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Policies for a sustainable labour market recovery

International Labour Organization
International Labour Organization

1) Despite economic recovery in some countries, the gap in total working hours compared to pre-crisis trends remains large. 2) Long-term unemployment has increased sharply since the beginning of 2009 while inactivity has also risen. 3) Investment levels remain well below pre-crisis trends, hampering job creation. 4) Many countries have focused fiscal policy on consolidation rather than further stimulus, which could support employment. Labor market policies have also not been utilized much so far.

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Policies for a sustainable labour market recovery Post-crisis challenges Ekkehard Ernst International Institute for Labour Studies ILO ECB/CEPR Labour market workshop Dec 17th, 2010
Post-crisis challenges Take-home message Make labour market measures center-piece Despite output recovery, gap in hours worked remains persistent Policy makers have started focusing unilaterally on consolidation Remaining policy space needs to target measures that support employment E. Ernst (ILO) Sustainable labour market recovery Dec 2010 2 / 15
Post-crisis challenges Hours gap is closing slowly The hours gap remains large Total working hours wrt. trend E. Ernst (ILO) Sustainable labour market recovery Dec 2010 3 / 15
Post-crisis challenges Inactivity has increased Long-term unemployment has increased sharply Change in long-term unemployment (2009Q1-2010Q1, in %) &zZ / D ^ : ^ ' W d E / ^ ^ , ^ W Z Z ' E ^ h D h E. Ernst (ILO) Sustainable labour market recovery Dec 2010 4 / 15
Deviation of investment from trend (in per cent) E. Ernst (ILO) 30 20 10 0 Iceland Estonia Ireland Poland Denmark Slovak Republic Luxembourg Spain New Zealand United States Finland Czech Republic Post-crisis challenges United Kingdom Sweden Japan Mexico Norway Belgium Israel Australia Sustainable labour market recovery France Portugal Netherlands Austria Switzerland Low investment hampers job creation Canada Investment: Deviation from trend (2010Q2) Korea Italy Germany Job creation is bugged down by low investment Dec 2010 5 / 15
Post-crisis challenges Public 鍖nances are no longer supportive Public 鍖nances concentrate on consolidation Stimulus vs. consolidation packages 10 5 Fiscal package (in % of GDP) 0 5 10 Denmark Hungary Netherlands Germany Portugal Slovenia France Spain United Kingdom Earlier announced stimulus package Fiscal consolidation package E. Ernst (ILO) Sustainable labour market recovery Dec 2010 6 / 15
Policy recommendations for a successful recovery Dont consolidate all at the same time Further stimulus might support employment Stimulus vs. baseline scenario E. Ernst (ILO) Sustainable labour market recovery Dec 2010 7 / 15
Policy recommendations for a successful recovery Dont consolidate all at the same time Dont consolidate all at the same time Stimulus vs. global consolidation scenario E. Ernst (ILO) Sustainable labour market recovery Dec 2010 8 / 15
Policy recommendations for a successful recovery Labour market policies have not been used much so far Spend more on labour market measures Forecast of public spending on labour market policies 4.0 Labour market spending (in % of GDP) 3.0 2.0 1.0 0.0 es m lia ay a d nd nd l ria ce n en d s k m ga nd ar ad an ai an do iu ra at w an la la st ed rtu Sp m rla lg an al nl or St st er Ire Au ng Fr Sw en Be Ze Fi Po Au N he C itz Ki d D te Sw et ew d ni N te N U ni U Active Labour market spending Passive labour market spending Total projected labour market spending in 2010 E. Ernst (ILO) Sustainable labour market recovery Dec 2010 9 / 15
Policy recommendations for a successful recovery Target labour market measures Target most effective measures Labour market spending: Contributions to job creation 39.2 40 30 Contributions (in %) 25.7 20 15.0 15.7 15.6 10 7.5 5.3 3.4 4.0 3.5 3.5 2.8 0 Generic Unemployment Hiring Training Public employment Direct job public benefits incentives expenditures services creation spending Shortterm on Longterm on job creation job creation E. Ernst (ILO) Sustainable labour market recovery Dec 2010 10 / 15
Policy recommendations for a successful recovery Tax cuts are not effective Forget about tax cuts ! Annual cost per additional job created Policy measure Cost per job (in US$) Gov. Consumption 83,700 Gov. investment 79,900 Personal tax cut 152,500 Investment tax credit 200,100 Source: Adams and Gangnes (2010), The employment effects of 鍖scal policy: How costly are ARRA jobs?, preliminary draft E. Ernst (ILO) Sustainable labour market recovery Dec 2010 11 / 15
Policy recommendations for a successful recovery Policy effectiveness at different levels of structural unemployment Dont wait until unemployment becomes structural Structural unemployment lowers policy effectiveness Unemployment benefits Hiring incentives 20 150 Coefficient estimate Coefficient estimate 10 100 0 50 10 0 20 50 Low Intermediate High Low Intermediate High Structural unemployment rate Structural unemployment rate Note: 1stage estimates Note: Iterated estimates Direct job creation Training expenditures 100 60 Coefficient estimate Coefficient estimate 40 50 20 0 0 20 50 Low Intermediate High Low Intermediate High Structural unemployment rate Structural unemployment rate Note: Iterated estimates Note: Iterated estimates E. Ernst (ILO) Sustainable labour market recovery Dec 2010 12 / 15
Policy recommendations for a successful recovery Internal 鍖exibility and policy effectiveness Allow for more internal 鍖exibility Internal 鍖exibility improves policy effectiveness E. Ernst (ILO) Sustainable labour market recovery Dec 2010 13 / 15
Summary Successful exit strategies Summarizing exit strategies How should countries adjust their exit strategies? 1 Dont start too early with the consolidation process 2 Labour market policies often more effective than generic government spending or tax cuts 3 Focus on most effective measures and expand them 4 As economy recovers, switch gradually from demand management to labour market policies 5 Target risk of rapid increase in long-term unemployment: Spend it now, spend it fast 6 Allow for more internal 鍖exibility to strengthen policy effectiveness E. Ernst (ILO) Sustainable labour market recovery Dec 2010 14 / 15
Summary Successful exit strategies Thank you ! Just out ! World of Work 2010 http://www.ilo.org/inst E. Ernst (ILO) Sustainable labour market recovery Dec 2010 15 / 15

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Policies for a sustainable labour market recovery

  • 1. Policies for a sustainable labour market recovery Post-crisis challenges Ekkehard Ernst International Institute for Labour Studies ILO ECB/CEPR Labour market workshop Dec 17th, 2010
  • 2. Post-crisis challenges Take-home message Make labour market measures center-piece Despite output recovery, gap in hours worked remains persistent Policy makers have started focusing unilaterally on consolidation Remaining policy space needs to target measures that support employment E. Ernst (ILO) Sustainable labour market recovery Dec 2010 2 / 15
  • 3. Post-crisis challenges Hours gap is closing slowly The hours gap remains large Total working hours wrt. trend E. Ernst (ILO) Sustainable labour market recovery Dec 2010 3 / 15
  • 4. Post-crisis challenges Inactivity has increased Long-term unemployment has increased sharply Change in long-term unemployment (2009Q1-2010Q1, in %) &zZ / D ^ : ^ ' W d E / ^ ^ , ^ W Z Z ' E ^ h D h E. Ernst (ILO) Sustainable labour market recovery Dec 2010 4 / 15
  • 5. Deviation of investment from trend (in per cent) E. Ernst (ILO) 30 20 10 0 Iceland Estonia Ireland Poland Denmark Slovak Republic Luxembourg Spain New Zealand United States Finland Czech Republic Post-crisis challenges United Kingdom Sweden Japan Mexico Norway Belgium Israel Australia Sustainable labour market recovery France Portugal Netherlands Austria Switzerland Low investment hampers job creation Canada Investment: Deviation from trend (2010Q2) Korea Italy Germany Job creation is bugged down by low investment Dec 2010 5 / 15
  • 6. Post-crisis challenges Public 鍖nances are no longer supportive Public 鍖nances concentrate on consolidation Stimulus vs. consolidation packages 10 5 Fiscal package (in % of GDP) 0 5 10 Denmark Hungary Netherlands Germany Portugal Slovenia France Spain United Kingdom Earlier announced stimulus package Fiscal consolidation package E. Ernst (ILO) Sustainable labour market recovery Dec 2010 6 / 15
  • 7. Policy recommendations for a successful recovery Dont consolidate all at the same time Further stimulus might support employment Stimulus vs. baseline scenario E. Ernst (ILO) Sustainable labour market recovery Dec 2010 7 / 15
  • 8. Policy recommendations for a successful recovery Dont consolidate all at the same time Dont consolidate all at the same time Stimulus vs. global consolidation scenario E. Ernst (ILO) Sustainable labour market recovery Dec 2010 8 / 15
  • 9. Policy recommendations for a successful recovery Labour market policies have not been used much so far Spend more on labour market measures Forecast of public spending on labour market policies 4.0 Labour market spending (in % of GDP) 3.0 2.0 1.0 0.0 es m lia ay a d nd nd l ria ce n en d s k m ga nd ar ad an ai an do iu ra at w an la la st ed rtu Sp m rla lg an al nl or St st er Ire Au ng Fr Sw en Be Ze Fi Po Au N he C itz Ki d D te Sw et ew d ni N te N U ni U Active Labour market spending Passive labour market spending Total projected labour market spending in 2010 E. Ernst (ILO) Sustainable labour market recovery Dec 2010 9 / 15
  • 10. Policy recommendations for a successful recovery Target labour market measures Target most effective measures Labour market spending: Contributions to job creation 39.2 40 30 Contributions (in %) 25.7 20 15.0 15.7 15.6 10 7.5 5.3 3.4 4.0 3.5 3.5 2.8 0 Generic Unemployment Hiring Training Public employment Direct job public benefits incentives expenditures services creation spending Shortterm on Longterm on job creation job creation E. Ernst (ILO) Sustainable labour market recovery Dec 2010 10 / 15
  • 11. Policy recommendations for a successful recovery Tax cuts are not effective Forget about tax cuts ! Annual cost per additional job created Policy measure Cost per job (in US$) Gov. Consumption 83,700 Gov. investment 79,900 Personal tax cut 152,500 Investment tax credit 200,100 Source: Adams and Gangnes (2010), The employment effects of 鍖scal policy: How costly are ARRA jobs?, preliminary draft E. Ernst (ILO) Sustainable labour market recovery Dec 2010 11 / 15
  • 12. Policy recommendations for a successful recovery Policy effectiveness at different levels of structural unemployment Dont wait until unemployment becomes structural Structural unemployment lowers policy effectiveness Unemployment benefits Hiring incentives 20 150 Coefficient estimate Coefficient estimate 10 100 0 50 10 0 20 50 Low Intermediate High Low Intermediate High Structural unemployment rate Structural unemployment rate Note: 1stage estimates Note: Iterated estimates Direct job creation Training expenditures 100 60 Coefficient estimate Coefficient estimate 40 50 20 0 0 20 50 Low Intermediate High Low Intermediate High Structural unemployment rate Structural unemployment rate Note: Iterated estimates Note: Iterated estimates E. Ernst (ILO) Sustainable labour market recovery Dec 2010 12 / 15
  • 13. Policy recommendations for a successful recovery Internal 鍖exibility and policy effectiveness Allow for more internal 鍖exibility Internal 鍖exibility improves policy effectiveness E. Ernst (ILO) Sustainable labour market recovery Dec 2010 13 / 15
  • 14. Summary Successful exit strategies Summarizing exit strategies How should countries adjust their exit strategies? 1 Dont start too early with the consolidation process 2 Labour market policies often more effective than generic government spending or tax cuts 3 Focus on most effective measures and expand them 4 As economy recovers, switch gradually from demand management to labour market policies 5 Target risk of rapid increase in long-term unemployment: Spend it now, spend it fast 6 Allow for more internal 鍖exibility to strengthen policy effectiveness E. Ernst (ILO) Sustainable labour market recovery Dec 2010 14 / 15
  • 15. Summary Successful exit strategies Thank you ! Just out ! World of Work 2010 http://www.ilo.org/inst E. Ernst (ILO) Sustainable labour market recovery Dec 2010 15 / 15