Tackling the Jobs Crisis: An OECD Perspective

1. Tackling the Jobs Crisis:An OECD Perspective Martine Durand OECD Deputy-Director for Employment, Labour and Social Affairs Employment and Social Affairs Committee of the European Parliament Brussels, 2 December 2009

2. Outline of presentation I. The labour market impacts of the crisis II. The employment and social policy responses

3. I. What are the labour market impacts of the crisis?

4. The jobs crisis (1) • Latest data show a mixed picture • OECD unemployment rate hit a post-war high of 8.6% in September 2009. • Pre-recession 25-year low was 5.6% in 2007 : this represents an increase of 15.7 million unemployed people (5.5 million in the EU). • Some easing in the pace of unemployment increase in some countries (US, GER, FRA) but continued deterioration in others (UK, IRE and ESP) • Different adjustment process acrossOECD countries • Employment has fallen significantly in the US, IRL, SPA and more recently UK; FRA has been less affected and GER has seen little change • Large declines in hours worked, particularly in GER and some other European countries • Widespread reduction in participation of youth; some reduction among prime-aged workers (BEL, IRL, ITA) and older workers (ICE, KOR, MEX)

5. The unemployment impact differs greatly across countriesOECD harmonised unemployment rate (%)

6. The jobs crisis (2) • Vulnerable groups are bearing most of the brunt: • The OECD youth (15-24) unemployment rate reached 18% in Q2 2009; 36% in SPA and around 25% in FRA, ITA and in the US; • Job losses concentrated on temporary contracts in many EU countries, e.g. SPA, ITA and FRA; • The unemployment rate of immigrants increased much more than that of natives: e.g. SPA it is 50% higher than the already very high overall rate (18.5%) • While the recovery is in sight, unemployment is expected to rise further • The recovery is expected to be weak • Job creation lags output growth early in a recovery • A real risk that high unemployment will persist into the recovery: • Different mechanisms at work: depreciation of human capital and demoralisation; Long-term unemployed are less attractive hires for employers; Insider-outside effects (e.g. in wage setting)

7. Youth are particularly exposed Unemployed as a % of the labour force Source: National labour force surveys.

8. Recessions not only hurt lots of people, but also take a long time to fix Unemployment rates, Finland, January 1970 to September 2009

9. II. What are the policy choices ?

10. Labour market policy challenges • Short-term challenges: • Should labour demand policies play a major role? • Are social security systems appropriate? Should unemployment benefits (UBs) or social assistance benefits be expanded? • Is the work-first approach recession-proof? How to activate the unemployed when labour demand is weak? • Long-term challenges: • How to avoid high unemployment from persisting? • How to avoid undermining long-run labour supply? • How to avoid undermining long-term labour market efficiency?

11. Supporting labour demand • Vigorous macro-economic policy response, including large fiscal packages, to boost aggregate demand • Estimated to save 3.2 to 5.5 jobs in 2010 in the 19 OECD included in the analysis • Most OECD countries have introduced targeted measures to support labour demand • Reduction in social security contributions • Short-time work schemes (e.g. Kurzarbeit in Germany counts more than 1.4 million participants corresponding to about a 1 percentage-point smaller rise in unemployment) • Labour demand measures play a positive role, but have to be temporary and well-targeted

12. Reinforcing social safety nets • Crisis leads to longer average unemployment spells • Where unemployment benefit durations are short, temporary extension during the crisis helps reduce the poverty risk among the long-term unemployed • Countries that have temporarily extended benefits durations are: Canada, Finland, Japan, Portugal and United States • Increasing numbers of ineligible jobseekers due to the increase in non-standard work in some countries • Extension of unemployment benefit coverage if adequate job-search enforcement can be provided • Countries that have extended coverage are: Finland, France, Japan and United States • Make sure social assistance is adequate and accessible (backstop) • Extensions generally should be temporary and targeted to the most vulnerable, and not undermine job-search requirements

13. Unemployment benefits are only one element of safety nets for job losers Average net replacement rates over a 5-year unemployment spell

14. Helping job-seekers find a job • Maintain core jobs-search assistance to help jobseekers • Even in recessions firms continue to create many new jobs • Cost of job loss increases due to longer expected unemployment duration and loss of human capital • Many countries have made good progress in recent years in implementing back-to-work policies • For those at risk of long-term unemployment, re-employment services need to be adapted to the crisis situation • Shift in emphasis from “work-first” approach to “train-first approach” through training and work-experience programmes • Helps provide jobseekers with “the new skills for the new jobs” in the recovery • Requires more resources for ALMPs

15. Discretionary funds for ALMPs limited with some notable exceptions Average annual planned additional expenditure in response to the economic downturn

16. Avoiding long-lasting “scars” on youth • Youth unemployment has increased disproportionately in many countries risk of a lost generation • Youth employment twice as sensitive to cycle as that of prime-age workers • Youth unemployment rate much higher than other groups (e.g. 1/3 Spain; 1/4 among teenagers in the US) • Strong evidence of “scarring” for the most disadvantaged youths • Need for decisive actions targeted on at-risk youth • Redouble efforts to prevent youth entering the labour market without qualifications (e.g. second-chance school, subsidies for apprenticeships for un-skilled youth) • Out-of-school youth should have access to appropriate ALMPs even if they do not qualify for unemployment benefits

17. Inappropriate government responses can undermine labour supplyin the long run • Allowing the unemployed to drift into long-term unemployment and inactivity • Essential to maintain mutual-obligations activation regimes (“bend but don’t break”) • Early retirement schemes and exemptions from job search of older unemployment benefit recipients • Did not free up jobs for youth and took a long time to unwind • So far so good? • More recently, large inflows of working-age persons into sickness and disability programmes • Some countries have made reforms aimed at promoting employment and employability of people with remaining work capacity • Will they stay the course?

18. Ageing populations remain a challenge for welfare systems (old-age dependency ratios)

19. Concluding remarks • Governments are intervening to prevent the jobs crisis from turning into a fully-blown social crisis • Even with the recovery in sight, governments must not reduce their efforts to tackle high and persistent unemployment and some countries may have to do more • Governments must tackle the jobs crisis in ways that do not undermine labour market inclusion in the long run.

20. THANK YOU www.oecd.org/els/employment/outlook

21. Annex: Fiscal stimulus packages and automatic stabilisers* vary across OECD countries * Coefficients summarizing the automatic change in fiscal balance due to a one percentage point change in the output gap.

22. Annex: Resources available for labour market policies differ across OECD countries • On average in 2007, 1.3% of GDP of which: 0.8% passive and 0.6% active • But large differences across countries: e.g. from 0.4% in US to 2.8% in DEN • Spending on UBs exceeds spending on ALMPs in almost all countries

23. Annex: Governments have taken many types of measures in response to the jobs crisis Number of OECD countries that have taken different types of measures