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The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of the United Kingdom published on 27 September 2007.
The flexible labour market has facilitated structural change and inward migration has eased labour market tightness
Compared with most other OECD countries, the United Kingdom has relatively few distorting labour market regulations. As a result, job-to-job mobility between similar industries is relatively high, suggesting that resources shift quite smoothly. The labour market is also better at getting the unemployed back into work than labour markets in the country’s large European neighbours, although some Scandinavian economies have much higher unemployment outflow rates.
Strong economic growth over the past decade helped to reduce the unemployment rate from around 8% in 1996 to a low of around 4½ per cent in 2004. Since this was the same year that the United Kingdom opened its labour markets to workers from the new EU member countries, an influx of migrants helped to fill skill vacancies and cool inflationary pressures in the labour market. Since then the unemployment rate has crept up to around 5½ per cent, but it is unclear whether increased immigration is partly responsible. Relatively little is known about migration flows and the characteristics of the migrants. Statistical monitoring of the stock of migrant labour should be improved.
Policy needs to better equip lower skilled workers for globalisation
As in many other OECD countries, the wages of those at the top of the earnings distribution have increased much faster than those of the rest of the population. These top earners seem to be reaping the biggest gains from globalisation. Among the rest of the population, the earnings distribution has not changed much. In part this is because minimum wage increases and tax-benefit changes have cushioned low-income households. In addition, those with mid-level skills may be as affected by globalisation and skill-biased technical change as those with very low skill levels, since many medium-skill jobs are vulnerable to offshoring, while many low-skill service sector jobs must be done at home. However, at least so far, the real median wage has risen in line with productivity, in contrast with a number of other OECD countries.
Low-skilled workers have a low employment rate(1)
1. Employment rate for persons with less than an upper secondary level of education. Age group 25-64.
2. 2003 for Japan.
Source: OECD (2006), Education at a Glance.
The pace of increase in the minimum wage should be slowed
The introduction of the minimum wage has mitigated the increase in wage inequality. To date, the minimum wage does not appear to have had a significant adverse effect on employment. However, there are some signs that this could be occurring in certain low-skilled industries. Consequently it may be prudent to increase the national adult minimum wage and the youth wage by less than median earnings in order to foster employment of the low-skilled.
The tax and benefit system should be modified to improve incentives to up-skill and work
It is widely agreed that the ideal way to improve income prospects for the low-skilled is to facilitate higher labour force participation and encourage up-skilling. With respect to participation, the UK record is mixed: on the one hand, the UK tax-benefit system has been successfully designed to minimise unemployment traps for most people. However, high child-care costs continue to create a high implicit tax rate on second-income earners returning to work, reducing labour force participation among this group. Incentives for low-skill second-income earners to participate in the labour market should be improved by providing greater access to child-care support. At the same time, there are concerns that the same “make work pay” policies may have left certain groups of low-skilled workers in “low-wage traps”, with reduced incentives to invest in further education and training. Improving these incentives is not easy, since reducing marginal effective tax rates in one place tends to push them up in others. Nevertheless, modifications to the tax-and-benefit system should be considered in order to reduce the marginal effective tax rate faced by lone parents and one-earner couples when extending their hours or when progressing in work. Extending the availability of child-care support could also enhance incentives for low-skilled parents to engage in further education. To do this, the child-care element of the Working Tax Credit should be extended to low-skilled parents undertaking approved courses of study. Work testing for lone parents should also be made more stringent, along the lines suggested in the government’s recent Green Paper. Currently the United Kingdom has one of the most lenient regulations in this respect in the OECD.
For some workers the implicit tax on returning to work is high(1)
Per cent of gross earnings in new job, 2004
1. Taking into account child-care fees and changes of taxes and benefits in case of a transition to a job paying two-thirds of average worker earnings.
Source: OECD (2007), Benefits and Wages, forthcoming.
Further reform to active labour market policies is needed to help the most disadvantaged groups back to work
Significant efforts have been made to help those on sickness and disability benefits back to work. The Pathways to Work pilots have successfully used work-focused interviews, targeted support, and financial incentives to help people to better manage their health conditions and get back to work. New welfare legislation will further enhance the financial incentives for claimants to return to work while providing enhanced financial security for the most severely sick and disabled. This will take effect in late 2008. The Pathways to Work scheme should be extended on a mandatory basis to the full stock of claimants, if the pilots are successful and cost-efficient. More attention should be given to the health status of job-seekers on unemployment benefits, and those with jobs who are reaching the end of their entitlement to sickness pay and benefits, so as to identify the need for earlier support and minimise the number of transfers onto the incapacity benefit. A new active labour market initiative focused on those without work in the most disadvantaged areas was introduced in 2006, but no evaluations of its effectiveness are yet available.
A high share of working-age population receive disability benefits
Per cent of population aged 20-65
Source: OECD (2007), Going for Growth, Economic Reforms.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of the United Kingdom 2007 is available from:
For further information please contact the UK Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Anne-Marie Brook, Åsa Johansson, Petar Vujanovic and Marte Sollie under the supervision of Peter Hoeller.