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Jun 15th 2006
From The Economist print edition

Tackling unemployment requires a careful mixture of policies

A DOZEN years ago the OECD published its Jobs Strategy, a list of recommended ways in which governments (mainly in Europe) might reduce high and persistent unemployment rates. The list was short: ten points and fewer than 200 words. This week the OECD “restated” the strategy at six times the length, arranging 20 recommendations in four “pillars”. In part, the extra text is pure verbiage. In part, though, the list is longer because, 12 years on, there is much more to be said about which policies work and which do not, and about what should be done next.

The original list was succinct largely because it carried a broad, simple message: get more people into work, mainly by loosening labour markets. The new version, backed by the OECD's annual Employment Outlook, which contains a thorough review of recent research, takes a less clearly deregulatory line. “There is no single road to better labour markets,” the OECD's secretary-general writes. That there is no single road, however, does not mean that there are many.

In broad terms, since 1994 most OECD countries' labour markets have improved: unemployment rates (the proportion of the workforce looking for jobs) have fallen; employment rates (the proportion of working-age people in jobs) have risen. Some countries, such as Australia, Britain, Denmark and Ireland, have seen marked improvement in more than one of these measures. But in other countries, notably France, Germany and southern and central Europe, too few people are in work. And although the general picture has improved in most places, some groups have done far less well than the average. In some countries, says the OECD, more could yet be done to bring women into the workforce or to make young people outside school or university easier to employ. One group of special concern is people aged 55 or over. Although 70% of Swedes and 61% of Americans aged 55 to 64 work, a mere 32% of Austrians and Belgians in that age range do. Too many countries have allowed or even encouraged older workers to drop out early. Unless that is reversed, the rise in the average age of populations may cause economic strain.

The Employment Outlook sifts study after study of which policies have done best. Over the years, economists have listed many things that can gum up labour markets. Generous unemployment benefits, especially those that last a long time, can blunt the incentive for those who lose their jobs to seek new ones. High minimum wages and tight job-protection laws can make employers loth to take on new employees, especially young ones who are untrained and untried. A thick wedge of taxes between what workers take home and what it costs to employ them can both discourage people from working and make firms reluctant to hire them. People without jobs may lack the education or skills that employers require.

Several countries have tried to ungum labour markets by deregulating them, by trimming marginal tax rates and by making benefits less generous. Broadly, these policies have raised employment. However, this has not been the only route. In essence, says the OECD, its members can be divided into four groups: two successful, in that they have lower unemployment and higher employment rates than the average, and two not. The fortunes of the four groups are summarised in the table.

You take the high road

The first group, labelled “mainly English-speaking” by the OECD (Japan, South Korea and Switzerland are honorary Anglophones), tends to have weaker job protection, less generous unemployment benefits and thinner tax wedges than the average. Its employment rate is comfortably higher than the OECD average; its jobless rate is comfortably lower. In the second, “northern European” group (Scandinavia, the Netherlands, Austria and Ireland), taxes and unemployment benefits are high and workers hard to fire. Yet the average employment rate is a little higher than the first group's and the unemployment rate a little lower.

There are two reasons why the second group can match the first. Their product markets are, like those of the first group, fairly loosely regulated, making the whole economy more dynamic. And they spend much more on schemes intended to ensure that the unemployed try hard to find work: in return for high benefits, they must accept that their search for a job will be closely watched and that some work-seeking programmes may be compulsory. That high unemployment benefits are a disincentive to seek work is not in doubt; but it seems that a sufficiently diligent and well-funded employment service can offset their effects. So if governments dislike gross inequality of income between those with jobs and those without, they can both avoid it and maintain the incentive to look for work—at a cost in taxes.

Countries in the third group—mainly southern European ones, plus France and Germany—tend to pay high benefits too. But they have not offset these with labour-market programmes on the scale of the second group, and their product markets are more protected. In the last group, which includes the Czech Republic, Poland and Slovakia, benefits are low. But workers are not especially easy to fire; little is spent on pushing the jobless into work; and product markets are more regulated than in any other group.

Next, says the OECD, many countries need to do more to bring specific groups into work. Arguably, as populations age, older workers will be the most important of these. Wages are often based on seniority, not productivity, making some older workers relatively dear to employ. Pension schemes in many countries encourage early retirement—in effect, levying an implicit tax on remaining in work in your 60s. This tax has fallen in some countries in recent years, but has gone up in others. Some of the OECD's members have done well at getting more of their people into jobs. Most still have a lot to do.

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