Employment policy: Passing the stress test

Employment policy

Passing the stress test

Stefano Scarpetta and Paul Swaim, OECD Directorate for Employment, Labour and Social Affairs

The main victims of severe economic downturns tend to be workers and their families, so governments are rightly stepping in to help job losers weather the storm. But while the severity of the unfolding jobs crisis may require extraordinary policy responses, how can governments avoid the wrong ones?

More than 11 million workers joined the ranks of the unemployed in the OECD area in the year to April 2009, as companies cut production, closed factories and offices, and dismissed thousands of workers. Despite recent hopeful signs that the recession may be easing off, with small improvements in home sales and manufacturing orders in the US and a modest uptick in business confidence in Germany and Japan, output is likely to continue to fall for some time, affecting large and small firms both in industry and services. The OECD sees a substantial contraction in OECD area output in 2009, close to 4% of GDP on average, and even when growth returns in 2010 it is expected to be mild. (For an update on these forecasts, see OECD Economic Outlook No 85, June 2009). The trouble is, the jobs recovery is likely to lag substantially behind any pickup in economic growth, because employers tend to be cautious about hiring new staff in the early stages of a recovery when business conditions are still affected by uncertainty. Also, firms usually have scope to increase production without new hiring, especially if they restore working hours that were trimmed during the downturn.

Consistent with this historical tendency, unemployment for the OECD area is projected to continue to rise through 2010, approaching 10% in the second half of the year, an all-time high. If that projection should materialise, the number of persons unemployed would increase by almost 26 million over the course of the recession, representing an increase of 81% from the recent unemployment low registered at the end of 2007. And experience shows that, even if economic growth becomes vigorous late in 2010 and 2011, it will still take years to reabsorb this large pool of unemployed. Some countries have still not managed to regain their pre-crisis unemployment rates, even many years after the steep recessions in the 1980s and 1990s.

Most governments are responding vigorously to the current jobs crisis by strengthening their safety nets for the unemployed, scaling up measures to assist them finding a new job, and also propping up labour demand.

But this also means most governments face hard choices. Obviously, prompt help is needed to prevent the recession from becoming a full-blown social crisis. However, it is also essential that governments avoid repeating mistakes of the past, in particular by not allowing protections to become barriers to restoring high employment rates after economic growth resumes.

While it is too soon to assess how well employment policy is performing in the current crisis, it is clear that governments have moved vigorously to reinforce their policies. Of the 28 countries responding to an OECD survey on new policy measures to assist workers in surmounting the crisis, all report having undertaken multiple initiatives to plug gaps in the safety net for job losers and reinforce the assistance to help the unemployed to find new jobs. Twenty-one

All countries in our survey are expanding their active labour market programmes

out of 28 countries surveyed have shored up unemployment benefits or other forms of income support available to people who have lost their jobs. For example, France and Italy have made benefits available to some workers whose temporary job has ended, while Finland and Japan have reduced the minimum employment period required to receive unemployment benefits. Greece and Poland are examples of countries that have increased the level of unemployment benefits paid, while Canada, Japan and Portugal have extended the maximum period during which benefits can be paid. Finland and the United States opted to do both.

All of the 28 countries in our survey reported that they have expanded active labour market programmes (ALMPs), which increase reemployment assistance for the unemployed or their options for receiving additional training. While governments have moved to reinforce these standard ALMPs, a large majority have also moved aggressively in ways that have been less common in recent years, such as expanding measures to directly bolster labour demand, including public sector job creation schemes as in Korea and Spain. Subsidies to employers to avoid layoffs by adopting shorttime working plans have been introduced or scaled up in Austria, Germany, Italy, Mexico and the Netherlands. And several countries, including Australia, France and the United States, are focusing on expanding labour market assistance for low-qualified youth. This is particularly welcome for this age group since young people are at a disadvantage in a weak labour market and face a real danger of their long-term career prospects being compromised if they are not assisted.

So, can past mistakes be avoided? Here too, there are hopeful signs, though it is early days. In past recessions, many of those who lost their jobs drifted into long-term unemployment and were soon disconnected from the labour market, often never returning to work again. One reason for this is that spending on training and reemployment assistance did not increase with unemployment, and public employment services soon became unable to provide timely help to the swelling numbers of unemployed. The plethora of initiatives to expand ALMPs in current programmes suggest governments are determined not to repeat this mistake. However, it will be some time before we can judge whether employment policy budgets are being scaled up enough, or whether the right types of assistance are being targeted.

Perhaps the costliest mistake governments made in the past was to try to mask the rise in unemployment by recategorising some job losers onto other social programmes, such as early retirement or disability benefit schemes. Many of these people were neither near normal retirement age nor disabled. Yet almost none of them ever returned to work. Moreover, it took a long time to get these programmes back on to sound operating principles, such as determining eligibility for disability benefits solely on the basis of a medical examination. Opening pathways to early retirement also proved not to have the hoped-for effect of expanding employment opportunities for younger workers–in fact, the contrary occurred. Governments seem to have learnt this lesson the hard way; only by reinforcing their unemployment benefits and expanding ALMPs will they keep job losers in the labour market and ready for the recovery when it arrives.

But while policy responses appear sounder this time, much will depend on the crisis and the effectiveness of other policies to end it. The longer and more serious the downturn, the greater the temptation will become to give in to expedient measures, such as early retirement. The OECD is working closely with governments to monitor changes in labour market conditions and “stress testing” various employment policies to check their effectiveness in the crisis. We will be reporting more on our findings to OECD employment and labour ministers when they meet in Paris on 28-29 September. Hopefully by then, our assessment will still be encouraging.

Joblessness record ahead

Trajectories of unemployment rates during previous and current downturns

Unemployment in the current recession has followed a steeper rise than in any previous recession since the 1970s. Projections show unemployment to reach 9.9% in 2010, the OECD’s highest ever rate. If March projections prove correct, the level of unemployment will be 80% above 2007 levels.

Source: OECD March 2009

References

OECD Economic Outlook Interim Report, March 2009, www.oecd.org/oecdeconomicoutlook See www.oecd.org/speeches for speech by the

OECD Secretary-General to G8 Labour and

Employment Ministers, 30 March 2009 Visit www.oecd.org/employment For more on OECD work on employment, including information on the labour ministerial in

September, contact Stefano.Scarpetta@oecd.org or

Paul.Swaim@oecd.org