Global Think-Tank: Jobs Crisis to Linger as Economy Struggles

Tuesday, 10 Jul 2012

Unemployment in advanced economies will remain high until at least the end of 2013, with young people and the low-skilled bearing the brunt of what is by far the weakest economic recovery in the past four decades, the OECD said on Tuesday.

The jobless rate in the 34-country OECD area will still be stuck at 7.7 percent at the end of next year, close to this May's 7.9 percent rate and leaving 48 million people out of work, the Organization for Economic Cooperation and Development said in 2012 Employment Outlook.

The recent deterioration in the economic outlook was very bad news for the labor market, OECD Secretary-General Angel Gurria said.
"It is imperative that governments use every possible means at their disposal to help jobseekers, especially young people, by removing barriers to job creation and investing in their education and skills," said Gurria. He presented the report in Paris, where the think tank is headquartered.

Countries needed to tackle the jobs crisis with appropriate macroeconomic policy measures, including immediate steps to stabilize Europe's banking system. There was also a case for some easing of fiscal policy if governments retain room for budgetary maneuver, the OECD said.

The challenges facing policymakers were in some respects unprecedented, according to the report:

• Almost three years into the recovery from the trough of the global financial crisis, the May jobless rate was just 0.6 percentage points below the post-war high of 8.5 percent touched in October 2009.

• Youth employment has declined by almost seven percentage points, relative to overall employment, since the start of the crisis, while low-skilled employment has dropped almost five percentage points.

• What's more, temporary employment has picked up strongly because of firms' reluctance to rehire workers on open-ended contracts given the uncertain economic outlook.

• Long-term unemployment has jumped to 35 percent of the jobless total from 27 percent before the crisis, raising the specter that the increase becomes structural as skills erode.

INEQUALITY

Despite the grim environment, the OECD called for bold structural reforms in labor and product markets. For example, governments could tap a rich seam of job growth by opening the retail trade and professional services to greater competition.

Economists have pointed to still restrictive shop opening times in a raft of European countries and international lenders have demanded that Greece and Italy loosen closed-shop practices, whether it be by pharmacies, law firms or taxi drivers.

The report examines a plunge in the share of national income taken by wages and benefits, which has been dropping steadily across most of the OECD for the past 20 to 30 years.

The median labor share fell to 61.7 percent in the late 2000s from 66.1 percent in the early 1990s.

The report attributes 80 percent of the fall to improved total factor productivity and to capital deepening - the key drivers of economic growth — as a result of the spread of information and communication technologies.

This has led to unprecedented advances in innovation and the invention of new capital goods and production processes, enriching society as a whole but also replacing workers with machines for many routine tasks.

Indeed, the OECD is worried that the drop in low-skilled jobs is a permanent, structural phenomenon that will not be reversed when growth resumes.

Increased competition due to globalization accounts for at least 10 percent of the decline in the labor share, the OECD estimates.

Furthermore, by creating incentives to maximize profits, privatization explains as much as a third of the drop in the labor share in formerly state-owned network industries such as energy, transport and communication.

By contrast, the report finds no evidence that increased foreign direct investment had squeezed labor’s share of income.

The OECD advocated further investment in education and training to equip workers to win the "race against the machine" and repeated its support for tax measures to temper the sharp rise in income inequality that has accompanied technological change and globalization.

On average, the wage income share of the top 1 percent of earners increased by 20 percent over the past two decades, while those at the foot of the skills ladder saw their wages slump.

"The growing share of income going to top earners suggests that this group now has a greater capacity to pay taxes than before" the OECD said.