Speech by Angel Gurría, OECD Secretary-General, at the Bertelsmann Stiftung Conference on “Germany recovering from the Crisis: Labour Market and Employment Strategies”
Berlin 28 April, 2010
Ms. Mohn, Dr. Thielen, Ladies and Gentlemen:
It is a privilege to be invited by the Bertelsmann Foundation to speak to you today. The topic of this conference could not be more timely. Helping workers and their families to weather the recessionary storm moved to the centre of the policy agenda last year and it will remain there for some time to come, even if recovery has begun in most countries.
The OECD has been monitoring closely the impact of the crisis on labour markets and the policy response of governments since late 2008. We discussed challenges and policy responses in depth with Labour and Employment Ministers, both at the G-20 Labour Ministerial, which I had the pleasure of attending in Washington last week (read his speech), and at an OECD Ministerial meeting last September. Much of what I will say reflects lessons that we have drawn from this very fruitful and on-going international dialogue.
In my talk today I will provide an overview of labour market conditions in OECD countries. I will then discuss how large fiscal deficits complicate labour market policy choices going forward. Finally, I will present some of our conclusions on how policy makers can promote a job-rich recovery that benefits all workforce groups, including the most vulnerable.
1. Labour market slack has risen to high levels, but not always in the form of open unemployment
The recession that struck OECD countries during 2008 and 2009 was very deep by historical standards and it has had a strong impact on labour markets. Starting from a 28-year low of 5.8% in 2007, the OECD unemployment rate rose to 8.8% in the fourth quarter of 2009, which means that more than 18 million additional persons became unemployed. The number of workers who would like to work full-time but have had to settle for a part-time job has also increased sharply.
Data for early 2010 suggest that OECD unemployment may have peaked. The most recent OECD projections imply that economic recovery is underway but it will not be strong enough to bring the millions of new unemployed back to work quickly. We expect 1.9% average GDP growth in the OECD area for 2010 and 2.5% for 2011. If these projections should be confirmed, unemployment will decline slowly and still be significantly higher at the end of next year than it was before the crisis.
Job losses have been especially large for certain workforce groups and industries. For example, employment fell particularly sharply for workers on temporary contracts and youth, two groups that often overlap. International migrants and workers in the construction sector were also disproportionately likely to lose their jobs. The collapse in world trade last year led to an unusual concentration of job losses among skilled production workers in durable manufacturing.
The rise in unemployment has been uneven across countries, even after making allowance for cross-country differences in output declines. For example, real GDP fell more sharply in Germany than in Spain. But unemployment rose very little in Germany while it doubled to nearly 20% in Spain. Job losses were surprisingly small in Germany — as they were in a number of other continental European countries and Japan — because employers relied more heavily on reductions in working time to accommodate output declines than had been the case in earlier recessions.
Several factors influence how much employers cut employment or hours when scaling back production in a recession. One of these factors is whether there is a public short-time work scheme encouraging temporary hours reductions as an alternative to layoffs. New OECD work for 18 countries shows that short-time schemes saved jobs in the current crisis, but that not all jobs were protected equally. The schemes preserved primarily permanent jobs while temporary jobs were nonetheless lost. This suggests that short-time schemes dampen the overall increase in unemployment and bring efficiency gains by maintaining productive workforces intact; but they may come at the cost of stronger labour market segmentation.
What are the remedies? At a minimum, short-time schemes should be accompanied by measures to help those who already lost their jobs as well as low-skilled workers and others who typically do not benefit from such schemes. If subsidies for short-time working are too high or continue too long into the recovery period, there is also a risk that workers could be locked into jobs that have become uncompetitive.
2. The need to reduce unemployment…and fiscal deficits
Most OECD economies are exiting from the recession straight into a major policy challenge: how to balance two contradictory needs: to reduce high unemployment and unprecedented fiscal deficits simultaneously.
Public finances in OECD countries have been deteriorating during the past two years at alarming speed. The OECD average fiscal deficit is close to 10% of GDP, while public debt is expected to reach 100% of GDP by 2011. This is a shocking 30 percentage points higher than before the crisis. Even if consolidation were sufficient to bring public budgets back to balance by 2017, debt-to-GDP ratios would still exceed pre crisis levels in most countries.
As if this were not bad enough, our estimates also suggest that OECD countries may have lost over 4 per cent of their potential output as a result of the crisis, half of it because of higher unemployment and lower participation rates. This will limit the extent to which countries can “grow their way” back to fiscal balance.
It is tempting to consider additional fiscal stimulus as a way to faster recovery in the labour market, but the fiscal room for stimulus is vanishing quickly in most countries. At the same time, the fragility of the recovery underscores the need for caution in removing fiscal stimulus. In particular, we need to maintain those parts of previously-enacted stimulus packages that expand active labour market programmes assisting workers to re-integrate into the labour market, provided they are cost-effective. However, it is not realistic to propose a major expansion in overall funding for labour market programmes at a time when ambitious, clearly communicated medium-term consolidation programmes are required.
3. Persistently high unemployment is a major risk
A recent OECD study suggests that, even in countries with employment-friendly policies and institutions, it can take about 5 years for unemployment to revert back from its recessionary peak to the pre-crisis levels. In other countries, high unemployment may persist for much longer.
But even in those countries that managed to contain job losses by widespread cuts in working hours, the short-term labour market outlook is not rosy. They face a serious risk of a “jobless recovery”. Firms have ample margin to respond to the higher demand by raising working hours before hiring new workers in large numbers again. Since the rise in unemployment was typically muted in these countries, muted employment growth is not a problem overall. But it may make reintegration of non-core workers whose jobs were not preserved especially difficult.
So what can be done to ensure that high unemployment does not persist for too long?
Unfortunately, there is no magic bullet, but we have identified some key policy measures that, adapted to the specific circumstances of each country, could help us advance in the right direction.
4. New labour policies: in support of a job-rich recovery
Let me share with you a few signposts.
- First, support needs to evolve from preserving jobs to jumpstarting job creation. For example, it appears timely to begin phasing out short-time working schemes in countries where they expanded significantly during the downturn, just as it would be good to scale up hiring subsidies, especially for employers recruiting the long-term unemployed or workers from other vulnerable groups.
The currently high level of labour market slack also means that it is a good time for governments to implement green growth initiatives that have the potential to generate jobs quickly, such as programmes to retrofit existing buildings for greater energy efficiency.
- Second, effective re-employment services, combined with adequate safety nets, are important for a quick reintegration of jobseekers into jobs while fighting poverty.
The build-up in long-term unemployment and the possibility of prolonged under-employment could result in acute needs for income support. This is a particular concern in countries, including in Germany, where inequality and poverty had been rising even before the crisis. With reduced earnings and increased risk of joblessness well-targeted and employment-oriented safety-nets play an important role in alleviating economic hardship.
Effective activation strategies helped many OECD countries achieve low unemployment before the crisis and they must play a major role now. But activation policy has to be adapted to the different phases of the downturn and recovery to ensure effective support to a large and growing pool of unemployed. Income support for jobseekers should be combined with effective re-employment services.
Most countries have maintained or even expanded core job-search assistance and have also sought to provide more targeted re-employment services, including training opportunities, for the most hard-to-place unemployed. A shift towards greater investment in training, especially linked to local labour market needs, is warranted in the present circumstances.
- Third, policies to prevent a “lost youth generation” are a must.
Youth unemployment is around 19% in the OECD area, and one in four youth in the labour market are jobless in France, Italy and among teenagers in the US, while youth unemployment is above 40% in Spain. Germany provides a welcome contrast since youth unemployment has held steady at around 10%. This reflects the strong performance of the dual education system in smoothing the transition from schooling to work, as well as the muted impact of the current recession on overall unemployment in Germany.
For most people, the effects of unemployment in young years are temporary. But for disadvantaged youth lacking basic education, a failure in their first experience on the labour market is often difficult to make up and may result in long-lasting scars. It is essential for governments to keep these youth connected to the world of work and improve their long-run employability, for example through offering them training programmes or subsidised work experience. The Youth Guarantee in the United Kingdom is a very interesting initiative along these lines.
Ladies and Gentlemen:
Fostering a job-rich recovery must be the top priority for our governments. I have sketched out some of the elements of a policy response that could help to speed up labour market recovery and help to assure that vulnerable workforce groups are not excluded from the benefits of the recovery. We at the OECD look forward to continuing our work with all of you to address this challenge.
Thank you for your attention.