OECD Observer

Jobs crisis

Policies that work
OECD Directorate for Employment, Labour and Social Affairs

Unemployment is rising to unprecedented high levels. There are several good policies governments can deploy to tackle it, but there are risks to avoid too.

The global economy is in the midst of the worst financial and economic crisis of the past 50 years, with severe consequences for workers and their families. Since the second half of 2008, major declines in output have occurred in countries everywhere, leading to sharp falls in employment and steep hikes in unemployment. From a 25-year low at 5.6% in 2007, the OECD unemployment rate rose to a postwar high of 8.5% in July 2009, corresponding to an increase of over 15 million in the ranks of the unemployed. In short, OECD countries are facing a jobs crisis.

Though all social groups have been affected by job losses from this crisis, from blue-collars (construction) to white-collars (banking) as in previous severe economic downturns, it is the already disadvantaged groups in the labour market-youth, lowskilled, immigrants, ethnic minorities and, among them, those on temporary or atypical jobs-that are bearing most of the brunt. At the time of writing, there are growing signs that the worst of the recession may be over and that a recovery may be in sight. But the short-term employment outlook remains grim.

The latest OECD projections suggest that output growth will regain positive territory only in the first half of 2010 and that growth will be mild until late in the year. In any event, job creation will lag significantly behind any pickup in output. As a result, the OECD unemployment rate is projected to continue rising through much of 2010, approaching a new postwar high of 10% in the second half of the year. That's 57 million people out of work, which is equivalent to the population of some major industrial countries!

A major risk is that much of this unemployment becomes structural in nature as many of the unemployed drift into long-term joblessness or drop out of the labour force. This unwelcome phenomenon occurred in a number of OECD countries in past recessions, and it took many years, if at all, to bring joblessness back down to the pre-crisis level. This persistence in unemployment arises because the longterm unemployed become less attractive hires for employers as a result of declining human capital and diminished job-search activity. Moreover, persistently high unemployment brings other major social and economic costs in its wake, from poorer health, lower living standards and less life satisfaction for the unemployed and their families to increased crime and lower growth potential for society.

Labour market and social policies have a key role to play in preventing these outcomes by helping jobseekers back into employment and enhancing their skills to enable them to move into more productive jobs when the recovery gathers speed. Most of the fiscal stimulus packages introduced by OECD and other countries to bolster demand include additional labour market and social policy measures to cushion workers and low-income households from the negative effects of the crisis.

The first line of defence is the social safety nets, such as unemployment benefits and social assistance, which provide essential income support to job losers during the economic downturn. While unemployment benefits automatically step in to stabilise the incomes of many job losers, coverage of such benefits is weak in some OECD countries, especially where part-time, temporary and other "non-standard" workers account for a large share of the workforce. Such workers are often the first to be laid off and have weaker benefit entitlements. In a number of countries, some efforts have been made to extend the coverage and, in some cases, duration of benefits to provide a more effective safety net for the crisis. Such measures can be effective, but should be carefully designed so as not to dull incentives to look for employment, thereby lengthening the jobless spell.

Apart from reinforcing safety nets, governments have also sought to scale up the resources for active labour market policies (ALMPs) to help jobseekers find work. However, compared with the overall size of the fiscal stimulus packages and the magnitude and pace of the job losses in the current crisis, the increase in spending on ALMPs has been modest in many cases. This looks like a missed opportunity. True, calls for additional public spending on labour market policies have to bear in mind the growing fiscal constraints many countries are facing due to the crisis. However, the extra spending can be justified on cost-effectiveness grounds. We now know a lot about what works and what does not work in this area. In addition, as this year's edition of the OECD Employment Outlook highlights, the composition of spending on active labour market policies can be varied with the business cycle to maximise effectiveness.

A key priority is to provide effective employment services to a rapidly rising pool of jobseekers and ensure that the most vulnerable of them do not lose contact with the labour market. Many countries have made good progress in the past decade in implementing successful activation/ mutual-obligation strategies that require benefit recipients to participate in job search, training or employment programmes, or face the threat of benefit sanctions. It will be important to build on these successes and not dismiss the activation approach, even if there are fewer job vacancies to which jobseekers can be referred. Instead, the activation approach needs to be adapted to the circumstances of a deep recession. It is essential to maintain core job-search assistance throughout the downturn. Even in a deep recession, many jobs are created by firms that are able to exploit new market opportunities, and employment services can play a decisive role in helping fill these vacancies quickly.

Indeed, as OECD research suggests, the focus and resources behind activation could be shifted somewhat from the "work-first" approach, which tended to dominate prior to the crisis, to a "train-first" approach. This is likely to be particularly important now, since the global economic crisis is spurring structural changes in OECD economies, and measures to foster skills and training will help ensure that workers are well-equipped for emerging jobs.

Joblessness record aheadTrajectories of unemployment rates during previous and current downturns OECD March 2009

During the recession, firms have been battered by a collapse in demand and a major credit crunch, resulting in massive lay-offs. Many OECD countries have introduced or scaled-up subsidies that encourage firms to retain or hire workers, with measures such as short-time working schemes, hiring subsidies, and cuts in social security contributions. Such measures help support labour demand in the short term, but to judge by past experience, they often lead to high deadweight costs that bear down on economic performance. To minimise these costs, such schemes should be temporary and well-targeted at firms where demand is depressed only temporarily and at those workers who are at high risk of long-term unemployment. Without these key features, these schemes will not only be less effective in preserving jobs but could also become an obstacle to the recovery by slowing the reallocation of workers from declining to expanding firms and sectors.

Likewise, public-sector job creation schemes that target the hardest-to-place jobseekers might provide a useful, temporary backstop to activation regimes during the recession. However, experience shows that these schemes are not that successful in helping the most at-risk jobseekers get back into regular jobs. It is therefore important to build incentives into such measures to ensure that participants go on to regular jobs and to unwind the schemes quickly once the recovery gathers pace.

There is now real hope that a recovery is on the horizon. When it comes, this will make tackling the jobs crisis easier. But a recovery on its own is unlikely to make swift inroads into high and persistent unemployment. Together with appropriate counter-cyclical macroeconomic policies and further structural reforms in labour and product markets, well-designed and adequately resourced labour market policies have a key role to play in preventing the crisis from casting the long shadow of persistent unemployment.

Adapted from OECD Employment Outlook 2009: Tackling the Jobs Crisis, Paris, September 2009


Scarpetta, Stefano and Paul Swaim (2009), "Employment policy: Passing the stress test", in OECD Observer No 273, June

"Unemployment: The language of the crisis", in OECD Observer No 272, April 2009.

©OECD Observer N° 274, October 2009