The contribution of labour market and employment policies to addressing the needs of vulnerable workers and areas in a globalising economy


Speech by Angel Gurría, OECD Secretary-General, at the Meeting of the G8 Employment and Labour Ministers

Niigata (Japan), 11-13 May 2008

Minister Masuzoe, Ladies and Gentlemen,

It is a great pleasure to join you at this important G8 meeting. The theme of our session, “the contribution of labour market and employment policies to addressing the needs of vulnerable workers and areas in a globalising economy”, brings together three important policy areas that are too often treated in isolation: i) the social dimension of globalisation; ii) policies to foster better integration of underrepresented groups into the labour market; and iii) local economic development. The OECD has done much work on these topics. I am delighted to have this opportunity to share with you some of our main findings.

But before I do this, I would first like to say a few words about the currently unsettled global economic situation and the potential impact on labour markets. The current global economic environment is one of significant uncertainty and downward risks. The turbulence in financial markets has spread far beyond its origins and the real economy has not remained immune from these developments. In this context, labour market conditions have shown signs of weakening in the past few months, after having improved for most of the decade. Indeed, unemployment is now rising in several G8 countries. If labour market conditions worsen significantly in the near term, labour market and social policies in G8 countries will face intensified pressures. While it is important for employment policy to react quickly to changing business cycle conditions, we should not lose sight of the need to continue to strengthen the adaptability of the labour markets to cope with fluctuations in demand. Indeed, the current period of macroeconomic weakness should not be allowed to obscure the importance of continued structural reform in the labour markets.

Globalisation continues to be a reliable engine for raising living standards in both high and lower-income countries. Freer trade and investment have produced countless benefits, including in G8 countries. For example, the OECD Growth Study concluded that a 10% increase in trade openness is associated in the long run with a 4% increase in per-capita income in the OECD area. Freer trade and investment intensifies competition, thereby encouraging firms to innovate and adopt new technology – which, in turn, spurs economic growth and support job creation. Indeed, despite recent tensions, the average unemployment rate in the OECD is at its lowest level in two decades, and the OECD employment rate is also at an all-time high.

Nevertheless, we have to acknowledge that the gains from globalisation are not automatic and that some workers and areas risk losing out in the process if they do not receive the support they need from governments. Facilitating the reallocation of resources from less to more productive uses is not a costless process. In the United States, only 63% of workers displaced from jobs in manufacturing industries facing high international competition are re-employed within two years after their job loss. Moreover, these workers experience an average pay cut of 13% once re-employed, with 25% of them experiencing earnings losses of 30% or more. In Europe, average wage losses are less important, but only 52% of displaced workers are re-employed within two years after they lost their job. This means that almost 50% of displaced European workers remain unemployed.

More generally, there is also a feeling that some groups in the labour market benefit more than others from globalisation. The fact is that globalisation is occurring in the context of wider wage inequalities. The latest figures to be published soon in a major OECD report entitled Growing Unequal show that in most 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.

Despite increased taxation and social spending, the increase in income inequality and poverty has been fairly widespread (affecting two thirds of all OECD countries). Moreover, globalisation and stronger competitive pressures have been accompanied by a surge in atypical job contracts – fixed-term contracts and jobs through temporary work agencies. While providing greater flexibility for firms to adapt quickly to a rapidly evolving demand, they are a source of uncertainty for workers. In the “Strategic Orientations of the OECD” that I will present at the forthcoming annual OECD Ministerial Meeting in Paris in a few days, I have identified inequalities and poverty among the priorities for future work of the Organisation.

Disadvantaged people require special attention in a globalised economy. Analysis presented in our annual flagship publication – the OECD Employment Outlook -- has shown that lower employment rates for groups underrepresented in the labour market, such as women, the low-skilled, youth and workers approaching the retirement age, reflect greater barriers to participating in paid employment and that these barriers can be exacerbated by globalisation. Low-skilled workers provide a notable example. They are a particularly disadvantaged group in a globalising economy, because freer trade and investment, combined with skill-biased technological progress, tend to reduce the demand for unskilled labour relative to that for skilled labour. This, in turn, translates into a heightened risk of unemployment and falling relative wages.

The right mix of policies can promote employment and earnings prospects of low-skilled workers and other underrepresented groups. One key to improving employment outcomes for groups at the margin of the labour market is to strengthen their incentives to take up low-paid jobs through so-called “make work pay” policies.

Experience shows that in-work benefits (e.g. the Working Tax Credit of the United Kingdom or the Earned Income Tax Credit of the United States) combined with a moderate minimum wage can be effective    particularly for certain groups at risk of joblessness and in-work poverty. For example, the expansion of the in-work payment in the United Kingdom in 1999 is estimated to have increased total employment by 0.4% of the labour force.

But it is also essential to promote skill development and life-long learning. Better skilled workers are more mobile across occupations, industries and regions than their lower skilled counterparts. While it is difficult to exaggerate the importance of raising workforce skills, it must be admitted that there is still much to be learned on how best to implement the so called “lifelong learning” agenda. That is why I am especially proud of the OECD Jobs for Youth project – in which 5 of the G8 countries participate -- and the OECD newly launched Programme for the International Assessment of Adult Competences (PIAAC) – in which all G7 countries participate. The Jobs for Youth reviews will allow us to identify policies aimed at equipping youth with the skills they need to make a smooth transition into the labour market. And although we have to wait for several years before the results from PIAAC will become available, this path breaking survey will provide much clearer information for policy makers than what they currently have about the skills of the adult workforce and how well they match job requirements.

Employment policy can also play a more active role in supporting regional economic development.  The labour adjustment costs associated with globalisation and technological changes tend to be concentrated geographically. Workers residing in regions with specialisation in import-competing, declining sectors may confront a daunting choice between moving to another, more dynamic, area or risking a prolonged period of joblessness and underemployment, even if, at the same time, employers in dynamic, export oriented regions may encounter labour shortages.

Employment policies can help regions within countries to remain competitive in a rapidly changing economic environment.  At a recent high-level conference organised in Venice by the OECD and the Italian Government, the participants endorsed the Venice Action Statement which affirms that: “it has become urgent to review the organisation of employment policy so that it is better able to respond to the opportunities and threats experienced by localities in a knowledge-based economy”. The OECD background document summarises some of the lessons from recent experience about how this can best be done.

Let me conclude by saying that domestic policies are instrumental for enhancing the benefits from globalisation while addressing the needs of vulnerable workers and areas. A wide range of policies are potentially relevant for meeting this challenge and I have only mentioned a few of them. A fuller discussion is provided in the OECD background document which also shows that the Reassessed OECD Jobs Strategy of 2006 provides an important benchmark for assembling a comprehensive employment policy strategy. Which policy areas are most in need of attention will vary according to country-specific circumstances. What is important is to move ahead with a coherent, consistent and well-sequenced package, which will bring about success.

Thank you very much.