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Labour markets transitions through the looking glass

By Nhung Luu, Michael Abendschein and Orsetta Causa, OECD Economics Department

Labour market transitions, that is, the mobility of workers between jobs and in and out of employment, matter for growth and inclusiveness, not least to support the ongoing recovery from the COVID-19 crisis. Firm entry and exit, as well as the reallocation of workers allow resources to move from declining to expanding businesses, contributing significantly to productivity and allocative efficiency. From the perspective of workers, in particular young people entering the labour market, labour mobility and reallocation help them in seizing better job opportunities and reducing wage inequalities.

Our latest Working Paper: Labour market transitions across OECD countries: stylised facts (Causa, Luu and Abendschein, 2021) provides new evidence on pre-pandemic patterns and trends of worker transitions across European countries and the United States, with an emphasis on differences across socio-economic groups. Understanding labour market transitions is important in the context where effects of the Covid-19 crisis on the structure of employment may persist, with some sectors and occupations permanently shrinking and others growing.

Overall, we find that labour market transitions vary significantly from one country to another (Figure 1). Annual worker reallocation rates, defined as the sum of hirings from non-employment or from another job and separations to non-employment over a one year period range from around 30% of employment in Finland and Denmark to around 15% in the Czech Republic and Greece.

Figure 1. Labour market transitions in OECD countries, 2019

Note: Labour market transitions for the United States are available on a quarterly basis. Quarterly transitions are defined as the average over four quarters. Estimated annual transitions are obtained by summing quarterly rates.
Source: EU-LFS for European countries; Longitudinal Employer-Household Dynamics database (US Census Bureau) for the United States.

Labour market transitions also vary significantly within countries from one socio-economic group to another, underscoring key policy-relevant differences behind the aggregate picture. For example, women are much more likely than men to move in and out of jobs (Figure 2). This reflects the unequal burden of family-related responsibilities, which contributes to the higher propensity of women to drop out of the labour force and therefore to gender inequalities in the labour market.

Figure 2. Gender gaps in labour market transitions, 2019

Note: Gender gaps in labour market transitions are defined as the difference between transitions of men and women relative to transitions of men.
Source: EULFS for European countries; Longitudinal Employer-Household Dynamics database (US Census Bureau) for the United States.

Zooming in on labour market transitions over the great financial crisis provides an illustration of the long-lasting effects and scarring risks associated with recessions on labour market transitions, especially for young people entering the labour market. The transition from study to unemployment increased by 60% between 2007 and 2014, on average across countries for which data is available. More than two thirds of this increase was between 2008 and 2010. It took more than a decade for the transition from study to unemployment to decline back to its pre-recession level (Figure 3).

Figure 3. Scarring effects from the 2008 recession, 2007-2019

(OECD-EU average)

Note: The transition from study to employment from t to t+1 is computed as a share of the total students/trainers in the period t. The transition from study to unemployment from t to t+1 is computed as a share of the total students/trainers in the period t. The transition from employment to study from t to t+1 is computed as a share of the total employment in the period t. Rates are rescaled to 2007=100.
Source: EU-LFS and OECD calculations.

Our findings provide insights of the functioning of labour markets in OECD countries with implications for the recovery. While priorities will vary across countries based on the economic and social context, one overarching challenge for the recovery is to facilitate hiring dynamics and to minimise long-term unemployment among vulnerable groups who have been hardest hit and face higher risks of scarring from the recession, not least young people.

Reference:

Causa, O., Luu, N. and M. Abendschein (2021): Labour market transitions across OECD countries: stylised facts, OECD Economics Department Working Paper No. 1692, https://doi.org/10.1787/62c85872-en




Technology, Labour Market Institutions and Early Retirement: Evidence From Finland

by Naomitsu Yashiro*, Tomi KyyräƗ, Hyunjeong Hwang* and Juha Tuomalaǂ

@ Shutterstock/ SpeedKingz

Across OECD countries, promoting longer working lives is an important policy agenda for mitigating fiscal pressures from increasing pension and healthcare expenditures. There are, however, two significant barriers to increasing employment of older workers, especially in the context of digitalisation. First, workers engaged in codifiable, routine tasks are prone to being displaced by computers and robots (Gentile et al., 2020), a trend that may have been accelerated by the COVID-19 pandemic (Baldwin, 2020; Chernoff and Warman, 2021). Older workers are particularly exposed to this risk because, with shorter remaining working lives, they have weaker incentives to acquire new skills that would allow them to switch to tasks that are less likely to be automated. They may instead choose to retire early when facing rapid technological change (Ahituv and Zeira, 2011; Hægeland et al., 2007). Second, a number of OECD countries have in place institutions that encourage early retirement, such as exceptional entitlements for older workers or looser criteria for unemployment and disability benefits than for other workers. These two factors reinforce each other in pushing older workers out of employment: older workers who are more exposed to new technologies are more likely to exit the labour market when they have access to institutional pathways to early retirement; and older workers who have access to early retirement pathways are more likely to use them when they are more exposed to technological change. 

Our paper explores such complementarity for Finland, a country renowned for its intensive use of digital technologies but also with a considerably lower employment rate for older individuals than in other Nordic countries (OECD, 2020). The latter is driven importantly by early retirement through the so-called unemployment tunnel, which is the combination of the entitlement to unemployment benefit of up to 500 working days and the extension of unemployment benefit until the retirement age reserved for the unemployed aged 61 or over who have exhausted their regular unemployment benefit entitlements. From an empirical analysis exploiting a rich Finnish employee-employer database and the OECD data capturing exposure to digital technologies, we find that: 

  • An individual aged 50 or above in occupations exposed to a standard deviation higher than the average risk of automation (computed by Nedelkoska and Quintini, 2018) faces a 1.1 percentage point higher probability of exiting employment every year, if he or she does not have access to the unemployment tunnel. 
  • This probability is 2.2 percentage points higher if the individual has access to the tunnel. 
  • Gaining access to the unemployment tunnel increases the exit probability of an individual exposed to an average level of automation risks by 1.8 percentage points. 
  • The overall impact of higher automation risks and the unemployment tunnel therefore amounts to 4 percentage points, which implies an 80% increase in the probability of exiting employment for individuals aged 57-58. 

We obtain similar results when using other indicators to capture the exposure to digital technologies, such as intensity in routine tasks (Marcolin et al., 2016) or ICT skills (Grundke et al., 2017). Using the estimated coefficients, we simulate the impact of reforms that tighten access to the unemployment tunnel. Figure 1 illustrates that such reforms extend substantially the working lives of older workers exposed to high automation risks, but have little effect on individuals exposed to low automation risks.

This paper underscores the importance of labour market reforms that tighten access to institutionalised early retirement pathways in ensuring the inclusion of older workers in the future of work. While previous policy discussion often emphasised boosting lifelong learning opportunities, older workers will only have weak incentives to take up such opportunities if these early retirement pathways are left open. The recent decision by the Finnish government to abolish extended unemployment benefit by 2025 for persons born in 1965 or after is likely to encourage older workers relatively exposed to technological change to work longer and participate in upskilling opportunities. This, however, calls for targeted measures to increase the employability of groups most affected by this reform, namely low- and middle-skilled male workers in occupations exposed to high automation risks, involving more routine tasks and less use of ICT skills. Highly tailored training programmes as well as effective schemes for identifying the training needs of these older workers and certifying their acquired skills are important for boosting their upskilling efforts (OECD, 2020; 2019). Policy makers should also step up measures for getting older workers displaced by new technologies back into employment. In the case of Finland, such measures may include strengthening the capacity of the employment service to provide these workers with more personalised counselling and better monitoring of their activation requirements (OECD, 2020), as well as enhancing the role of social partners in facilitating job transitions even before dismissals take place, as in Sweden (OECD, 2016). 

*OECD Economics Department / ƗVATT Institute for Economic Research and IZA Institute of Labour Economics / ǂVATT Institute for Economic Research

Further reading

Naomitsu Yashiro, Tomi Kyyrä, Hyunjeong Hwang, Juha Tuomala (2021) “Technology, labour market institutions, and early retirement” VoxEU.org, 12 March 2021.

Yashiro N., Kyyrä, T., Hwang, H. and J. Tuamola (2021), “Technology, labour market institutions and early retirement: evidence from Finland”, OECD Economics Department Working Papers 1659.

OECD (2020), OECD Economic Surveys: Finland 2020, OECD Publishing, Paris.

OECD (2019), Working Better with Age, Ageing and Employment Policies, OECD Publishing, Paris.

Reference

Ahituv, A. and J. Zeira (2011), “Technical progress and early retirement”, Economic Journal, 121, 171–193.

Baldwin, R. (2020) “Covid, hysteresis, and the future of work” VoxEU.org, 29 May

Chernoff, A. and C. Warman (2021) “Down and out: Pandemic-induced automation and labour market disparities of COVID-19” VoxEU.org, 2 February. 

Gentile, E., S. Miroudot, G. De Vries and K. M. Wacker (2020) “Robots replace routine tasks performed by workers” VoxEU.org, 8 October.

Grundke, R. et al. (2017), “Skills and global value chains: a characterisation”, OECD Science, Technology and Industry Working Papers, 2017/05.

Hægeland,T., D. Rønningen and K. Salvanes (2007), “Adapt or withdraw? Evidence on technological changes and early retirement using matched worker-firm data”, NHH Dept. of Economics Discussion Papers, No. 22/07.   

Marcolin, L., S. Miroudot and M. Squicciarini (2016), “The routine content of occupations: new cross-country measures based on PIAAC”, OECD Science, Technology and Industry Working Papers, 2016/02.

Nedelkoska, L. and G. Quintini (2018), “Automation, skills use and training”, OECD Social, Employment and Migration Working Papers, No. 202.

OECD (2020), OECD Economic Surveys: Finland 2020, OECD Publishing, Paris.

OECD (2019), Working Better with Age, Ageing and Employment Policies, OECD Publishing, Paris.

OECD (2016), Back to Work: Finland: Improving the Re-employment Prospects of Displaced Workers, OECD Publishing, Paris.




Boosting employment in post-COVID Finland

by Naomitsu Yashiro, OECD Economics Department

In the context of the large economic contraction and debt build-up in the wake of the COVID-19 pandemic, the government of Finland is formulating reforms to raise employment by 80 000 persons by 2029. Achieving this would raise the employment rate from the estimated 70.8% in 2020 to 73.7% in 2029, reversing the labour market damage caused by COVID-19 and reducing, but not eliminating the structural budget deficit.

Before the pandemic, Finland’s employment rate was 73% in 2019, lagging behind the average of Scandinavian Nordics (76%).The largest contribution to the employment rate gap was made by the 60-64 year-old age group. Finland grants to older workers with sufficiently long working period unemployment benefit entitlements that are not only longer than those for younger workers but can also be extended from the age of 61 up to the statutory retirement age. This extension, often dubbed the unemployment tunnel, provides strong disincentives to continue working. It also induces employers to target older workers in redundancies, even though large employers are obliged to finance a part of the unemployment benefits claimed by their former employees who entered the tunnel. The risk of unemployment increases markedly as workers near the age at which they become eligible to the unemployment tunnel (Figure 1). Past reforms that raised the eligibility age in steps from 59 to 61 have pushed back the timing of the sharp rise in unemployment risks each time, effectively lengthening the working lives of older workers (Figure 1). The 2020 Economic Survey of Finland, published in 10 December 2020, recommended abolishing the unemployment tunnel. A week later, the government announced its decision to abolish the tunnel by 2025.

In Finland, inflow into disability benefits has often increased when access to other early retirement pathways was tightened by policy changes. Early retirement via disability benefits is facilitated by more lenient eligibility criteria for awarding disability benefits applied to individuals aged 60 and over, which include non-medical factors. The Survey recommends aligning the criteria between older and younger individuals, namely by not taking into account non-medical factors. This is important for avoiding the surge of inflow into disability benefits as the unemployment tunnel is being phased out.

In order to ensure that these supply-side reforms result in higher employment, additional policy efforts to place older workers in jobs are needed. Activation requirements for the older unemployed should be applied with the same vigour as for other unemployed persons. The capacity of the public employment service needs to be strengthened by focusing resources on providing essential services like face-to-face counselling while making more use of private providers expertise and digital technologies. Ample upskilling opportunities should be provided to workers with higher risks of jobs loss at old age, such as those with jobs exposed to automation risks (Yashiro et al., 2021). Although the participation in adult education in Finland is relatively high, old and unskilled workers participate much less, as in other OECD countries. Finland’s adult education is biased toward formal education at higher education institutions, making it less attractive to the low skilled. The government should bolster targeted trainings, referencing successful examples in other OECD countries, such as the Unionlearn scheme in the United Kingdom where Union Learning Representatives help workers identify their training needs and arrange learning opportunities within their companies.

Another population group contributing to Finland’s relatively low employment rate vis-à-vis its Scandinavian peers is young women (30 to 34). However, the lower employment rate among this group is mainly due to differences in the statistical treatment of maternity leave between Finland and Sweden. The work attendance rates, which measure the share of persons who were at work during the surveyed week, are about the same between the two countries. However, the attendance rates are still considerably lower in Finland among mothers of children aged up to three years old, owing to the generous social benefit granted for taking care of children at home instead of using childcare services provided by municipalities. Removing this financial disincentive would encourage return to work by young mothers, thereby avoiding their career development being hampered by a long absence from work, which would help reduce the large gender pay gap.

Further reading:

OECD (2020), OECD Economic Surveys: Finland 2020, OECD Publishing, Paris.  

REFERENCE

Yashiro et al. (2021), “Technology, labour market institutions and early retirement: evidence from Finland”, OECD Economics Department Working Papers, Forthcoming, OECD Publishing, Paris.




Flattening the unemployment curve? Policies to support workers’ income and promote a speedy labour market recovery

by Cyrille Schwellnus, Michael Koelle, Balazs Stadler, OECD Economics Department

The spread of COVID-19 across countries and measures taken by governments to contain it – including shutdowns of many business and restrictions on travel and mobility – have led to employment losses that dwarf those experienced during the economic crisis of 2008-09 in terms of both speed and magnitude. The OECD projects the OECD-wide unemployment rate to increase by around 6 percentage points between the fourth quarter of 2019 and the second quarter of 2020 as compared to an increase of around 2 percentage points between the third quarter of 2008 and the second quarter of 2009.

A number of countries, including Australia, Japan, New Zealand and most Western European countries, have established or expanded job retention schemes to preserve as many existing jobs as possible (OECD, 2020). These schemes typically operate on the principle that businesses are subsidised to preserve existing job matches while workers experience no or limited wage losses. In practice, businesses continue to pay employees a significant part of their monthly wages even though they are working only part-time or not at all. In return, they can claim a wage subsidy that covers part of the excess wage cost.

Other countries, including a number of Central and Eastern European countries and the United States, have taken very limited labour market measures to support the preservation of existing jobs. Firms in these countries have greater incentives to lay off workers in response to the COVID-19 shock. The unemployment rate in the United States, for instance, increased by about 10 percentage points between February and May 2020, which partly reflects the ease of layoffs and the absence of significant job retention schemes at the federal level.

The massive use of job retention schemes during the crisis raises the question of their effectiveness in preserving existing jobs in the short term. Although data on GDP growth and unemployment for the first half of 2020 are not yet available, a first assessment can be made by analysing OECD projections. OECD country specialists integrate real-time information on GDP growth and unemployment from high-frequency indicators in their projections, as well as information on the extent of job-preserving measures, including past experience and real-time information on programme uptake, thereby summarising the currently available information in a synthetic way. The analysis suggests that – relative to predictions based on the historical relation between unemployment and GDP growth (“Okun’s law”) – countries that have resorted to large job retention schemes during the crisis are projected to experience smaller increases in unemployment than other countries (Figure 1).

A complementary way to assess the effectiveness of policies to preserve existing jobs is to compare real-time unemployment developments across countries with and without large job retention schemes. Ideally, such comparisons would take into account differences across countries in the magnitude of the GDP shock. However, GDP is available on a less timely and lower-frequency basis than unemployment data, which makes conditioning on GDP impossible. The approach taken instead is to report changes in registered unemployment along with the workforce covered by applications to job retention schemes. The results, shown in Figure 2, suggest that increases in unemployment have been systematically smaller in countries with larger coverage of applications, suggesting that – at least in the short term – these schemes have been effective in limiting increases in unemployment.

Job retention schemes may be effective in preserving existing jobs in the short term, but this may come at the cost of a less efficient reallocation of workers from unviable jobs to industries and firms with better medium-term growth prospects (Barrero, Bloom and Davis, 2020). Restrictions on some non-essential activities (e.g. travel; hotels and restaurants; parts of the retail sector; recreational services) may persist for some time and consumer demand may not fully recover even thereafter, while industries and firms with business models that are compatible with social distancing may grow (e.g. e-commerce; courier, express and parcel services; parts of the health sector; as well as activities that rely mostly on tasks that can be performed remotely), suggesting that the COVID-19 shock may require significant reallocation of resources.

The optimal mix of job preservation and unemployment benefit policies to support workers and ensure a rapid recovery thus depends on whether the exogenous COVID-19 shock turns out to be purely transitory or more persistent. Given large uncertainty about the longer-term consequences of the crisis for the reallocation of resources across industries and firms, policies to preserve existing jobs can be combined with temporary expansions of unemployment benefits where generosity and/or coverage is currently low.

For instance, employers’ contributions to the cost of job retention schemes could be set in such a way that only businesses expecting to be viable in the medium term select into them rather than using the unemployment insurance system (OECD, 2018). This may require gradually increasing employers’ contributions from the low level put in place during the acute phase of shutdowns.. Moreover, access to training and restrictions on combining income from short-time work schemes with income from other jobs could be eased to allow workers to seize new job opportunities as they arise.

An appropriate balance between preserving existing jobs and reallocation could also be achieved by strengthening incentives in unemployment insurance systems to recall dismissed workers once economic conditions improve (Fujita, Moscarini and Postel-Vinay, 2020). Combining generous unemployment benefits with rules that provide subsidies or tax relief for firms that recall previously dismissed workers could support workers and preserve job matches to a similar extent as short-time work schemes, while allowing for a sufficient degree of reallocation. In Israel, for instance, the government introduced a recall subsidy of around USD 2100 at the end of May.

As the COVID-19 crisis evolves, finding the right balance between job preservation and reallocation of resources will involve some degree of experimentation regarding the sharing of costs related to job retention schemes between employers, employees and the government, as well as a focus on restoring viable job matches in countries that have experienced large numbers of layoffs. As activity in a number of industries resumes, a renewed focus on active labour market policies, including training and public employment, on top of appropriate income support may limit the costs of reallocation for workers. In order to provide timely and granular labour market policy advice, the OECD is monitoring ongoing reallocation across firms, industries and regions using real-time data on online job advertisements. The results of this work will be reported in forthcoming OECD policy briefs.

References
Barrero, J., N. Bloom and S. Davis (2020), COVID-19 Is Also a Reallocation Shock, National Bureau of Economic Research, Cambridge, MA, http://dx.doi.org/10.3386/w27137.

Fujita, S., G. Moscarini and F. Postel-Vinay (2020), The labour market policy response to COVID-19 must save aggregate matching capital, VoxEU CEPR Policy Portal, https://voxeu.org/article/labour-market-policy-response-covid-19-must-save-aggregate-matching-capital.

OECD (2018), Good Jobs for All in a Changing World of Work: The OECD Jobs Strategy, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264308817-en.

OECD (2020), OECD Economic Outlook, Volume 2020 Issue 1: Preliminary version, Issue Note 5 Flattening the unemployment curve? Policies to support workers’ income and promote a speedy labour market recovery, OECD Publishing, Paris, https://doi.org/10.1787/0d1d1e2e-en




Addressing labour market challenges in Belgium

By Müge Adalet McGowan, Belgium desk, OECD Economics Department

Job creation has lowered the unemployment rate to record low levels at 5.2% in the third quarter of 2019, but the Belgian labour market still faces many challenges, including those related to the changing nature of work. The main ones are low employment, primarily due to high levels of inactivity, and a large employment gap for disadvantaged groups. Low employment rates reflect barriers to finding a job such as low levels of skills and weak work incentives (Hijzen et al., 2020). The 2020 Economic Survey of Belgium discusses policies that could help to address these challenges and promote a more inclusive labour market.

Rising skill shortages, especially in information and communication technology, signals a need to better align skills with labour market needs and re-skilling (Figure 1). In addition, the success of recent pension reforms will depend on keeping older workers attached to the labour market, which requires more incentives for them to work, but also more willingness of companies to hire them. Participation in lifelong learning is key for that purpose. However, at 8.5% in 2018, it is below the EU average of 11.1% and training requirements, which are at the firm level, do not guarantee that workers that need it the most benefit from it. The 2020 Economic Survey of Belgium recommends the introduction of individual training allowances, with guidance support on training programmes, and targeted support, such as higher training time and/or funding requirements, for disadvantaged workers.

Self-employment, at around 15% of total employment, is higher in Belgium than a number of peer countries (Figure 2). Non-standard employment can provide greater flexibility for workers and firms, facilitate the emergence of new business models and could provide a stepping stone to standard employment for some. However, they can also raise concerns about job quality and potentially increase disparities, which might require a fundamental change in labour market, skills and social policies. Belgium has already made much progress in this area, but more can be done. The 2020 Economic Survey of Belgium recommends further aligning the pensions system of the self-employed with that of dependent employees, for example through the harmonisation of contribution rates and pension calculations.

While the unemployment rate has declined, the long-term unemployment rate remains high at around 50%. Given the significant disparities in labour market outcomes in Belgium, targeting of activation measures could be improved further, and the benefits of public employment services making greater use of statistical profiling tools are likely to be substantial. Extending the use of tools for the profiling of individualised risks can be a good way to identify job-seekers who are more at risk of becoming long-term unemployed and boost their employment.

References:
Hijzen et al. (2020), “Lowering employment barriers in Belgium and Norway”, OECD Jobs Strategy Implementation Note, February.
OECD (2020), OECD Economic Surveys: Belgium 2020, OECD Publishing, Paris.




Fostering formal sector job creation to further improve living standards in Indonesia

By Christine Lewis, Head of Indonesia Desk, OECD Economics Department

The Indonesian economy has grown solidly in recent years, which together with helpful government policies has raised incomes and brought down poverty rates to record lows, as highlighted in the latest OECD Economic Survey of Indonesia (OECD, 2018). Prudent macroeconomic policies have contributed to economic stability, muted inflation and limited government debt. Even with the more challenging external environment, GDP growth is expected to remain around 5¼ per cent in 2018 and 2019.

Indonesia’s youthful population represents an opportunity to lift future growth and living standards. In contrast with higher-income countries, the working-age population share is rising and will likely continue doing so for another decade (United Nations, 2017). OECD estimates suggest that over the next decade this demographic change alone is expected to boost trend GDP growth by around 0.3% on average (OECD, 2018; Guillemette and Turner, 2018).

Indonesia’s favourable demographics could provide a bigger boost to growth if a larger share of employment consisted of high-quality jobs in the formal sector. Informality is usually associated with insecure jobs with lower pay and fewer training opportunities (OECD, 2015; Allen, 2016). Although the rate of informality has fallen in Indonesia, it remains pervasive. The OECD estimates that around half of all dependent employees and 70% of all workers are informally employed, compared to 35% in Brazil or around 55% in Colombia (Figure 1). Growing the share of formal sector jobs would increase incomes and, by raising government revenues, would allow better services to be provided for future generations.

Indo CLewis informality 1

There are different reasons for informal employment so tackling it requires a multi-pronged approach. Stringent employment regulations, including high dismissal costs and minimum wages, limit firms’ ability and incentive to hire formal employees (Figure 2). The Survey recommends trialling easier employment regulations and a discounted wage for youth in special economic zones and extending these reforms if they are successful. Continuing to simplify business regulations and to improve the new online submission system for licensing would help reduce barriers to businesses operating formally.

Indo CLewis informality 2-2018

Low skill levels combined with a relatively high minimum wage also limit the growth of formal sector employment. Only half of all Indonesians aged 25-35 have completed upper secondary school. The OECD PISA test results show that many 15 year-olds still lack basic skills in maths and reading. Improving the quality of education can be difficult but it is crucial for improving the prospects of future generations. Reforms should focus on improving teacher quality in schools and better linking vocational education with employers to ensure students graduate with the skills they need to find good jobs and continue developing over their career.

References

Allen, E. (2016), “Analysis of trends and challenges in the Indonesian labor market”, ADB Papers on Indonesia, No. 16, Asian Development Bank, Manila.

Guillemette, Y. and D. Turner (2018), “The long view: scenarios for the world economy to 2060”, OECD Economic Policy Papers, No. 22, OECD Publishing, Paris, http://dx.doi.org/10.1787/b4f4e03e-en.

OECD (2018), OECD Economic Surveys: Indonesia, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-idn-2018-en.

OECD (2015), “Enhancing job quality in emerging economies”, in OECD Employment Outlook 2015, OECD Publishing, Paris, http://dx.doi.org/10.1787/empl_outlook-201h5-9-en.

United Nations (2017), World Population Prospects: The 2017 Revision, DVD Edition;




The UK productivity puzzle through the magnifying glass: A sectoral perspective

Rafał Kierzenkowski, Gabriel Machlica and Gabor Fulop, Economics Department.

Labour productivity has flatlined since the global financial crisis, which contrasts with its recovery profiles from past recessions over the last decades (Figure 1).  The productivity shortfall, defined as the gap between actual productivity and the level implied by its pre-crisis trend growth rate, reached nearly 20% at the end of 2016. This unprecedented levelling off represents the so-called productivity puzzle, with the level of output being surprisingly weak relative to high total hours worked in the economy. At the aggregate level, the weakness in productivity is driven by subdued investment developments and total factor productivity, and this underperformance appears to be mainly structural rather than cyclical.

Fig1.JPG

Using disaggregated data at the sectoral level provides additional insights about the determinants of the productivity puzzle, as shown in a recent OECD Economics Department Working Paper (Kierzenkowski et al., 2018). There has been a marked increase in the dispersion of productivity performance across UK sectors since the crisis, with sectors lagging behind becoming even more disconnected from the best-performing sectors (at a given point in time). Moreover, the aggregate productivity slowdown appears to be mainly driven by the weakness in productivity within each sector, which suggests sector-specific determinants of the productivity shortfall.

To investigate the issue further, it is possible to calculate the contribution of each sector to the aggregate productivity shortfall since 2007. Such calculation shows that half of the gap is explained by non-financial services (with information and communication being the largest contributor), a fourth by financial services, and another fourth by manufacturing, other production and construction (Figure 2). All but non-financial services and the construction sectors contribute disproportionately to the productivity shortfall compared to their shares in overall output and hours worked of the UK economy.

Fig2.JPG

In non-financial services, large increases in self-employed with no employees may have reduced the economies of scale and scope of organised work (Figure 3, Panel A), while the production of the sector has become less capital-intensive at the same time. Greater mismatches between changing skills and created jobs may have also curbed productivity growth, in particular in the information and communication sector where many high-skilled occupations have been created but where increases in labour quality have been comparatively weak.

In financial services, stagnant labour productivity is mainly linked to reduced risk-taking and leverage, as reflected by the decline in total factor productivity following its steep increases in the run-up to the crisis (Figure 3, Panel B).  Although the measurement of output of the financial sector is difficult, this finding is corroborated by the relative size of the financial sector, which was expanding quickly to become significantly larger than in the rest of the G7 in the run-up to the crisis. Looking ahead, the key issue is the extent to which the financial sector can add to productivity growth of the UK economy without undermining financial stability.

In manufacturing, low accumulation of the capital stock (Figure 3, Panel C), suggests a greater substitution from capital towards labour in the production process and a drag on the productivity of the sector. Also, there are indications that weak corporate restructuring may have been another driver, with company exits being smaller than in the overall economy (Figure 3, Panel D). Particularly, in low-tech manufacturing , the percentage of capital and labour that is held up by zombie firms (defined as firms which persistently fail to cover their interest payments from current profits) is estimated to be respectively at around 18% and 13% (OECD, 2017).

The UK productivity puzzle is also partly explained by pre-crisis developments, which include a low tangible investment in comparison with other OECD countries, a too rapid expansion of the financial sector despite the comparative advantage of the City, productivity gains in the manufacturing sector that were insufficiently “offensive” (driven by innovation), and a secular decline of the oil and gas sectors with dwindling resources in the North Sea.

Fig3.JPG

References:

Kierzenkowski R., G. Machlica and G. Fulop (2018), “The UK productivity puzzle through the magnifying glass: A sectoral perspective”, OECD Economics Department Working Papers, No 1496, OECD Publishing.

OECD (2017), OECD Economic Surveys: United Kingdom 2017, OECD Publishing.

 




Delivering on the promise of better outcomes for Canadian women

by Andrew Barker, Canada Desk, OECD Economics Department

The current Canadian government has declared itself feminist and has taken a number of steps to improve labour market outcomes for women. This includes increased funding for early learning and child care and improving equality of parental leave by introducing five weeks of leave for the second parent (generally fathers) on a take it or lose it basis. In terms of employment and labour force participation, Canadian women do much better than the OECD average.

However, there remains a sizeable gap in earnings between Canadian men and women (Figure 1).

Canadawomenblog 2018

The earnings gap is particularly large for women with children, in part explained by fewer years of work experience and more hours devoted to unpaid work (Figure 2). This might be fine if it was the result of personal choices on how to split paid and unpaid work between couples, but international survey evidence indicates that women would like to work more and, within Canada, comparison with Quebec – where women have for many years enjoyed affordable child care and more equitable division of parental leave – indicates that Canadian women would choose to work more if given access to more family-friendly policy support.

Canadawomenblog2 2018

An important step in this regard is to make sure that new fathers use the additional leave that they are now entitled to. Governments need to work with businesses and lead by example to create a culture where men are encouraged to take leave to look after their young children. Payment rates for parental leave may need to be adjusted if take-up remains low, as it has in some other OECD countries with low payment rates.

Improving access to high-quality, affordable early childhood education and care (ECEC) is the best way to improve labour market outcomes for Canadian women. Canada stands out among OECD countries for the high cost of childcare (in the comparison province of Ontario, at least) and the low share of Canadian youth who have attended ECEC for two years or more. Affordable and high quality ECEC can address barriers to mothers’ labour force participation, reduce the motherhood wage penalty and support child development, particularly for disadvantaged children. While there are upfront fiscal costs, these are offset over a longer period through women’s higher participation and productivity. Women’s productivity, and thus incomes, would also be assisted by further steps to promote female entrepreneurship and to boost women’s representation in senior management, computing and engineering.

References:

OECD (2018), OECD Economic Surveys: Canada 2018,  OECD Publishing, Paris.




Enhancing labour-market integration of immigrants in Canada

by David Carey, Head of Canada Desk, OECD Economics Department

Canada has long taken in more immigrants relative to its population than most other countries. Immigration policy in Canada aims to promote economic development by selecting immigrants with high levels of human capital, to reunite families and to respond to foreign crises and offer protection to endangered people. Economic immigrants, who are selected for their skills, are by far the largest group. The immigration system has been highly successful and is well run. Outcomes are monitored and policies adjusted to ensure that the system’s objectives are met. Immigrants and their children are better integrated in Canada based on a variety of indicators than in most other countries. Immigrants selected for their skills earn substantially more than other immigrants, indicating that selection is succeeding in identifying immigrants with the greatest potential for labour market integration.

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A problematic development is that immigrants’ entry earnings fell sharply relative to those of the comparable native-born in recent decades. Important causes of the fall include weaker official language skills and a decline in the returns to pre-immigration labour market experience.

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In response, immigration policy has been changed to select immigrants with better earnings prospects. More are selected for their human capital, and greater weight has been given to official language competence, age (inversely related to foreign work experience) and Canadian work experience. Recently, the selection system was overhauled with the introduction of Express Entry, which only invites candidates with the highest point scores to apply for permanent residence and gives employers a greater role in selection. The system would be still more effective if more weight were given to skilled Canadian work experience in selection and applications from candidates with skilled work experience and a relevant job offer were processed before others.

Canada also has an extensive array of programmes that facilitate integration. The Targeted Employment Strategy for Newcomers facilitates foreign-credentials recognition and helps immigrants gain Canadian work experience in their profession. Bridge programmes, which help with post-secondary credentials recognition in regulated occupations, and mentoring programmes, which help immigrants overcome underrepresentation in high-quality jobs by developing professional networks, have proved effective and should be expanded. The federal government’s settlement programmes are extensively used but it is not clear whether utilisation patterns reflect differences in needs or availability. There are large differences in efficiency of government language programmes, pointing to possibilities for reorganisation to improve outcomes.

References:

OECD (2018), OECD Economic Surveys: Canada 2018,  OECD Publishing, Paris.




The Czech economy is thriving but labour shortages will limit growth

by Falilou Fall, Head of Czech Desk, OECD Economics Department

Growth, driven by both internal and external demand, has been accelerating since 2013 and at 4.6% in 2017 it was more balanced than in previous years. Household consumption is supported by income growth, a declining savings rate as confidence is high, and by rising credit. Going forward, private investment is projected to increase thanks to favourable credit conditions, and greater withdrawal of European Structural and Investment Funds. Moreover, the relative higher cost of labour than capital should stimulate physical capital investment.  Also, high housing demand and prices will continue to drive housing investment. However, growth will slow down in 2018 mainly due to labour supply constraints, but at 3.8%, growth will remain above its potential.

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Inflation picked up strongly in 2017 reaching on average 2.5% after three years of being around 0.5%. Inflation will remain above the 2% target of the Central Bank, driven by high wage growth, strong household consumption and increasing oil prices. The current account has been positive in the last four years contributing to foreign reserve accumulation. However, after the exit from the exchange rate floor policy in April 2017, reserves (as a percent of GDP) started to decrease and the koruna to appreciate. As wages and inflation are rising, monetary policy should raise interest rates further at a gradual pace.

The fiscal position is strong but will be challenged by an ageing population. The primary balance increased to 2.3% in 2017 and has been in surplus for three years in a row. Therefore, debt-to-GDP is decreasing rapidly and at 35% of GDP in 2017 is one of the lowest in the OECD (Maastricht definition). According to new measures announced by the newly elected government, there is a risk of fiscal policy becoming pro-cyclical. In view of signs of overheating economy, fiscal policy should avoid being pro-cyclical. Some fiscal space is also needed to prepare for the rise in future ageing-related spending.

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The lack of workers is becoming the main bottleneck to higher growth. The unemployment rate fell further in 2017 and at below 2.4% is among the lowest in the OECD. Until recently, labour shortages driven by demographic changes and high employment were partly offset by higher economic activity rates. However, the economy is facing constraints on the labour market and vacancies registered at employment offices increased more than seven-fold, from 30 803 in end 2010 to almost 267 000 in April 2018. Increasing labour productivity would sustain wage growth and help to cope with labour shortages. Providing workers with the right skills and training, as well as strengthening the effectiveness of R&D and innovation policies will be crucial to generate sustainable productivity gains and achieve inclusive growth.

References:

OECD (2018), OECD Economic Surveys: CZECH REPUBLIC 2018, OECD Publishing, Paris.