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Employment policies and data

Speech by OECD Secretary-General Angel Gurría at the launch of the OECD Employment Outlook

 

Press conference for the OECD Employment Outlook
Introductory remarks by Angel Gurría, OECD Secretary-General
19 June 2007, Paris

Ladies and Gentlemen:

The debate about the social impact of globalisation is becoming more prominent. On the one hand, most economists highlight the favourable effects of globalisation for the economy. It is a fact that more open markets tend to be associated with greater prosperity. But on the other hand, there is concern in the public opinion in many OECD countries, especially in the US and France, about the risks of job losses and lower wages that globalisation may entail. One of the consequences is  resistance to pursue further trade and investment liberalisation.

This issue of the Employment Outlook helps to understand the divergent assessments. It also indicates some possible ways to address the employment challenges posed by globalisation. Let me highlight 3 main factors at work:

First, the current scale of globalisation is unprecedented and it involves many countries at different levels of development.

  • Brazil, China, India and Russia (the so-called BRICs) are becoming major trade and investment partners for OECD countries. This has entailed a major increase in the number of workers whose outputs compete on world markets – as shown in Chapter 1, the BRICs account for 45% of the world labour supply, compared with less than one fifth for OECD countries as a whole.
  • Globalisation increasingly concerns many services – and not mainly industry and agriculture as in the past. This is because globalisation goes hand-in-hand with the rapid adoption of information and communications technology, which facilitates the fragmentation of the production of both goods and services, and offshoring of certain tasks to other countries. 
  • New OECD data confirm the growing importance of offshoring in total trade. For example, OECD manufacturing production used 28% of imported inputs in 2003, compared with 18% in 1990.  
  • In short, most firms and workers are directly or indirectly competing in today’s world economy. And, global competition comes increasingly from non-OECD countries where wages are low.

A second factor explaining the diverging views about globalisation is that economic integration is occurring in the context of wider earnings inequality and perceptions of job insecurity in OECD countries:

  • Over the past two decades, the share of wages in national income has tended to fall in the majority of OECD countries (see Figure 3.7, p. 117 in the English version).
  • Also, in 16 of the 19 OECD countries for which data are available, the earnings of workers at the top of the wage distribution have risen relative to those of workers at the bottom since the early 1990s.
  • And workers in a number of OECD countries are increasingly worried about their ability to keep their current jobs.

Chapter 3 shows that trade deepening and offshoring is indeed a potential source of vulnerability for workers. An analysis covering trade and labour market developments since 1980 shows that jobs and wages have become more vulnerable to external shocks. This might have reduced the bargaining power of workers, especially low-skilled ones, which may therefore contribute to explain the falling share of wages in national income. Since 1980, the share of wages in national income has fallen by almost 5 percentage points in the US, about 7 percentage points in EU-15 countries and almost 15 percentage points in Japan. There is also some evidence that offshoring, or the threat of it, may be one of the driving forces behind the increase in the vulnerability of jobs and wages. This is because offshoring allows firms to respond more flexibly to shocks via changes in the mix of production at home and abroad.

True, the contribution of globalisation to increased earnings inequality or job insecurity appears to be quite modest compared with other drivers such as technological change. Nevertheless, it is crucial to address these concerns: public support for furthering international economic integration could wane if the perception that many workers do not benefit from it takes root.

And this brings me to the third factor: policies matter. Indeed, it is crucial for policy makers to realise that they can play a major role in reaping the potential gains from globalisation and reducing workforce adjustment difficulties. Countries with similar trade and FDI patterns – even members of a regional trading area – have widely different employment and unemployment rates and wage disparities. And this reflects different policy settings among countries.

The Restated OECD Jobs Strategy of 2006, highlighted in last year’s Employment Outlook,  provides an effective policy benchmark to help create more and better jobs in a globalising world. Several of the chapters in this year’s issue of the Employment Outlook probe more deeply into how certain of the policies highlighted in the Restated Jobs Strategy can make a difference. Let me give some examples:

  • Reducing barriers to the creation of new businesses or to the expansion of sectors where comparative advantage lies will significantly increase the gains from globalisation. Chapter 2 shows how structural reforms can be both pro-employment and pro-productivity.
  • Globalisation requires mobility to ensure that workers are not trapped in jobs which have no future. In this regard, tying dismissal regulations to existing jobs will tend to weaken workers’ mobility opportunities.  The Restated Jobs Strategy provides several examples of innovations on how to provide adequate workers’ protection against dismissal, while at the same time reducing some of the drawbacks of traditional severance pay systems – e.g. the so-called “flexicurity” approach, as adopted in countries like Austria or Denmark.
  • It is essential to compensate job losers through social protection systems which are employment-friendly. This can be done by providing adequate benefits hand-in-hand with “activation” policies which increase the re-employment opportunities. Chapter 5 documents good practices in this area, such as job-search assistance and compulsory participation in a labour market programme after a period of unemployment, backed by moderate benefit sanctions, if necessary. Experience of Nordic countries, Australia and the UK, shows that such policies, if well-designed, are a very useful tool to improve the re-employment chances of laid-off workers, thereby easing their fears about globalisation. 
  • The low-skilled are a particularly disadvantaged group in the face of globalisation. In OECD countries, freer trade and FDI, combined with skill-biased technological change, tend to reduce the demand for unskilled labour relative to that for skilled labour. This requires renewed efforts to improve workers’ skills. 
  • “Make-work-pay” policies can also help not only those who otherwise would not be able to find a job because of globalisation or any other reason, but also those on low-paid jobs. Finally, Chapter 4 shows that low-skilled employment can also be supported by making the funding of social protection more “progressive” and by shifting from social contributions to tax bases, like income taxes, VAT or real estate taxes, which fall on broader population groups, and not just wage earners. The recent reform in Germany, where VAT was increased in return for lower social contributions, is an interesting case in point. 

The bottomline is that well-designed domestic policies are instrumental for enhancing the benefits from globalisation while addressing the adjustment and inequality concerns. These policies would also help strengthen public support for freer trade and investment policies, and promote perceptions that globalisation is an opportunity for all.

 

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