OECD sounds warning on jobs

Date: 12/06/1997

By Tim Jones

WHEN former European Commission President Jacques Delors put together his famous White Paper on Growth, competitiveness and employment four years ago, he was still hopeful that the EU could struggle out of the pit of slow growth to which it had consigned itself.

A range of reforms to labour markets, a shift from old industries to the expanding areas of the future and a targeted boost to investment spending could have produced sustained average growth rates of 3&percent; and put 15 million people back to work - or so ran the theory.

Four years on, prospects look bleaker. The recession of 1993 may be in the distant past but, since then, EU growth has been slow to take off. Gross domestic product grew by only 2.9&percent; in 1994 and 2.5&percent; in 1995 before actually decelerating to 1.6&percent; a year later.

When the Organisation for Economic Cooperation and Development (OECD) publishes its six-monthly Economic Outlook next Wednesday (18 June), it will show that 3&percent; growth rates for Europe are simply not on the horizon.

Jobs are going to have to be found by means other than a straight cyclical upturn if the Union is to cut the rate of unemployment from 11&percent; of the workforce.

“Western Europe may well have to live with average growth rates of less than 3&percent; simply because of demographics,” says Paul Atkinson, the head of the OECD's economic prospects division. “Societies are ageing while working-age populations are not growing very fast and, in some countries, they are even declining. In that context, 3&percent; growth would require the kind of increases in productivity that we have not seen over the past 25 years.”

In its outlook, the Paris-based organisation will forecast a continuation of the slow recovery from the recession of the early Nineties during this year but, at something close to the 2.4&percent; growth rate in GDP forecast last December, this will be nothing spectacular.

The problem for the continental European economies is that their recoveries have been predominantly based on a surge in demand for exports, while domestic consumers have continued to sit on their hands.

“There has been a lot of theorising about consumer behaviour in continental Europe, but I guess there are two things going on,” says Atkinson.

“The first is that you have got pretty widespread fiscal tightening efforts going on throughout Europe and, one way or another, since households pay the taxes, it is pretty hard to avoid letting households bear that. The second element is the employment situation.”

While growth in real disposable incomes is undermined through the rounds of budgetary cut-backs and tax increases implemented by governments in order to qualify for single currency membership, so total demand for goods and services is weakened by the number of people on the dole.

“Whatever is happening to the average person's disposable income, the total amount of consumption spending the economy can support depends on how many people have disposable incomes,” says Atkinson.

“The job-creation performance in continental Europe has been pretty poor for a long time and some countries are even below where they were in 1992-93, which means they did not even manage a gain in employment during the upswing.”

High rates of unemployment have a secondary effect on demand. Households are simply less willing to go out and spend on big-ticket items such as televisions, washing machines or computers if wage-earners are worried about losing their jobs or being forced into part-time work.

Although the OECD recognises that some of Europe's unemployment is the result of an economic downturn, the organisation has long been critical of the large 'structural' elements of the problem.

These include excessive costs for employers in hiring young people, high infrastructure costs, rigid wage-bargaining structures, underdeveloped services markets and welfare benefits which act as a disincentive to work.

Asked whether Europe has to live with 11&percent; unemployment, Atkinson delivers a stark warning. “Labour market performance and job creation have been pretty steady in Europe for 25 years and if more is not done in most countries to favour employment more in terms of structural policies, I do not see why labour market performance should improve much,” he says.

In a jobs policy report produced for OECD ministers a fortnight ago, Atkinson and his colleagues recommended a raft of changes to economic policies to promote work opportunities.

The report identified four countries which had been able to buck the trend of slow jobs growth, including three in the EU - the Netherlands, Ireland and the UK. The other was New Zealand.

“They have all seen significant improvements over time although - and this is the key point - it does take time to implement enough of the reforms needed to make a difference and it takes a long time for these to filter through and affect behaviour,” says Atkinson.

Unlike in countries such as the United States, the pattern of job creation in continental Europe over the past 50 years has not been one of strong growth in boom years and shedding in recession.

Instead, unemployment rose from nothing in the Fifties, shot up during recessionary years and then declined only slightly in the good times.

Essentially, the graphs show an upward trend.

“Some people might say that this is a fair choice for a society: a trade-off, something you must accept in return for good social protection,” says Atkinson.

“That is fine if you are assuming that France or wherever is going to have to live with 3 million unemployed or 12&percent; of the workforce for the next 20 years. But, if you assume that it is 3 million now and we are coming from 500,000 a generation ago, where are we going to be ten years from now? That is a wholly different question.”

The economist is keener to analyse than proscribe, but the conclusions of the OECD study are difficult to dispute.

“It is unfortunate when things get caricatured, but there is a balance between completely overriding the market and living with the excesses of savage capitalism,” he says. “Continental Europe has situated itself an awfully long way to one side of that spectrum, which we certainly think has had consequences for the way the labour market operates and is not helpful in this situation now.”

The prospect of establishing a single currency for the EU seems to have concentrated the minds of many European policy-makers on these intractable issues in a way that nothing else could.

“The single currency will at least highlight the need to pursue many of these reforms, although most of the things that the single currency makes necessary - fiscal consolidation, labour market improvements, making product markets more flexible - were all necessary anyway.”

Atkinson believes it is a pity that many of these vital changes are being sold to the public solely as a necessity for membership of economic and monetary union.

“It is better to confront the fact that government finances have to be brought under control and debt ratios cannot just rise for ever and ever without serious problems,” he says.

If and when the euro does go ahead, Atkinson does not think the member countries will miss the freedom they now have to devalue their currencies.

“It is fair to say that an awful lot of the exchange rate flexibility that countries took advantage of was not particularly helpful in anything except the very short term,” he says. “In the dozen years leading up to 1983, exchange rate flexibility often simply meant inflating a little bit faster.”