that has merely (and predictably, economists would say) caused employers to shift from permanent to short-term contracts, exacerbating inequality of treatment in the labour market. Arguably, partial reform has been worse than none. Reform and reassessment Nonetheless, according to the OECD's figures there remains a clear and strong correlation between high levels of employment protection and high levels of unemployment and inactivity. Job protection probably restricts the flow of workers out of jobs and into unemployment, as it is intended to do; however, it also reduces the flow out of the dole queue and into work. All this should bolster the case for further reform. As the Employment Outlook shows, in the past few years the pace has slowed in some respects (and, in a few cases, gone into reverse). That said, reform need not mean stripping away all employment protection. Some countries are trying out inventive policies intended to allow companies to hire and fire more freely, yet still provide workers with some security of income if they lose their jobs and give them an incentive to look for work. The Netherlands, Denmark and New Zealand have employment rates close to America's, yet also manage to maintain big safety nets. The OECD's exploration of these examples is a saving grace for a document that is otherwise laden with platitudes about reconciling “social objectives”. Take Denmark. It pays the unemployed up to 96% of the salary they received in work. You might think that this would not inspire them to seek a new job. Yet the Danish approach makes use of “activation” policies, such as monitoring the diligence with which the jobless seek work and offering full-time programmes for training. The disadvantage is that such an approach is expensive: it costs a huge 5% of Denmark's GDP. The Austrian government has tried to address the problem of high severance costs, which can act as a disincentive to hire new workers. Employers now pay about 1.5% of employees' salaries into special individual accounts. Sacked workers with more than three years' tenure can either take the money or have it paid into a pension fund. This eliminates the high cost of firing workers without reducing the payout to sacked employees. There is a cost - in effect, a levy on wages - but the net effect seems to be that flows into and out of work are smoother. The Netherlands has privatised its job-search agency, and pays a bonus for placing workers in jobs. It has also ensured that the unemployed would earn more working than from benefits. Its bigger neighbours would be wise to emulate this. Such steps are welcome. Ministers are not due to discuss the OECD's review until 2006. The approach hitherto has been basically sound, even if some OECD economists are not so sure. More reform is needed. It would be a pity if politicians were given an excuse to stop now. The article analyses the latest thoughts of the OECD on labour market reform (in its OECD Employment Outlook 2004) and detects a softening of approach. |
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| Source Link | http://www.economist.com |
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| Subject Categories | Employment and Social Affairs |
