Unemployment, Structural Change and Globalization

M. Pianta and M. Vivarelli

UNEMPLOYMENT AND THE SUPPLY OF LABOUR
by M. Pianta

1. Introduction

The evolution of the supply of labour is affected by several factors of very different nature.

First, demographic factors are important, including population growth fertility rates, migrations and the age structure of the population.

Second, social issues such as the position of women in families and society, the extent and benefits of education, the characteristics of the retirement systems affect the participation to the workforce of women, the youths, and the aged. Important effects also result from specific issues of an institutional nature and defining social arrangements, such as the existence and availability of part-time positions, the length and flexibility of working time per worker, the possibility to alternate periods of work to periods of study and training, the regulations for migrant workers, etc.

Third, economic factors such as the minimum wage rate, wage structures, the nature of labour contracts, the extent of social protection and provision of public services, the dynamism of labour demand, all can encourage or discourage the participation to the labour force of individuals.

Economic analysis has long recognized the relevance of non-economic factors shaping the supply of labour, and demographic, social and institutional issues have been crucial in providing appropriate explanations of empirical developments.

The focus of labour economics has traditionally been the explanation of labour supply as a function of real wages, taking as given the socio-demographic variables. In particular, classical works on labour markets (Robbins, 1930; Hicks, 1946) have explained labour supply as a function of real wages and real incomes derived from non-work activities (such as property, etc.). The former has by far resulted as the key determinant of labour supply, and several empirical studies have associated the rising participation to the labour force to the availability of rising real wages. This is particularly important for the component of the labour force which has grown faster, i.e. women.

More formalized models of economic behaviour have also been proposed (Becker, 1964;1976), trying to explain economic and social behaviour as utility-maximizing choices by individuals, an approach marked by an economic reductionism which may not help much in our understanding of complex human, social and institutional issues.

Other factors affecting labour supply, which have been considered in various modelling efforts of the labour market have included the preference for leisure, time allocation choices, the burden of housework (which is important especially in the case of women, and its distribution within families), the segmentation by skill, sector of activity and geographical factors.

Once a particular level of labour supply emerges from these complex interactions, the impact on unemployment depends on the ability of the economic structure to generate enough labour demand. Unemployment tends to increase when demographic, social and economic factors expand the labour force faster than the economy expands labour demand. A feedback mechanism then operates, with discouraged unemployed leaving the labour force (again, this concerns first of all the "weakest" sections of the work force: women, youths and the aged).

The different factors shaping the supply of labour will be examined in turn below.

When economic and institutional arrangements are unchanged, the evolution of labour supply is shaped by the growth of working age population, resulting from previous fertility rates and current migration rules.

A long term growth has characterized the supply of labour in industrial countries; this has been at the same time a pre-condition and an effect of rapid economic growth. The rapid demographic growth of the "baby boom" years, and the higher participation of women to the workforce have been the major factors sustaining increased labour supply.

In post-war years population growth has been slower in Europe (with big differences across countries) and faster in North America, although a convergence in the late 1980s was registered. For OECD countries the slower rate of growth of population is expected to continue in the near future, leading to a slower increase of the labour force. In fact, the dynamics of population growth is crucial to explain the employment patterns of industrial countries (in the case of OECD countries it can account for 85% of employment change) (OECD, 1994a, p.23).

The long-term pattern of growth in the labour force is expected to continue in the future, although at lower rates than in previous decades. Labour force in OECD countries will continue to increase, according to projections up to 2005, even under rather conservative assumptions on participation rates, migration, etc. Only a few Northern European countries are expected to record a net decrease of their labour force (OECD, 1994b)

Compared to the growth rate of the 1980s, the expansion of the labour force is declining in all European countries, but stays stable in North America. The share of women in the labour force will continue to increase everywhere, and more women than men will join the labour force up to 2005. Also the rates of growth for women, however, will decrease compared to the 1980s.

The number of young people entering the work force is expected to fall in Europe and Japan, and rise in North America; in fact in the US the current number of young people is in the same order as that of the "baby boomers" in the post-war decades (although, with a much higher total population now, the weight of the youngs is substantially lower).

The most important current demographic development in most advanced countries is the ageing of the population. The old-age dependency ratio (population 65 and over divided by the 15-64 age group) is expected to increase in most countries; from 1990 to 2005 it should rise from 17 to 29% in Japan and from 22 to 26% in the EU, while in North America it may remain stable. A recent and increasingly widespread reaction to such trends is to increase the age of retirement; this is reversing the pattern set by widespread policy reforms since the 1970s which had progressively anticipated the retirement age.

The combination of fewer youngs entering and more aged people remaining in the workforce has important implications also for the skill composition of labour supply. The upgrading of skills resulting from the entry of more educated youths is having less of an impact on the overall improvement of labour force skill levels, and additional efforts at training older workers may be needed.

In spite of the expected further slow down of population growth in most OECD countries (except in countries such as Ireland and Turkey), labour force growth should continue to outpace population growth as a result of further increases in the participation rates of women, and of migration flows.

In fact, migration has become a crucial element of demographic and employment patterns; it has increased in most advanced countries and is becoming an increasingly dynamic source of labour supply. Several important factors at the root of the migration push originating in many countries of the South, including increasing poverty, the proliferation of conflicts and civil wars creating high numbers of refugees, and the high population growth rates.

The regulation of migrations has become a major policy issue in industrial countries, with important problems of integration; migrant labour tends to occupy specific niches within labour markets, in low wage, menial or seasonal jobs, in sectors more exposed to restructuring and unemployment. The result is that unemployment among "foreigners" tends to be higher than that of "nationals" in most European countries.

3. Social factors

The number of people in work or looking for jobs divided by total population gives a country's rate of participation to the labour force, which is at about 75% in North America and Japan, and about 67% in Europe. Over the past two decades, a decline in the participation rate of men and an increase in that of women has been registered in all industrial countries.

The decisions by men and women to enter or not the workforce are influenced by a range of social factors, including individual preferences, the consideration of alternative activities outside labour markets (education, household work, etc.), of the possible alternative sources of income (retirement pensions, pooling of family incomes, etc.), and of the existence of favourable conditions for entering the labour market and at the same time caring for families (provision of public services, flexibility of employment arrangements, shorter working hours, etc.).

The major pattern common to all countries resulting from such social developments has been the growth in the labour supply of women. This trend has been traced back to 1890 in the case of the US and the UK. In the US the participation rate of women went from 19% in 1890 to over 50% in 1980 (Killingsworth and Heckman, 1986; Sorrentino, 1983). The rise in women's labour has been substantial also in terms on number of hours worked, in spite of the marked reduction of average working time experienced in the last century (see below).

The supply of labour by men, on the other hand, has experienced a long term decline, resulting from the extension of education for the youths and of retirement schemes for the aged. In central age groups male decline in participation rates has concentrated among the low skilled, and those active in agriculture and traditional sectors.

Increases in women's labour supply have been spread over all skill groups, but have been highest among the more educated. A strong growth of employment in services is associated to growing female participation rates, both because women tend to be employed more in services, and because a higher share of working women generates demand for a range of services (from catering to child care).

4. Economic factors

Wage levels, fringe benefits, labour rights, social security coverage and working conditions are the main economic factors determining the supply of labour (for the relevance of wage levels and their link to unemployment see the entry "Unemployment and wages").

All these factors operate in the standard interplay of market forces, with demand and supply of labour setting the current rate of unemployment (see the entry "Unemployment and labour markets").

But besides the simple operation of markets, what is relevant to consider in this context are the arrangements regulating the terms of employment, its length and degree of protection and autonomy. This is particularly important because of the current debate on reductions in the working time, and because of the diffusion of non standard forms of employment, with the traditional full-time, waged, tenured and usually unionized jobs increasingly replaced by part time, temporary, non unionized and less protected jobs, often taking the forms of self-employment activities.

At present, the actual supply of labour may be affected equally by the wage rate and by this set of social arrangements which may make the entry in the labour force more or less attractive to important parts of the population, including women, youths and aged people. Let us now consider these issues in some detail.

The reduction of annual working time

The growth of the labour force and the increasing participation rate of women are clearly associated to the strong reduction in the annual working time registered in all countries since the 1970s (see the entry on "Unemployment and working time").

In the United States the average number of hours worked in 1970 was 1840, and it fell regularly to 1736 hours in 1992, with a modest rise to 1743 in 1993. In Japan, the hours worked per person in 1973 were 2201, falling to 1965 in 1992. In Europe working hours are much shorter and reducing faster, a typical case is that of Germany, where hours have been reduced from 1949 in 1970 to 1588 in 1993 (OECD, 1994b, p.196).

The annual number of hours worked per employee is an appropriate indicator because it takes into account not just the average daily or weekly workhours, but it includes also arrangements such as holidays, possibility of leave for family or training reasons, etc.

The progressive reduction in annual working time makes more attractive and feasible for many sections of the population the entry (or the permanence) in the labour force, as it makes easier the possibility to combine caring for the family with regular, full time work. A general reduction in working time may contribute to avoid a growing polarization between highly paid, career-track, mostly male full time jobs, and low paid, less interesting, mostly female part time jobs (see below).

The current proposals for reducing working time in France and Italy, and the striking cross country differences in this regard make this issue a major policy area also from the perspective of managing an appropriate supply of labour.

The growth of part time work

While the large employment growth of the post war decades was based on the expansion of full time, usually tenured jobs in industry and services (largely in the public sector, especially in Europe), much of the dynamism in the 1990s is in part time jobs, and in private services. This offers opportunities and risks needing careful consideration.

The share of part timers in total employment has increased in the US from 15% in 1973 to 18% in 1993. A share of 20-25% in 1993, with clear upward trends, is found in countries such as Japan, Australia, the UK and other Northern European countries. The Netherlands represent an extreme case with 33% (ILO, 1996, p.26).

Part time for men the US it went from 8.6 of total employment in 1973 to 10.9 in 1993. Canada, Australia and New Zealand have similar records. In Japan over the same period it increased from 6.8 to 11.4. In Europe the growth has been much smaller, with shares below 3-4% in 1993 in most countries, with the UK reaching 6.3% and Sweden 9.1%. The major exception has been the Netherlands, where a dramatic policy change has brought to 13.4% the share of part timers in 1992 (OECD, 1994b, p.198).

For women, in the US the share of part timers has stayed stable at about one quarter of the women employed in 1973 and 1993. In Japan it increased from one quarter to a third, and Australia and New Zealand have more than 40% of part time women. In Europe a similar growth is found in Germany, but most countries have still lower levels. the highest values of female part time is found in the Netherlands, with almost two thirds of women, the UK (45%) and Sweden (41%) (OECD 1994b, p.198).

While this growth of part timers has been hailed as a solution for labour market problems, it should be pointed out that a significant part of these jobs in fact are under-employment in disguise. The share of involuntary part timers in 1993 is 31% in the US, and between 32 and 47% in Australia, Canada, France, Italy and other EU countries. Conversely, in the Netherlands only 18% of part timers are involuntary and Spain, Japan and the UK have even lower shares (ILO, 1996, p.26).

This evidence shows that the diffusion of part time may conceal unemployment as much as solving it; a significant share of part time workers, given the opportunity, would still prefer to hold a full time (and, more importantly, full wage) job.

This raises a broader range of problems on the regulation of part time work. Currently, in most countries it does not provide the level of income, protection and security needed for assuring dignified working conditions and for avoiding the "working poor" trap. In fact, the spread of part time may extend the precarization of employment relations and weaken the bargaining position of regular full time workers.

On the other hand, the positive aspects of part time work are that it is much more appealing to a growing share of the population who do not feel committed to a full time job, and needs time to pursue other activities, ranging from studying (in the case of youngs), to caring for the family in the case of women (and to a little extent, also of men), while older people may not want to retire completely, but may appreciate a lower work burden.

These developments obviously presuppose the presence of other main sources of income within the household, so that part time work integrates them, but would be unable by itself to assure a standard of living out of poverty in the large majority of cases.

A more protected and better paid system of part time work would greatly contribute to expanding the supply of labour, and the overall flexibility of the labour markets. Whether it may in effect reduce unemployment, or may simply turn it into "under-employment" it will depend on the dynamics of labour demand.

Temporary employment

Temporary employment in 1993 accounted for about 10% of total waged and salaried employment in Japan, Germany and in most North European countries. In Italy and the UK it remained below 6%, while an extreme case is that of Spain, which after the labour reforms of recent years has doubled the share of temporary employment from 16% in 1987 to 32% in 1993. No data are available for the US. The rate of growth of this share has been strong only in some countries and strong national specificities emerge (ILO, 1996. p. 26).

This represent a further trend in the precarization of employment contracts on which however not enough evidence is available to detect a general trend across most countries.

Self-employment

The share of self-employment outside of agriculture in total employment has increased in most countries, but maintains strong cross-country differences.

It is very high in Mediterranean countries such as Italy and Greece, where a strong persistence of artisans and shopkeepers leads to shares of 24 and 28% in 1993, while Spain and Portugal have an 18% share. In these countries a reduction of traditional activities has been compensated by growing self-employment in other private services.

Most advanced countries have a share of self-employment in 1993 of 10-15% of total employment, with a general upward trend, especially marked in the UK and Ireland. Conversely, strong decreases have been registered in Japan, France and Germany, where traditional self-employment has declined, and the reorganization of business has not taken the road of decentralizing services and production tasks to individual suppliers. In the US the shares are even lower, at 7.7% in 1993, and did not increase significantly in the past two decades.

The case of self-employment shows how much the developments in the labour market depend on the one hand on historical and institutional specificities of countries and, on the other hand, on the models of organization of production and restructuring dominating industries and services. The nature of labour demand, in this case, appears to tailor the forms of labour supply pursuing the most efficient models of organization which appear possible in particular national economies.

All these developments in the economic factors and arrangements shaping labour supply, and affecting long term unemployment, share a common nature. They are all part of a blurring of the borders between work and non-work, between full time waged employment and independent self-employment.

As the ILO report pointed out, the emergence of "non standard" forms of work has marked the last two decades. So far, part time work, temporary work, self-employment generated by subcontracting activities of firms have offered lower wages and benefits, lower social security coverage and employment rights (ILO, 1996, p.25). However, this need not necessarily be so, and a greater articulation of employment contracts and work arrangements might usefully combine greater flexibility with similar degrees of employee protection. Nor such an evolution contradicts the fundamental objective of full employment as a major policy priority in an age of high unemployment.

Simply, full employment can be reconceptualized along the lines of an "active society" where besides full time jobs for all those who want them, there is plenty of opportunity for temporary and part time activities in a context where the individual interest in learning, changing activity and earning adequate incomes is matching the economic system's need for an educated, competent, flexible and well paid work force.

The key policy challenges for managing the supply of labour, therefore, will include not only demographic, migration and social policies, but they will also need to address the institutional arrangements of the labour market and the degree of protection of "non standard" employees. Action on these fronts, offering greater flexibility and security, and shorter working time, will make entry in the labour force and employment attractive for a larger set of people, in particular women, youngs and older people.

Empirical evidence

A large body of evidence on the dynamics of labour markets, working time and wages has already been provided by the three entries devoted to such issues. What may be useful here is to integrate such data with basic statistics on population and labour force growth in all world countries, taken from the World Bank World Development Report, 1997.

Table 1 shows the average annual growth rates of population and labour force in the 1980-90 and in the 1990-95 periods.

The slow down of demographic growth in the 1990s is evident across all regions of the world, paralleled by a similar reduction in the growth of the labour force (with the exception of Middle East and North Africa).

As pointed out above, in the 1990s the growth of labour force is always higher than that of population, with the highest differentials in the Middle East and North Africa and in Latin America, two of the main origins of world migrations.

Table 1: Population and labour force

The cases of reduction in either variable are very limited to special cases, mostly in the former Soviet bloc countries, while the lowest growth rates are found in the high income group.

If we plot the rates of growth of population and labour force in the 1990s, in Figure 1, we can see a strong regularity in the overall pattern, although substantial variations can be found. In particular, when population growth is very high, it becomes difficult for countries to expand the labour force at the same rate (due also to the generally very low average age of the fastest growing countries).

The regularities and national specificities in the demographic and economic factors shaping countries' supply of labour shed some light on the overall evolution of labour markets and on the prospects for employment and economic growth which may result when the men and women entering the work force are confronted with the demand for labour generated from the national economy.

References

* The main contributions of economic theory dealing with the supply of labour can be found in:

Ashenfelter O. and Layard, R. (1986), Handbook of labour economics, North-Holland, New York.

Hicks, J.R. (1946) Value and capital, 2nd edn., Oxford University Press, Oxford.

Killingsworth, M. (1983), Labour supply, Cambridge University Press, Cambrisge, Mass.

Mincer, J. (1968), Labor force participation, In International Encyclopedia of the Social Sciences, vol.8, Macmillan, New York.

Robbins, L. (1930), Note on the elasticity of demand for income in terms of effort, Economica, 10, 123-9.

* The economic analysis of individual decision making on the participation to economic activities has been pushed (perhaps too far) by the human capital approach which reduces complex human and social behaviour to simplistic choices based on individual utility and opportunity:

Becker, G. (1964), Human capital , Columbia University Press, New York.

Becker, G. (1976), The economic approach to human behaviour, University of Chicago Press, Chicago.

* A model on the case of labour supply in developing countries is offered in:

Harris, J.R. and Todaro, M.P. (1970) Migration, unemployment and development: a two sector analysis. American Economic Review, 60, 126-42.

* Review of labour market trends and empirical analyses of the evolution of labour supply can be found in:

Clark K.B. and Summers, L.H. 1981, Demographic differences in cyclical employment variation, Journal of Human Resources, 16, 61-79.

ILO (1996), World Employment 1996-97, National policies in a global context, Geneva, ILO.

Mishel, L. and Teixeira R.A. (1991), The mith of the coming labor shortage: jobs, skills and incomes of America's workforce 2000, Economic Policy Instiutute, Washington D.C.

OECD (1994a), The OECD Jobs Study, 2 voll. OECD, Paris.

OECD, (1994b), Employment Outlook, July 1994, Paris, OECD.

OECD, (1995), Societies in transition: the future of work and leisure, Paris, OECD

Owen, J.Working lives: the American work force since 1920. D.C. Heath, Lexington.

Sorrentino, C. (1983), International comparisons of labor force participation, Monthly Labor Review, 106 (2), 13-22.

* On the labour supply of women key contributions include:

Cowan, R.S. (1983), More work for mothers. Basic Books, New York.

Heckman, J. (1978), A partial survey of recent research on the labor supply of women. American Economic Review, 68, Supplement, 200-7.

Killingsworth, M. and Heckman, J. (1986), Female labour supply: a survey. In Ashenfelter O. and Layard, R. (eds.), Handbook of labour economics, North-Holland, New York

Layard R. and Mincer, J. (eds.), Trends in women's work, education and family building. Special issue of Journal of Labor Economics, 3 (1), January.

* The neoclassical views of unemployment and their approach to labour supply issues in the current policy debate are found in:

Bean, C. European unemployment: a survey, Journal of Economic Literature, 1994, 2.

Centre for Economic Policy Research 1995. European Unemployment: Is There a Solution?, London, CEPR

Drčze, J.H and Bean, C.R. (eds.). 1990. Europe’s Unemployment Problem, Cambridge (Mass.) MIT press

Layard, R. - Nickell, S. - Jackman, R. 1991. Unemployment: Macroeconomic Performance and the Labour Market, Oxford, Oxford University Press

Layard, R. - Nickell, S. - Jackman, R. 1994. The Unemployment Crisis, Oxford, Oxford University Press

Malinvaud, E. 1994. Diagnosis Unemployment, Cambridge, Cambridge University Press

Phelps, E. 1992. A Review of Unemployment, Journal of Economic Literature, vol.30, 1476-90