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Labour market reforms in OECD countries: some lessons

Raymond Torres, OECD

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Social protection and regulations have long been seen as bad for job creation

Welfare benefits may inhibit work incentives

Labour regulations (minimum wages, dismissal regulations, etc.) may:

make employers reluctant to hire (lower labour demand); and

slow down allocation of resources (lower labour productivity

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Point 1: If well designed, welfare benefits may promote labour supply

The “mutual obligations” approach

Governments offer good re-employment services, financial incentives to work, non-financial services like child-care – the “rights”

Beneficiaries should take active steps to find work – the “obligations”

This may require a minimum wage set at right level

= > This can be very effective to bring disadvantaged groups into employment

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Nordics, Netherlands: top employment performers…

Source: OECD Employment Outlook 2004.

Proportion of people of working age who are employed, 2003

Employment as a percent of population aged 15-64

40

45

50

55

60

65

70

75

80

85

90

Icelan

d

Switzer

land

Norway

Denm

ark

Sweden

Nether

lands

United

King

dom

New Z

ealan

d

Canad

a

United

Stat

es

Austra

liaJa

pan

Austri

a

Finlan

d

Portu

gal

Total O

ECD

Irelan

d

Czech

Rep

ublic

German

y

Luxem

bour

g

Korea

Franc

eSpa

in

Mex

ico

Belgium

Greece

Slova

k Rep

ublic

Hunga

ryIta

ly

Polan

d

Turke

y

%

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Point 2: Employment regulations can be made consistent with employment

Overly rigid dismissal regulations can be a problem.

It can inhibit job creation, Contribute to labour market duality and Reduce mobility

But some degree of regulation can help

This will force firms to internalise cost of dismissal decisions: see Austrian reform, experience rating in the US

Helps find better job match (productivity)

6Source: OECD Employment Outlook 2004 .

How strict are employment protection regulations in OECD countries?Index measuring the strictness of employment protection legislation in 2003

Protection of regular employment against individual dismissal, 2003 (Scale 0-6)

0.0

1.0

2.0

3.0

4.0

5.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Regulation of temporary forms of employment, 2003 (Scale 0-6)

Regular work total

-1.5

0.5

2.5

0.0 0.5 1.0 1.5 2.0 2.5

Regular work individual

EPL overall including collective dismissal (version 2), 2003 (Scale 0-6)

0.0

1.0

2.0

3.0

4.0

5.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

EPL overall excluding collective dismissals (version 1), 2003 (Scale 0-6)

Regular work total

-2.5

2.5

0.0 0.5 1.0 1.5 2.0 2.5

Temporary work

Regular work individual

0.0

5.0

0.0 0.5 1.0 1.5 2.0

Temporary work

Regular individual

-2.5

2.5

0.0 0.5 1.0 1.5 2.0 2.5

Temporary

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Unite

d Sta

tes

Unite

d Kin

gdom

Canad

a

New Z

eala

ndIre

land

Austra

lia

Switzer

land

Hunga

ryJa

pan

Denm

ark

Czech

Rep

ublic

Korea

Slova

k Rep

ublic

Finla

ndPol

and

Austri

a

Nethe

rland

sIta

lyG

erm

any

Belgi

umNor

waySwed

enFra

nce

Gre

ece

Spain

Mex

icoTur

key

Portu

gal

2003(Scale 0-6)

Regulation on temporary forms of employment

Specific requirements for collective dismissal

Protection of regular workers against (individual) dismissal

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Wide cross-country differences in union density and collective bargaining coverage,

200023456789

1011121314151617

Percentage of wage and salary earners

Australia

Austria

Belgium

Canada

Czech Republic

Denmark

FinlandFrance

Germany

Hungary

Italy

Japan

Korea

Luxembourg

Netherlands

New Zealand

Norway

Poland

Portugal

Slovak Republic

Spain

Sweden

Switzerland

United Kingdom

United States

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100Trade union density (%)

Col

lect

ive

barg

aini

ng c

over

age

(%)

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Point 3: Better skills are needed

Information and communications technology has opened up new growth possibilities:

New technology may help raise productivity of existing firms;

it may also create new market opportunities; and has raised knowledge externalities

But, this productivity potential will not be realised automatically: it needs better human capital for all and new work practices

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Big shift away from low-educated employment…

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Training reduces the risk of unemployment Low-estimate of the probability change High-estimate of the probability change

13141516171819202122232425262728-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

Austria Belgium Denmark Finland France Germany Greece Ireland ITALY Netherlands Portugal Spain

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…Employer-employee bodies help promote human capital

a) Countries are ranked from left to right in descending order of the percentage of employees in all enterprises with a joint CVTagreement participating in employer-sponsored CVT.

b) Estimations include a very small number of non-training enterprises due to missing values.Source: CVTS2.

Chart 4. Training participation is greater in firms with a joint CVT agreement

Percentage of employees in all enterprises with/without a joint CVT agreement with social partners participating in

employer-sponsored CVT courses, 1999a

0

10

20

30

40

50

60

70%

With Without

Average 50 32Coefficient of variation 0.24 0.42

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Point 4 : there is no single policy strategy One approach is not to do anything, which in

countries where benefit dependency is high will entail non-employment persistence

Another approach is to reduce benefit levels and their duration, and reduce demand-side barriers (the deregulation approach):

This will enhance work incentives and will also raise labour demand

It is also cheaper for public purse But it will not be enough in certain cases (lone

parents) ... ... And as such does not help improve career

prospects and may lead to labour market insecurity

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A third approach is to reform benefits, maintaining them at an adequate level, but introducing a “mutual obligations” approach and modernising labour law:

Provision of benefits, employment-conditional support and active programmes, in return for effective job-search

Promoting skill development Reform of EPL and wage formation systems This may give job incentives and possibly

facilitate transitions to a higher productivity logic...

... But it is costly and complex

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Thank you