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July 1 2006 - New reports from the OECD say that if countries want to improve living standards and keep welfare systems functioning they urgently need to get more people into paid employment. This means rejecting policies that discourage people from working and companies from hiring, and by doing more to increase skill levels. The reports find that many people on welfare gain little financial advantage from going into employment. Those who want to work often find their chances hampered by constrictive regulations, lack of support in the job search, or their own lack of skills. The result is to restrict economic growth and prosperity as well as individual wellbeing.

The report entitled Boosting Jobs and Incomes, is an assessment of employment policies in the OECD's 30 member countries. Also new is a review by Sveinbjörn Blöndal and Raymond Torres of the OECD Jobs Strategy launched in 1994 when high unemployment was a persistent problem. Rapid technological advances and globalization require workers in OECD countries to be able to adapt quickly to new challenges and increased competition.

Overall unemployment in OECD countries has fallen since 1994. Rates of participation of women in the workforce have generally increased and the decline in participation of older workers (aged 55-64) appears to have been reversed in some countries. The OECD argues that most economies remain unprepared for the imminent challenge of ageing populations, although some countries (the USA, Canada, some of the Nordics, Australia and New Zealand) will be affected less than others. Young workers are over-represented among the unemployed. This is only partly explained by longer periods in education.

The OECD argues that some characteristics of strong labour markets are timeless:

"High employment, low unemployment and high productivity, with ease of movement of skilled, confident workers from all backgrounds among dynamic, high valued-added sectors and the capacity to absorb and adjust to shocks. Add to the package an ongoing ability to attract and retain fixed investment, whether domestic or foreign, and broadly speaking this is how most governments would like their labour markets to function."

The OECD acknowledges that very few member countries can claim to fulfil this broad characterization, and even the best have weaknesses that need addressing.

OECD secretary-general Angel Gurría said:

"Getting people who want to work into jobs is one of the biggest challenges facing many OECD governments. Systems that exclude people from employment are unfair and need to be changed. The key is to ensure that all economic policies are in line with and supportive of measures to boost employment and incomes. We believe that countries that take action along the lines we are recommending will be rewarded by a stronger labour market and, most importantly, improved living standards."

The OECD makes it clear that no single set of economic policies can solve employment problems. Some countries achieve low unemployment by maintaining comparatively low welfare benefits and minimal regulations, but at the expense of relatively wide inequality in earnings. Others obtain similar results with generous welfare benefits and a proactive approach to job seekers, but at high cost in terms of public spending on labour market policies.

The OECD notes that countries successfully boosting employment have in common an emphasis on macroeconomic stability and strong product market competition. In addition, most provide strong job-search support combined with obligations placed on those looking for work, including the threat of benefit sanctions. Some have introduced reforms that supplement welfare benefits with measures to ensure recipients look for work and have a financial incentive to take a job.

The OECD finds that some social benefits can prove a disincentive to work. "Too many people in some countries are on sickness, disability and lone-parent benefits, for instance, and pension and other benefits tend to encourage early retirement. Yet, many of these people could and often want to work. Governments should tighten up entry to these schemes and develop ways of activating people on such inactive benefits."

Review of the 1994 Jobs Strategy recommendations includes the following themes:

• High payroll taxes and social charges impede job creation for low-productivity workers.
• Escalating costs of private healthcare in some countries is an inhibiting factor.
• Several countries have cut employers' social security contributions on low-wage employment and some have reported more hiring of such workers.
• Decentralized and centralized wage bargaining offer greater flexibility than sectoral agreements, but change in this area has been slow.
• Anti-competitive regulations have a negative effect on employment.
• Policies need to be supported by sound macroeconomic policy that encourages investment and growth, and reduces cyclical fluctuations in the economy.
• Better skills will help workers adjust to change. Policy should help promote investment in human capital, while also addressing existing learning inequalities.

The OECD argues that countries following the recommendations of the 1994 Jobs Strategy have succeeded in reducing persistently high unemployment, as have those adopting Nordic-type approaches such as Denmark's 'flexicurity' hybrid. This combines relatively easy hire-fire with strong support for, and obligations on, jobseekers. Countries that have not reformed enough, including France, Germany and Italy, as well as some central and east European countries, continue to experience high unemployment despite strong global growth.

In its revised Jobs Strategy, the OECD urges governments to:

• set macroeconomic policies aimed at maintaining price stability and sustainable public finances;
• ensure that recessions do not lead to permanent falls in employment;
• make it more attractive for people to work than to stay on benefits;
• make sure that benefit recipients receive high-quality services, and that there is close monitoring of job search processes, backed up by possible benefit sanctions;
• adapt regulations and tax policies to encourage companies to recruit new staff;
• strengthen competition in product markets;
• ensure that legislation to protect job security does not undermine the dynamism of the labour market or lead to discrimination in hiring and firing;
• provide people of working age with education and training opportunities needed to get jobs and raise incomes.

The OECD acknowledges that suggested reforms mainly relate to rich countries, but argues that issues relevant for the newest members of OECD are also addressed, such as how to promote the transition from undeclared work to formal employment. Reform needs political will and among the toughest tasks facing governments are likely to be winning public support for necessary changes and implementing them effectively. The OECD argues that countries that fail to reform face continued weak employment performance.

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