OECD Policy Responses to Unemployment

Sinead Pentony: The OECD has pre-released a chapter from its forthcoming Economic Outlook 2011 Report on the Persistence of High Unemployment: What Risks? What Policies? The report finds that at the end of 2010, “the average OECD unemployment rate was still close to historical peak reached during the crisis”. In countries (such as Ireland and Spain) that have been severely hit, persistently high levels of unemployment will eventually result in widespread deterioration of human capital (skills and competencies), discouragement and labour market withdrawal. This Report puts the scale of Ireland’s unemployment crisis in an OECD context and it makes three main policy proposals that are certainly worth considering as part of the Government's planned ‘Jobs Initiative’ which is due to be launched in May.

First of all, the report shows us how Spain and Ireland have been particularly badly hit by increases in unemployment. While Ireland is a few percentage points behind Spain (see Figure 1 reproduced below), it can be argued that net outward migration is having a dampening effect on the figure for Ireland. The drain of highly skilled workers out of Ireland, who are also of course members of families and communities, will have major long-term social and economic costs for the country.

Figure 1: The Increase in unemployment rates following the crisis (2007 Q3 – 2010 Q4)


The Report argues that aggregate demand policies continue to have a role to play in supporting economic recovery and in stimulating job growth. And monetary policy has been used by many OECD countries to increase aggregate demand by keeping interest rates low. However, the recent interest rate increase by the ECB - with indications given that there are more increases to come in 2011 – will hamper the efforts of policy makers in the three countries in the Euro Area (Spain, Ireland and Greece) that have seen the largest increases in the rate of unemployment in the OECD.
The Report also identifies a number of measures that have protected some countries employment levels from the worst effects of the crisis. “Labour hoarding” in particular, is singled out through the introduction of state subsidised ‘short-time working’ arrangements. The OECD place a lot of emphasis on the effectiveness of this measure in protecting employment levels, notwithstanding the risks which are outlined in the report.

The OECD also demonstrate the adjustment in labour markets in terms of the decline in output. As we can see (Figure 2 reproduced below), Ireland is an outlier in this regard. The OECD contends that “in the majority of countries, total hours worked declined less than GDP as the output shock was partly absorbed through labour hoarding.” Higher levels of job losses were also concentrated in low-productivity sectors such as construction. Countries such as Ireland, USA and Spain were identified as having higher than average proportions of workers in these sectors, which is reflected in higher than average reductions in hours worked.

Figure 2: Percentage decline in GDP and total hours worked from peak to trough


The OECD also examine nominal wage and labour costs. In most countries, wages decelerated sharply with labour costs also largely decelerating. The data presented in Figure 5 in the OECD report (reproduced below) shows changes to wages and labour costs before and after the crisis. What we find is that increases in nominal wages and unit labour costs just before the crisis hit were broadly in line with increases in the OECD. See here for a further discussion on unit labour costs. The OECD data shows that Ireland had the second lowest growth in nominal wages in the OECD between 2009Q1-2010Q2, and the largest fall in labour costs in the OECD during the same period.

Figure 5: Annualised average percentage change in nominal wages and unit labour costs before and after the crisis.




The three main policy proposals in the OECD report are as follows:

1. Temporarily extend unemployment benefits in countries where such systems are weak so as to provide needed income support ensuring that unemployed workers currently facing bleak jobs prospects do not fall into poverty or lose attachment to the labour market. This should be combined with active labour market policies that are adequately resourced to provide appropriate levels of job-search assistance and training.

The timing of the break-up and re-branding of FÁS is unfortunate given the unprecedented need and demand for targeted active labour market supports and services. The OECD identified effective and efficient services for the unemployed as “a structural determinant of outflows” from unemployment into jobs. Active labour market policies are an essential component of resolving the jobs crisis.

2. The second policy proposal relates to providing temporary hiring subsidies. The OECD highlights the fact that in many countries, the most difficult cases to match - long-term unemployed with low levels of skills - are often addressed through jobs subsidies or direct public-sector job creation targeted at specific groups. Policies aimed at stimulating labour demand included temporary cuts to employer social security contributions.

The OECD found this measure to be cost effective and involve a smaller deadweight loss. Current policy here includes PRSI exemption for taking on new employees and cuts to employer PRSI are expected as part of the forthcoming Jobs Initiative. However, Ireland already had the second lowest level of employer social security contributions in the EU 15 in 2008, which means that taxes on labour (from the employer perspective) are already very low.

The OECD identifies longer term taxation policy measures that are less damaging on employment and growth. These include a property tax, environmental taxes and consumption taxes – there is no mention of the regressive nature of consumption taxes, however, different rates of VAT could be used to lessen the regressive effects, with luxury items being liable for higher rates of VAT than items used to meet basic needs.

3. The third area relates to investment in training and education. The OECD found that younger workers have been much harder hit by the crisis than older workers and that it is younger workers who are now most at risk of chronic long term unemployment. With youth unemployment currently running at over 25 per cent in Ireland there is clearly a need for targeted interventions and supports for this group, especially those with low levels of education and skills, which puts them at a much higher risk of becoming long term unemployed.

While the number of traineeships and internships for new graduates and recently qualified workers has been expanded, they may well be insufficient to meet demand. Also, there remains a large cohort of young people that need a variety of education and training supports for the purpose of up-skilling /re-skilling if they are going to have any chance of success in re-entering the labour market.