The following OECD assessment and recommendations summarise Chapter 5 of the Economic Survey of the Unites States 2005 published on 27 October 2005.
What are the problems in the labour market?
Although job creation has finally gathered momentum, it has been atypically weak in the current business cycle. Non farm payroll employment continued to contract for almost two years after the end of the 2001 recession and surpassed its pre recession level only in early 2005. The strength of productivity growth can account for much of these developments. However, while in the short run greater productivity gains set the bar higher for employment growth, in the long run it leads to higher per capita income and can thus be expected to be at least neutral for employment. Nonetheless, the slow recovery of employment has reinforced concerns about job losses due to rising imports and “outsourcing”, which are reflected in increased support for protectionist measures. Although fears about the impact of globalisation on employment are often exaggerated, trade-displaced workers do incur significant adjustment costs, including frequently large wage losses when they finally find a new job. Furthermore, certain regions, sectors and populations may be disproportionately affected. While active labour market policies in the United States are modest by international comparison, the country is unique within the OECD for having operated a targeted programme for trade displaced workers, although its coverage has in practice been relatively narrow. Since the implied costs and distorting effects of such measures are probably minor compared to the potential adverse effects of rising protectionism:
Trade adjustment assistance programmes – including wage insurance and health insurance premium support – should be carefully evaluated and, if experience is positive, expanded to include younger and service sector workers, if not all dislocated workers, regardless of the cause of dislocation.
Another unusual feature of the current cycle has been the protracted decline in the labour force participation rate, which in the fourth year of the expansion still shows no clear signs of recovering. While this has kept the unemployment rate lower than otherwise, it would have adverse implications for potential output growth to the extent it turns out to be structural rather than cyclical in nature. One possible reason behind the fall in labour force participation among youths is competition from low skilled immigrants and older workers; another is a rise in school enrolment. However, it is unclear whether this added schooling results from a (temporary) deterioration in job opportunities or a long term increase in the returns to education. Another factor that may have depressed labour force participation as from the late 1980s is a tendency for the low skilled to take up disability rather than unemployment benefits. This would be problematic, because disability beneficiaries are less likely to return to the labour force when the economic situation improves. Hence:
Efforts should be made to reduce work disincentives for the disabled that result from restrictions in, and inconsistencies between, various government programmes by tightening access, changing the benefit indexation formula and making greater efforts at vocational rehabilitation.
It is worth trying to shift the composition of immigration more towards higher-skilled entrants who do not substitute for native youth in employment and represent a lower fiscal burden for society.
Return to the Economic Survey of the United States 2005
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