Combating unemployment and exclusion

International Labour Office	Globalization and Workers' Rights
Bureau for Workers' Activities
	Home

Combating unemployment and exclusion

Issues and policy options
(Contribution of the ILO to the G7 Employment Conference, Lille 1-2 April 1996)

International Labour Organization

Executive Summary

References

Executive Summary

In view of the preponderant role that they continue to play in the world economy, the G7 countries have both a domestic responsibility towards their own populations and a global responsibility towards the international community for taking the lead in efforts to combat the global employment crisis.

Inadequate growth during the past two decades lies at the heart of the employment problems of industrialized countries, even though these problems take different forms in the United States, in Japan and in Europe. Slow growth has also been a major cause of the structural problems in the labour market, particularly of the worsening situation of less-skilled workers. Popular fears that technological change and international trade are among the major causes of joblessness in general are often exaggerated; while they affect the structure of employment and therefore require efforts to adapt labour and production to a rapidly changing environment, they are not net job destroyers. They are, on the contrary, the locomotives of future growth and job creation. Nor has the level of real wages and social protection been a major cause of unemployment. Structural policies intended to promote greater efficiency and flexibility may have brought about a more efficient allocation of resources, but they have had little effect on aggregate employment levels.

Employment is now rising more rapidly than the labour force, but if present trends continue they are unlikely to absorb the backlog of unemployment currently confronting the G7 countries. Yet the present employment crisis is neither inevitable nor irreversible. The policy challenge is a double one:

how to accelerate the growth in the demand for labour, without provoking a return to inflation and macroeconomic imbalances; and
how to promote the employability and reinsertion of the unemployed and socially excluded, while creating room to maintain an adequate social safety net for those who need income support for some time to come.

To meet this twofold challenge requires a mutually supporting set of macroeconomic, structural and sectoral policies, and a commitment by fiscal and monetary actors at both the national and international level to keep employment promotion as a central focus of their action.

The role of macroeconomic policies in raising demand and promoting employment-intensive growth is crucial. They condition the success or failure of selective programmes. In the current context of low inflation, insufficiency of productive investment and a persistent backlog of unemployment, there is room for macroeconomic expansion without necessarily creating an upsurge of inflationary pressures. This expansion can be brought about by adopting a strategy of joint reduction of real short-term interest rates, budgetary policies which allow for expenditures to combat unemployment and break recessionary vicious circles in the short term, and a declared and consistent action towards gradual reduction of the public debt in the medium term. Such policies need, however, to be supported by strategies involving the social partners that aim at maintaining stability between wage increases and profits.

There is a need to strengthen mechanisms for policy coordination between the key monetary and fiscal actors. Only an improved coordination of policy action at the domestic and international level will ensure the confidence of capital markets that the policies will be credible and sustainable in the medium term, thereby providing sufficient signals for the real long-term interest rates to decrease.

Targeted interventions are also necessary to make macroeconomic policies benefit the vulnerable and excluded. In the design of such measures, account must be taken of the fact that it is unlikely that all the excluded individuals can be provided access to the world of work in the medium term. Therefore, programmes for reinsertion should be targeted at those individuals and groups who can respond to incentives, whereas adequate social protection should be reserved for those who cannot.

Labour market reforms should be undertaken in such a way that individual preferences are geared towards choosing employment rather than inactivity, and that conditions are created especially for the most vulnerable to gain access to employment and incomes. This implies, among other things, reducing the tax wedge for jobs remunerated at or near the effective minimum wage, and reforming the tax benefit structure to improve rewards from entering employment.

In order to promote competitiveness, adaptability and social integration, investment in human resources development must be stepped up. Even more than aiming at a general increase in the levels of educational attainment, the challenge is to match the development of skills and competence with the changing needs of the labour markets. This requires a better integration of the educational and vocational training systems with the world of work, which in turn calls for a strengthening of the partnership between business and public providers of education and training. Innovative approaches to the financing of training are also required in order to increase incentives and make training an integral part of investment decisions.

The economic and social return to standardized labour market training measures for vulnerable groups is low. The long-term employment effects of subsidized employment for such groups are also often questionable. It therefore appears desirable to move towards more targeted training programmes and to combine every job subsidized from the public purse with an element of training and human resource development.

There are strong economic, social and political arguments for decentralizing the delivery of labour market and other programmes to combat exclusion and to increase the commitment and responsibility of civil society in this respect. This must be done by increasing local partnerships and the involvement of the social partners in the design and delivery of programmes which meet both individual and local labour market needs.

While voluntary bipartite agreements on working time should be welcomed and encouraged as a means of preserving jobs and improving working conditions, it is doubtful whether the mandatory reduction of working time will be a very effective means of promoting employment. However, innovative approaches to the reorganization of working time can both increase flexibility of operating time and workers' control of their hours of work, and may be beneficial for efficiency and employment. There is an advantage for public policy promoting and accommodating such changes while protecting workers' safety and preventing precarious employment.

The success of an employment-oriented strategy will depend critically on the ability of governments to obtain broad-based support for the chosen package of economic and labour market policies. Each country needs to strengthen the tripartite dialogue between the public authorities and the social partners in order to ensure that the benefits of expansionary macroeconomic policies are not dissipated in a destructive struggle over income shares. The creation of an environment for faster, non-inflationary growth of output and employment will present a major challenge to all parties in the industrial relations system.

There is a need to review existing mechanisms in order to provide an environment where social concerns are integrated into the international economic policy-making process. Given the impact of globalization and liberalization on the functioning of national and international economies, unemployment and social exclusion cannot any longer be combated merely by national action. Partnerships among the international financial institutions and those agencies with a social vocation must therefore be enhanced, thereby ensuring that the voice of civil society, and in particular of the social partners, is heard.

Introduction

While the G7 countries have a 14 per cent share of the world's working-age population, they produce two-thirds of the world's total output of goods and services, cover more than half of world exports and attract more than 40 per cent of the inflows of foreign direct investment. Despite the increasing influence of a number of fast-growing economies outside the major seven, these still hold the key to the bulk of the world's productive assets. The way the G7 economies develop and are managed will therefore also continue to have a major influence upon the overall world economy. Persistent imbalances within the G7 will make it difficult to achieve a balanced and sustainable economic development worldwide.

At the World Summit for Social Development held in March 1995 in Copenhagen, the employment crisis was recognized as one of the main causes of poverty and social exclusion and one of the major obstacles to the achievement of social justice. The Heads of State and Government attending the Summit committed themselves to promoting the goal of full employment as a basic priority of economic and social policies. They agreed to put the creation of adequately and appropriately remunerated jobs and the reduction of unemployment at the centre of government action, with full respect of workers' rights and the participation of employers, workers and their respective organizations. Following this commitment and in view of their importance in the global economy, the G7 have a lead role to play in solving the crisis of unemployment and exclusion — not only for themselves, but for the benefit of societies throughout the world as a whole.

This paper addresses a number of the causes and consequences of the employment crisis and examines policy responses by which the G7 can assume their lead role in promoting more and better jobs and improving the situation of the most vulnerable. In preparing this paper, the ILO has drawn, inter alia, on OECD material, including its Jobs study, but in some important respects the policy conclusions that it presents differ from those advocated by the OECD.

Why growth is insufficient: The role of macroeconomic policies

Growth is the driving force behind the reduction of unemployment. For more than two decades now the growth rate has slowed down considerably in the industrialized countries. In the United States, this essentially took the form of an abrupt halt in the secular rise in individual incomes as a result of the slow-down in labour productivity gains. On the other hand, growth remained employment intensive and it was possible to keep unemployment trends down to a level similar to that of the period of full employment. In Europe, the fact that productivity gains remained at a more constant level meant that the decline in growth was reflected in an upward trend in unemployment, but the increase in labour earnings was maintained, although at a slower rate.

There is no single cause of the decline in growth since the early 1970s. While the supply shocks brought on by the two oil crises had a determining role at the outset, they cannot be blamed for the perpetuation of sluggish growth, since the 1986-87 oil counter-shock offset the terms of trade reversals initially sustained by the industrialized economies. However, these supply shocks did entail a lasting modification of economic policies and can be seen to have occurred simultaneously with the decline in productivity gains.

The early 1980s saw the adoption of largely restrictive monetary policies to combat inflation. In this, policies have been successful: inflation in the G7 fell from around 7 per cent in the early 1980s to around 2.5 per cent in the early 1990s. The rise in real interest rates, pushed up by financial deregulation, did relieve pressures on prices but at the cost of a lasting reduction in activity. Insufficient growth coupled with high real interest rates increased deficits and fuelled public debt, without this being attributable to a lax budgetary policy (see figure 1). On the contrary, although public budgets (excluding interest payments) did fluctuate according to the economic situation, swelling during recessions, followed by a leaner period during the upturn, they have not shown a general increasing trend (figure 2). In particular, transfer costs other than those related to the ageing of the population have been maintained at a stable level over the 1980-95 period (OECD, 1995a) despite the rise in unemployment, which shows inter alia that the increase in the number of beneficiaries has been offset by a reduction in the amount and duration of benefits paid. An examination of the main budgetary policy indicators shows that, contrary to what might be concluded from the growing deficits (dictated by the economic climate) and public debt, budgetary policies became largely restrictive in continental Europe and Japan in the 1980s. The Anglo-Saxon countries, on the other hand, maintained more neutral budgetary policies (see figure 2a).

The recent deterioration of the balance of public accounts, especially in the countries of continental Europe, appears to be essentially attributable to the effect of the economic situation, as governments have provided little support to activity through deliberate measures. Budgetary policies were more active in the Anglo-Saxon countries, and especially in Japan, but overall, they became restrictive again with the upturn and the balances of public accounts began to improve under the double impact of the economic situation and deliberate measures. The cumulative restrictive mechanisms have thus contributed to sluggish growth: high real interest rates maintained slow growth and called for budget restraint, which in turn has a negative impact on growth.

Moreover, low actual growth reduces potential growth, that is the rate at which an economy can grow without bringing major pressures to bear on the capital and labour factors of production. Persistently weak growth (i) reduces the accumulation of capital and production capacity, since enterprises reduce investment in anticipation of limited markets for their output, and (ii) worsens the quality and availability of labour, by keeping workers out of employment for long periods, which gradually makes their skills and competence obsolete. Another factor contributing to lower rates of potential growth is the decline in productivity gains; whether it is the result of an autonomous process or of slower real growth is, however, difficult to determine. In this context, any resurgence of growth outstripping the rate of potential growth rapidly results in imbalances that are viewed as excessive by economic decision makers (pressures on prices, external deficits) and leads to a tightening of economic policies. The industrialized economies thus find themselves caught in a pattern of slow growth which, although it does preserve certain major macroeconomic equilibria (keeping price increases and foreign trade balances under control) none the less erodes public finances and inevitably increases unemployment.

Alongside this macroeconomic policy stance, countries have focused on structural reforms and micro-economic policies of market liberalization. Many countries have adopted policies of privatization of state enterprises and the deregulation of private markets, not only for goods and services but also the labour market. These policies, although they may have contributed to economic efficiency, have widened the gap between winners and losers. In the labour market, rewards have been directed to skilled and well educated workers with good jobs in technologically advanced industries and services; unskilled and part-time workers have been marginalized, and the increasing duration of unemployment and social exclusion is creating an underclass which has difficulty obtaining employment. Increased labour market flexibility has sharpened this divergence.

The rise and changing structure of joblessness

Largely as a result of the combined effect of the above external shocks and structural changes, but also because of policy choices made, there has been a secular rise in unemployment levels in the G7 over the past 20 years, with the exception of the second half of the 1980s, when several years of growth of around 4 per cent was accompanied by a high rate of job creation. Yet between the early 1960s and early 1990s, unemployment rates more than doubled in most G7 countries, the increase being least dramatic in the United States and greatest in the United Kingdom, France and Germany. Between 1979 and 1994, the total number of unemployed in the G7 rose from 13 million to almost 24 million. In the European Union unemployment rose from just over 5 per cent in 1979 to around 11 per cent. While unemployment is still relatively low in Japan, it is also emerging as a problem there. Over the period, open unemployment in Japan rose from 2 to 3 per cent and the share of discouraged workers is relatively high. In the United States, unemployment increased steeply between 1979 and 1982 to nearly 10 per cent, but has subsequently declined to the 6 per cent level of 1979.

A number of other social problems have been associated with this secular increase. Unemployment has been concentrated among the young, unskilled workers and migrants, and the proportion of long-term unemployed has risen markedly. While an increasing number of women have entered the labour markets over the past decades, participation rates for young people and older workers have declined. This is especially true for older groups. In Italy, France, Germany and Canada less than half of the population between the ages of 54 and 65 are still in the labour force. Not only have the number and magnitude of social groups excluded from employment increased, but this development has also tended to swell the structural component of joblessness, which is less and less affected by cyclical upturns. This is clearly evidenced by the fact that the substantial job growth during the peak years of 1987-91 did not make a major dent in long-term unemployment in most industrialized countries. Furthermore, the figures on open unemployment do not give the full picture of the labour market slack. In addition to the 34 million unemployed in all the industrialized countries taken together (24 million of whom are in the G7) there are 4 million discouraged workers and 15 million who involuntarily work part time.

Parallel to the secular rise in unemployment, however, another trend is apparent: the secular change in the nature of jobs. Some people define the growing insecurity of employment, the increasing number of part-time and fixed-term contracts and other forms of atypical work as increased job flexibility, but others view these as signs of increasing precariousness of employment. These changes increase the risk of exclusion as they require enhanced adaptability and competitiveness from the workforce.

The evolution of wage dispersion has, even in those countries which have been less affected by rising unemployment, provided an added dimension to poverty and exclusion. For example, in the United States and Canada, there has been a marked increase in the proportion of low-paid workers, which is now considerably higher than that registered in other countries. This is also true to a slightly lesser extent in the United Kingdom. Moreover, in the 1980s, wage dispersion increased substantially in the Anglo-Saxon countries, while it remained virtually unchanged in the countries of continental Europe (figure 3). In countries where there has been moderate, if any, growth in real aggregate wages (United States, Canada, Australia), this phenomenon includes a reduction in the real wages of the lowest-paid workers. Their situation has thus become worse not only in relative but in absolute terms. This development has resulted in the emergence of an underclass of "working poor". For example, in the United States, around 18 per cent of all full-time employees were working for less than the poverty-line income for a four-person household in 1993. But the working poor are not only an American phenomenon: in Europe, an average of 10 per cent of all households had at least one member in employment and yet were below the poverty line, the share being higher in southern than northern Europe (European Commission, 1995a).

The growing vulnerability of less qualified workers

In all industrialized countries and in all categories of workers referred to above, unemployment hits the less qualified particularly hard. Their situation has globally deteriorated across the OECD in terms of the incidence of unemployment, but also in terms of their revenues in the Anglo-Saxon countries. This is true whether the workers are classified according to level of education or according to occupation and even if the different shares of less qualified persons in the labour force are taken into account (see figure 4).

The real causes of the deterioration in the situation of vulnerable groups must be identified carefully in order to provide adequate remedies. The policy mix will differ depending on whether the causes are considered to be related essentially to the overall insufficiency of demand or more specifically to structural factors such as a diminishing need for low-skilled, low-paid work. Popular perceptions and the international debate in recent years have attributed the overall deterioration of the situation of less qualified workers to two sets of factors: the exogenous impacts of trade with low-income countries and the effect of new technologies, on the one hand; and endogenous or domestic factors on the other hand, such as excessive real wages of the low skilled, other rigidities hampering an efficient functioning of the labour market, or simply a "crowding out" of the job search by unemployed persons with higher qualifications. These perceptions, which may not all be supported by facts, will be examined below.

4. 1 External factors

4.1.1 Is the high unemployment of low-skilled workers related to international trade?

The theoretical argument can be advanced that an expansion of trade with low-wage countries can have a direct downward pressure on wages in high-income countries. However, North-South trade still remains relatively modest, whereas the industrialized countries to a large extent trade among themselves. For example, the share of imports from the Dynamic Asian Economies (DAEs) plus China to the OECD represented only 1.5 per cent of the OECD GDP in 1993, compared with 0.19 per cent in 1962. Moreover, their trade with the developing countries, especially with the DAEs, has been in balance or in surplus, which means that such trade tends to be job creating rather than job destroying.

Trade may, however, have some job displacement effects in certain sectors, especially as imports tend to concentrate on products with low-skilled labour-intensive content, while exports from the G7 tend to be more capital intensive and embody a high-skilled labour content. These effects can be observed especially in the manufacturing industry, where the developing country manufactured imports now account for 4 per cent of G7 domestic demand for manufactured imports compared with 1 per cent in 1968. Yet both ILO and other studies have shown that the competition from the developing countries has had only a marginal impact on overall employment levels in the G7, and that trade with low-wage countries cannot be regarded as the major cause of either the high unemployment of low-skilled workers or the deterioration of their wages.

4.1.2 Has the introduction of new technologies affected employment adversely?

There appears to be little evidence that rapid technological changes have brought about an environment of jobless growth, to the point where the growth of output no longer generates employment. For example, technological innovations could be expected to have led to higher productivity growth, thus attenuating the growth of jobs. However, the average yearly labour productivity growth in the business sector in the 1980s and early 1990s was less than half the productivity growth in the 1960s and the early 1970s before the first oil crisis. According to recent ILO estimates, there is also clear evidence that the job content of growth has increased rather than decreased and that the relative capacities of European and American economies to create jobs have not changed. Thus, before the first oil shock in 1973, an annual growth rate of 2 per cent was required for the number of jobs to increase, whereas today new jobs are created as soon as growth reaches 0.6 per cent. In Europe, the corresponding required growth rate has decreased from 4.3 to 2 per cent (ILO, 1996).

As regards the structure of employment, however, technological progress may have had a more substantial impact. Automation has tended to eliminate less sophisticated tasks, while at the same time technological advances require workers to have higher levels of skill. There is also less complementarity between the demand for higher and lower skill categories now in an enterprise: the recruitment of more workers in one category does not necessarily lead to an increased demand for the other. Moreover, mobility from one category to others is more difficult without investment in training. The fact that wage dispersion in the Anglo-Saxon countries has increased not only between sectors at risk and protected sectors, but especially within sectors, is further evidence that technology has had a greater impact than trade on unemployment and incomes of low-skilled workers.

While the changing job structure therefore tends to shift demand towards workers with higher, more adaptable and multiple skills, it is questionable whether this demand has in fact accelerated in recent years as compared with previous periods when it was possible to manage the structural change within a full employment context. Certain indicators show that during the 1950s and 1960s in the United States this demand increased at the same rate as, if not at a higher rate than in the recent past. Yet wage dispersal was decreasing. It therefore seems likely that another more important factor had come into play at the time. In particular, there is reason to believe that at a time of substantial growth of total wages (as was the case during the 1950s and 1960s, when production and productivity were growing rapidly), there is a lower level of conflict between workers in the different skill categories and enterprises both find it easier and have a higher incentive to invest in training their workforces. Thus at times at rapid growth, the increasing demand for skills is met without bringing major pressures to bear on relative wages.

However, a combination of technological change and slow growth may produce perverse effects: there is a shortage of labour in a number of top-range technical occupations requiring highly specialized skills, while a surplus of labour has emerged in middle-range skill categories rendered obsolete by new technologies. Unless these workers can be trained or adapted to the rising skill requirements they will enter the ranks of the unemployed, thereby competing for jobs with less skilled jobseekers. This in turn may discourage firms from training these workers, both because they might consider that their competitiveness will increase and because wage pressures will be attenuated by the recruitment of unemployed with higher skills who would accept a lower-skilled job.

In sum, while it is clear that the introduction of new technologies entails a transformation of the structure, skill content and geographical location of jobs, and while there is an inertia of the labour markets in adjusting to these changes, leading to displacement of workers in some types of occupations and bottlenecks in others, it is doubtful whether technological change as such is leading to a net destruction of employment, if both direct and indirect impacts are accounted for. Furthermore, it is hardly possible to explain the unemployment of least qualified workers solely by a shift in the demand for different categories of skills. In fact, barring skill shortages in highly specialized occupations, a widening of unemployment to groups at different skill levels has been observed during the past decades.

4.2 Domestic factors

4.2.1 Is the unemployment of low-skilled workers related to their real wages?

It is true that where the lowest wages have been reduced, there has been an increase in the proportion of low-paid workers, which would appear to indicate that job creation at the lowest levels of pay is sensitive to the relative remuneration of these jobs. This could give the impression that there was only one alternative to mass unemployment of the least-skilled workers in Europe: the reduction of their wages.

Upon closer scrutiny, however, this would appear to be an oversimplification. Unemployment affects the least-skilled categories of workers to a similar extent in a number of industrialized countries, irrespective of the overall unemployment rate and changes in relative wages. Not only is the skills breakdown of unemployment identical, but in the case of men the unemployment rates among the least skilled are of a similar order of magnitude (approximately 8 per cent) (see figure 4) in Canada, the United States and France, despite the fact that wages have evolved in a radically opposite fashion in these countries.

In other words, the risk of unemployment is the same for all low-skilled men, whether or not their wages have been reduced. There is even a higher risk in the United Kingdom, where the relative wages of the least skilled have dropped the most. By contrast, low-skilled women have been hit particularly hard by unemployment in Europe. This would appear to indicate that the unemployment rates among least-skilled workers evolve to a large extent independently of changes in their remuneration. The main cause underlying the difficulties affecting the most vulnerable groups is rather to be found in the evolution of the overall economic situation.

In addition to real wages, statutory or collectively agreed minimum wages have also been regarded as a factor contributing to the exclusion of young persons and low-skilled workers from gainful employment. As a consequence, since the mid-1980s, minimum wage setting has been changed in many countries. The aim of the changes has been to reduce the minimum wage relative to average wages, to reform the adjustment mechanism with a view to suppressing indexation based upon average wages, and to make the minimum wage system more flexible and less binding. For example, in the United States during the 1980s the minimum was frozen at US$3.35 for almost a decade, and is now worth 30 per cent less than in 1968. As a consequence, as a proportion of the average hourly wage, the minimum wage is at its historically lowest level. In Italy, the sliding scale (scala mobile) indexation system was abolished in 1992, and
minimum rates are now updated through collective agreements. Another trend is the creation of a sub-minimum differential for young people, which now exists in France and the United States. The most striking change was the abolition of the statutory wage councils in the United Kingdom in 1993, which had set minimum rates for about 2.5 million adult workers, mostly women in industries such as hotels and catering. Since then, there has been no minimum floor, and wages tend to be fixed at plant or establishment level.

In most cases, the adverse impact of minimum wages on employment creation has been cited as the main reason for the changes. If the minimum wage is set too high it tends to limit the scope of wage differentials, discourage employers from hiring low-skilled workers, exacerbate inflationary pressures and necessitate a tightening of macroeconomic policy, with negative effects on employment. However, if it is set too low, the minimum wage cannot provide adequate protection for vulnerable groups against low pay and poverty. In addition, technological change, productivity growth and efforts to enhance efficiency may be hindered by a low-wage policy. It is therefore necessary to set the minimum wage at a level where it can play a positive role in promoting both equity and efficiency.

The minimum wage as a percentage of the average wage varies from country to country. In mid-1995, it was about 37 per cent in the United States, 43 per cent in Japan and close to 50 per cent in France. But even in France, where the level is relatively high, only a small fraction of the total labour force (about 8 per cent) is directly affected because the vast majority of workers receive earnings above the minimum wage. With the decline of the relative level of the minimum wage, the argument that the minimum wage affects employment negatively is being increasingly questioned (Freeman, 1994). Furthermore, empirical evidence shows that there are situations in which minimum wages can actually lead to increased employment (Card and Kruger, 1995). Where there is a negative linkage, the impact tends to be small and to be largely confined to young workers (Bazen and Benhayoun, 1995).

4.2.2 Is unemployment caused by labour market rigidities and social protection?

In recent years, it has often been argued that the lack of employment growth and the marginalization of certain groups are caused by a prohibitive micro-economic framework. Distortions and rigidities in labour markets are attributed to regulations and high non-wage labour costs, used inter alia to finance social protection, especially in Europe. Comparisons of the shares of long-term unemployment and young entrants to the labour market have been used to support the hypothesis that the nature of unemployment is different in the United States and in Europe. In the former, it is a result of the relative ease with which employees can be dismissed. Combined with a shorter duration of unemployment benefits, this leads to higher labour turnover, but shorter spells of unemployment. In Europe, on the other hand, unemployment is held to be the result of employers' reluctance to hire new workers, allegedly because employees' jobs are better protected. This leads to lower labour turnover, longer spells of unemployment, but also a more generous protection of incomes, through a longer duration of unemployment benefits. In Japan, open unemployment is allegedly kept under control through the "lifelong employment" system, with higher job tenure and an element of job protection internalized in enterprises, although this system does not cover the entirety of the labour market and runs the risk of being eroded by the labour market slack. The merits and demerits of these three approaches — the "maintenance of incomes" approach, the "labour market flexibility" approach and the "protection of jobs" approach — are widely debated in the literature, without full account being taken of the policy realities in these countries, or of the difficulty of transferring any of these approaches to other countries with different social contexts.

As regards the role of labour market institutions, and especially that of collective bargaining and wage setting mechanisms, it has been argued that there is a positive correlation between trade union power or trade union membership and unemployment. There is no evidence to support this hypothesis. Rather than unions, it is the changing structure of labour markets that affects employment gains or losses: jobs have been increasing in the service sector, for instance, where trade union membership has traditionally been weaker. It can also be argued that labour market institutions can be a powerful factor in restructuring production systems towards greater competitiveness and more robust employment in the long run. Furthermore, at the level of labour market regulation, governments have endeavoured to make labour markets more flexible throughout the 1980s by reviewing and reforming their labour market legislation. Yet unemployment levels are now similar to, or higher than those of the early 1980s.

As regards social charges, it is true that they represent a high proportion of the total cost of employing labour in almost all OECD countries. The fear is that this affects both the demand for labour, by reducing incentives to hire, and the supply of labour, by decreasing the motivation to search for a job through high social benefits. An additional fear is that such costs undermine the international competitiveness of countries, resulting in a loss of both export earnings and productivity, and indirectly leading to higher unemployment.

The international experience is, however, mixed: there appears to be little linear correlation between the level of social charges and competitiveness. Countries with high real incomes have also been able to afford higher social costs. In those countries (especially in Europe) social security transfers have contributed significantly to reducing initial rates of poverty, especially for the elderly, but also for the unemployed and for single-parent families. Persistent poverty undermines social cohesion, while a high level of social protection may also have substantial positive, if unmeasurable, effects on economic performance, in particular through the added confidence which it gives individuals in taking economic decisions and a greater willingness to accept change (especially structural change) and to take risks. Indeed, social security systems have been used extensively to facilitate the restructuring process that has taken place in the early 1980s and early 1990s in Western Europe. The size, structure and skill profile of the labour force have been significantly altered through the use of pension and unemployment benefit systems and parental leave benefits, as well as the provision of retraining by employment services. Social protection has thus increasingly become an instrument for economic restructuring, allowing society to modify its economic base without provoking social instability.

4.2.3 Are skilled workers displacing unskilled workers in the context of high unemployment?

A reduction in the overall demand for labour, coupled with insufficient economic growth, may have a massive impact on the low-skill categories even without a shock specifically affecting the demand for skills. In a situation of widespread underemployment, jobseekers holding diplomas or degrees apply for jobs for which they are over-qualified, accepting lower remuneration than that which they could command given their level of competence. Employers prefer to hire them since this enables them to have a higher-quality workforce. This "crowding out" phenomenon does restore a certain amount of flexibility to remuneration and attenuates wage-cost inflation, since wages diminish relative to qualification without, however, resulting automatically in a widening of wage differentials.

This displacement not only aggravates the problem of underutilized capacity in the economy as part of the investment in higher skills is forgone, but it may also lead to a deterioration of such skills, as these workers may find it difficult to readapt to jobs at their previous skill levels. Provided that this can be prevented by appropriate measures to foster skill maintenance, an expansion of employment opportunities would not cause bottlenecks and inflationary pressures.

This "crowding out" phenomenon may be further aggravated by the saturation of the employment services, which are not equipped to deal with mass unemployment. Especially in the public employment services, where officials may be legally obliged to hand out benefits and compensation for the unemployed, time may be "bought" by giving preference to the placement of those who are easiest to place. This may make it even more difficult for vulnerable and less competitive jobseekers to find a job. Displacement is thus another by-product of slow growth, and part of the vicious circle in which those who are excluded find themselves trapped.

Lessons and challenges: A policy agenda for the future

Summing up the above examination, it seems to be beyond doubt that current high and persistent levels of unemployment in the G7 are, more than anything else, a result of insufficient aggregate demand linked with lower rates of growth. There also appears to be no doubt that slow growth in itself has been a major cause of the structural problems of the labour market, which manifest themselves, inter alia, in high levels of long-term unemployment and the "crowding out" of the low-skilled jobs by high-skilled jobseekers.

While there is no single explanation for the employment crisis, it is clear that external shocks, insufficient adaptation to structural change and domestic policies have played a role. Macroeconomic monetary and fiscal policies which have focused on immediate stabilization and give priority to cost restraint over revenue promotion have proved to be insufficient to create confidence in the long-term sustainability of growth. They may also lower the capacity of economies to generate momentum for recovery, so that recoveries were more modest than they could have been. Nevertheless, it seems to be easier today than a decade ago to achieve higher rates of job creation through appropriate macroeconomic policies, as any rate of growth now generates more employment: growth has become more employment intensive.

As regards the structural causes of joblessness, contrary to popular belief both "technology pessimism" and "trade paranoia" are unwarranted. Even if these developments create a need for structural transformation, they are clearly engines of competitiveness and growth over time. In the context of demand slack in the industrialized countries, the latter would be ill advised to cut themselves off from emerging markets in countries where the consumption potential is enormous. Where the evolution of technology and trade create transitional inequalities among different categories of workers, the only viable means of attenuating them is the design and implementation of adequate policies.

Furthermore, it appears to be beyond doubt that neither high real wages nor extensive social protection as such have been a primary cause of overall joblessness in recent years. Historical experience supports the argument that high income and high productivity can support high social costs. However, the particular way in which social safety nets are financed and revenue for them is obtained has had an impact on total labour costs, thereby both affecting the capital-labour substitution and creating a bias against vulnerable groups.

In the absence of growth, it is difficult to ascertain the effectiveness of structural policies undertaken in the past decade. Over this period, however, they seem to have had little effect on aggregate unemployment levels. Structural policies intended to promote efficiency and flexibility of labour markets may have addressed these problems partially by enhancing the efficient allocation of the most competitive groups. But at the same time they may have aggravated the gap between the insiders and outsiders. Furthermore, other aspects such as structural policies to reallocate the returns from growth towards vulnerable groups, or to deal with new phenomena (such as the emergence of new types of work or emerging skills) have been neglected or inadequately addressed. As a result, structural adaptation of labour supply and demand has been too slow or insufficient.

While globalization and international interdependence bring enormous benefits, the necessary deregulation of parts of the international system (such as financial flows) has not been accompanied by an enhanced efficiency of the international mechanism to monitor and manage the global economy and to provide an "early warning system" to prevent and counteract imbalances. At the same time the vulnerability of individual governments has increased and the effectiveness of solitary action decreased, and the pressures have been multiplied on States which do not react in a timely fashion, or whose domestic policies appear to be inconsistent with market expectations or the policies of other States.

It would be pretentious to claim that any domestic agent or international organization possesses the ultimate answer to solving the employment crisis, or that there is a single panacea to cure it. But in view of the developments described above, it is clear that the employment challenge cannot be addressed only ex post by special measures targeted at the groups already excluded, or by any single policy intervention. The factors at the root of the imbalances are interrelated and self-perpetuating, unless the vicious circle is broken by effective policies. These must address both the conditions under which imbalances arise, and the outcomes of these by interrelated, mutually supportive measures.

It remains to be seen whether the recovery of 1994-96 will be sustained and provide a lasting reversal of unemployment trends. On the one hand, employment is now increasing faster than the labour force. On the other, joblessness is being reduced very slowly, which will leave the G7 with high rates of unemployment at the end of this century. The least competitive, vulnerable groups, which constitute the hard core of this backlog of unemployment, require special action to prevent the emergence and perpetuation of two-track societies.

The policy challenge which emerges from these developments is a double one:

how to accelerate the growth in demand for labour, without a return to inflation and macroeconomic imbalances;
how to promote the employability and reinsertion of those who are unemployed and socially excluded.

Strategies are required on both fronts. And not only for the benefit of the unemployed in the advanced economies, but also for the impetus which they would give to trade, growth and employment in developing and industrialized countries alike. At the same time, room must be created to maintain an adequate social safety net for the inevitably large numbers of individuals who will require income support for some time to come.

An effective strategy to create more and better jobs and to gear growth to improving the situation of the most vulnerable therefore requires a critical examination of these macroeconomic and structural policies and the effectiveness of micro interventions, as well as a review of the mechanisms which prevent the G7 from undertaking joint and mutually supportive action in this field. The key elements of such a strategy are examined below.

Macroeconomic policies for sustained growth

The G7 economies are clearly operating below full capacity: aggregate demand is insufficient, unemployment is massive, and inflation is at or below the levels of the 1960s. There is therefore room for some expansion without an excessive fear of resurging inflation. However, the success of macroeconomic policies in meeting the employment challenge depends not only on whether the measures have an impact on production and the demand for labour, but also on whether they are considered to be consistent and credible. Failing this, volatile capital markets will undermine any positive effects of the policy interventions, however well intended.

Within the above framework, macroeconomic policies must be based on five interrelated elements: an improvement of the international mechanism to coordinate the policies; a lowering of both short-term and long-term interest rates; a halt to the growth of public debt in the medium term, inter alia, by appropriate budgetary policies; and the pursuance of strategies that avoid wage push inflation.

First, the mechanisms of both international policy coordination and that between monetary and fiscal decision-makers must be strengthened. It is doubtful whether the international mechanisms of the management of the world economy and the institutional structures of the key authorities allow for such coordination at the moment. In the context of increased globalization and interdependence of economies, individual action by any single actor is at best ineffective, and at worst counterproductive. Similarly, the increasing complexity of societies does not allow policies to be subordinated to single objectives such as the regulation of money supply. Budgetary, fiscal and monetary decision-makers must act in concert to complement a declared and well coordinated monetary policy with a declared and coordinated fiscal policy to promote growth without excessive inflation. A coordinated recovery will have beneficial results beyond establishing credibility among the capital markets, by limiting the impact of displacement by foreign trade and national external deficits, i.e. beggar-thy-neighbour tendencies; and by reinforcing the initial expansionary effect, since growth in one country stimulates the growth of its trading partners (ILO, 1995).

Second, as regards monetary policy, it appears to be beyond doubt that given the degree of slack in the economy, short-term interest rates are still too high (see figure 5). This slows down productive investments and reduces profit margins. There is therefore room for a further reduction of short-term interest rates. However, given the high level of integration of economies, and financial markets in particular, it is necessary to coordinate action by the central banks of the G7 (and the industrialized countries in general) in this area in order to avoid excessive and counterproductive fluctuations of exchange rates.

Third, in the area of budgetary policies, an assessment must be made of whether stabilizing or decreasing public debts should be a short-term or medium-term objective and whether such stabilization should be introduced gradually while strengthening the capacity of the economy to generate jobs. Persistent budget deficits which increase the debt burden and thereby absorb productive capital from the private sector are in the long run detrimental to growth and employment. However, it is a question of finding the right timing and pace of reducing public deficits in order to counteract exclusion effectively, while at the same time enabling the economy to reach a sustainable growth path. A rapid decrease of the total public debt in a situation where unemployment is high and capacity utilization is low also absorbs resources which could be used to generate productive capacity, with a subsequent easing of debt reduction. There are thus two basic options for stabilization:

In the first option, by implementing severe budget restraint, countries create high primary surpluses (excluding interest payments) to decrease the debt burden. In this approach, where the emphasis is on cost reduction rather than income expansion, the counter-effect of debt reduction is persistent unemployment and insufficient growth. Stabilization is achieved, but at a lower level of activity which may not sustain the needed rate of job creation.
In the second option, countries try to reduce the difference between interest and growth rates by means of monetary policies globally favouring demand. It should be noted that lower interest rates also ease debt service, thereby alleviating the fiscal burden. Decreasing the public debt could moreover be facilitated both through a reduction of unemployment, which would lower public expenditure on unemployment compensation, and through higher incomes (and public revenues) resulting from increased economic activity.

The policy issue therefore seems to be not so much the level of public debt, but its growth and the cost of servicing it. While it is necessary to strive for budgetary balance in order not to increase the debt and its service, it would appear to be feasible to accept current levels of debt as a transitional phenomenon as long as economies have not achieved sufficiently high rates of growth. Beyond debt stabilization, then, debt reduction would be an objective in the medium term. It is, however, imperative to adopt a clear and declared policy towards debt reduction and introduce such policies gradually and in a coordinated way in order to convince capital markets of the sustainability and credibility of this change.

Fourth, both the credibility of fiscal and monetary policies and their room to manoeuvre must be supported by a non-inflationary wage strategy. While there is little evidence that excessive real wages as such during the last decade or so were preventing non-inflationary growth and job creation (ILO, 1995), incomes policies in the years to come must be based on moderate increases in nominal wages, which would create room for productive investments, enhance the allocation of labour from less to more productive use, and alleviate inflationary pressures. It is especially important in a situation where unemployment starts to decline, to avoid the resurgence of inflationary wage demands. A return to lasting non-inflationary growth is only possible in a context in which value added is shared in a stable manner, ensuring both price stability and the maintenance of sufficiently high profit levels of enterprises to finance investment. This can only work in the context of a sound industrial relations system. This would require a strong commitment by all the partners in the labour market to the objective of non-inflationary, employment-intensive growth and to the use of an appropriate negotiating mechanism for this purpose. If such wage strategies were successful, they would create room for monetary and fiscal policies with reduced inflationary consequences (see Chapter 9).

Fifth and last, the long-term interest rates which are the outcome of the functioning of capital markets are not directly controllable by any individual decision. Rather, they reflect the credibility of monetary and fiscal policy and are therefore heavily dependent not only upon the coherence and consistency of decisions directly related to the other variables mentioned above, but also upon the way in which this coherence, or lack of it, is perceived by capital markets. While nominal long-term interest rates have decreased over the past years, they remain high in real terms (see figure 6). This does not reflect the equilibrium between the supply and demand of assets, as demand and private consumption are insufficient and it cannot therefore be argued that there is a lack of savings in the economy. As a consequence, long-term interest rates should decline. As this is not the case, a brake is put on achieving higher rates of growth. It is therefore imperative to achieve a reduction of long-term interest rates in real terms. The current high levels are, however, due to fear of resurgence of inflation in the medium term and a lack of trust in the capacity of economies to maintain sustainable monetary and fiscal policies.

However, while the consistent and coordinated macroeconomic strategies defined above will create the conditions for higher and more sustainable growth, supporting structural and sectoral policies will be required to make growth more employment intensive. Furthermore, policies and programmes specifically targeted at the groups at risk will be required in order to improve their interaction and combat exclusion.

Structural policies with an impact on the overall functioning of the labour market

There is a whole range of measures affecting the functioning of the labour market and providing an enabling environment for translating growth into employment, in which public policy has a role to play. These include the promotion of enterprise creation through appropriate support structures, incentives, access to credit and the improvement of infrastructure as well as a review of the regulatory mechanism. They also cover an appropriate technology policy to enhance R&D and the promotion of competitiveness through access to new production techniques. Other elements are regional policies and local adjustment strategies to promote structural change and prevent displacement and marginalization.

The following paragraphs will focus only on three types of supply-oriented policies which provide a counterweight to macroeconomic policies and are perceived to promote employment and therefore attract much interest in the current debate. These are training, social expenditure and working time arrangements.

7.1 Investment in human resources

Continuing deregulation aimed at increasing the so-called numerical flexibility of the labour market (fixed-term work, separation rules, etc.), combined with an increased economic flux and decreasing expenditure, tends to increase polarization in the labour market, which may make it more difficult for vulnerable groups to maintain a foothold. At the same time, the regulatory system governing, inter alia, access to social protection, the accumulation and transferability of occupational pensions and the acquisition of seniority has not adequately taken into account structural changes in the labour market, which are evolving towards an increased use of atypical work contracts, part-time work, telework and homework. Such gaps prevent both workers and employers from making full use of the positive potential of the changing nature of work, and at the same time fail to provide adequate security and protection to the individuals concerned.

On the other hand, policies promoting functional flexibility have still not received sufficient attention. Such policies place a premium on human resources development and especially on education and training. All the available evidence shows that training not only promotes reinsertion but also prevents marginalization. Furthermore, the competitive advantage of industrialized countries in a globalized economy will increasingly lie in a high-productivity, high value-added workforce that can produce quality products for higher-priced market niches; this implies the continuous formation and utilization of "intelligent labour" based on knowledge, innovation and technology. However, it appears that the training effort is insufficient in all G7 countries. Therefore, if human resources development is to meet the twin objectives of economic efficiency and social integration, a number of conditions have to be fulfilled and renewed efforts undertaken to ensure that training outputs meet the needs of the labour market.

First, primary and secondary education, vocational training and targeted labour market training for the vulnerable (for the latter, see section 8.1) must be mutually supportive. Beyond transmitting cultural values and civic skills, the performance of the educational system must be gauged on the basis of whether it has enabled the individuals to learn how to learn rather than merely learn to know; opened horizons rather than narrowed down the choices; created a sense of adaptability rather than fixed competence. Educational systems must also create a broad understanding of the world of work and promote an entrepreneurial climate, which requires a closer interaction between schools and business in curriculum development and providing packages for transition from school to work. There must also be a closer interaction between the business community and post-graduate education. Many countries are experimenting with university programmes providing on-site business development training. This not only improves the matching of high skills with emerging new jobs but enhances the competitiveness of enterprises and the economy as a whole. Improving the performance of the educational system along these lines is a necessary condition for a successful delivery of vocational training and the other components of human resources development.

Second, as the new entrants on to the labour market represent only 1 or 2 per cent of the stock of the labour force, the bulk of the structural reforms needed to combat marginalization and enhance competitiveness must be undertaken within the labour force at hand. This lays a heavy burden on the vocational training systems. Rather than sporadic training, the focus must be much more on a continuous upgrading of the labour force. This puts a premium on lifelong learning and the alternation of work and training as well as training at work. It is highly desirable for public policy to support this development through an enabling regulatory system and the provision of incentives for paid educational leave.

But, in order to be effective, the vocational training systems also have to be brought closer to the world of work. It is well known, for example, that countries with well developed apprenticeship systems tend to have lower youth unemployment rates. For the adult labour force, training delivery through public or private vocational training institutions is increasingly being replaced by enterprise-based training or a combination of both. In order for the potential of this development to be fully utilized, enterprises must no longer consider training as an externality but as an integral part of their investment decisions. This requires the setting up of appropriate incentive structures. Many countries have been developing such schemes. The Australian "training guarantee scheme", with tax benefits to enterprises for training, is a case in point.

Third, the content of training must be brought in line with the needs of the labour market. Beyond the seemingly trivial conceptual issue of whether training is considered as part of an educational policy or an employment policy looms the question of how to bridge over the often sub-optimal compartmentalization of public administrations and manage an efficient identification of training needs and objectives. Training cannot just be a way of hiding unemployment; a special effort must be devoted to developing indicators to monitor the changing skill requirements and to making the training systems flexible and responsive to new and emerging jobs. The responsiveness of the training systems, in turn, is dependent not only on their "de-institutionalization" but on the quality and upgrading of the skills of the trainers, to which a special effort must be devoted.

Fourth, the improvement of the quality and effectiveness of training calls for a redefinition of new and complementary roles and responsibilities for the stakeholders: the State, the private sector, and the individuals who are supposed to benefit from training.

Priority areas for partnership between the State and the enterprises are: (i) training policy and system development, in which the government is responsible for promoting tripartite dialogue on training and for creating the enabling environment for enterprises to participate; (ii) financing of training through fiscal incentives for enterprises to add their contribution to the government's resources; and (iii) delivery of training, which is more and more being successfully transferred to enterprises on their own or in joint ventures with schools and training centres. Enterprises' involvement guarantees closer adaptation to the requirements of markets and a better quality of training, while the State oversees the long-term interest of society and equity concerns.

Individuals are the main architects of their own competencies and no training system can substitute for their own capacity and responsibility in making their choices to acquire them. Nevertheless, individuals will only invest in their own training if certain conditions are met, namely a diversified supply of training offering multiple combinations, information and guidance services, access and financial support for initial and recurrent training, recognition of skills' value and certification of competencies formally and informally acquired, and, most crucial, good prospects of employment and income.

Consideration must be given to the role of government in counteracting market imperfections which may result in under-investment by enterprises and individuals in training. The lack of incentives may be caused by distortions preventing enterprises from paying lower wages to trainees, low wage rates which do not encourage individuals to pay for training, or risks and uncertainties about whether trained workers will remain in their jobs.

Fifth, public policies should also be designed to remedy and complement insufficient funds for training, to support types of training which require a high level of investment, to promote research and development, to provide technical support services and evaluation, to make up for a weak capacity for the private provision of training — particularly among small- and medium-size enterprises — and to fill the gaps in access for the young, the unemployed, displaced workers and disadvantaged groups.

7.2 Decreasing the tax wedge and the poverty trap: The delicate issue of social charges

An important adverse effect of high social charges is that they drive a wedge between the formal and informal components of the labour market (particularly in low-paid jobs because of contribution ceilings), causing demand for labour to shift to those jobs and occupations where social charges can most easily be avoided rather than to the jobs which are most productive or profitable. The development of an informal or clandestine labour market has been an issue of concern for some time now, not only because of the productivity and revenue losses involved but also because in some areas, and for some contingencies, non-compliance with the established rules leads to a loss of social entitlements.

In addition, high taxes on labour and the structure of taxation have a negative impact on employment by introducing an excessive distortion between the cost of the labour to the enterprise and its social cost for the nation. This distortion is harmful during periods of widespread underemployment because enterprises will be inclined to make socially inefficient choices when opting to produce or not to produce and when selecting more or less capital-intensive production techniques.

Thus it is desirable to reduce the cost of labour in terms of a constant purchasing power of wages. This reduction could be specifically targeted on the groups in the lowest skill and wage segments of the labour force, as unit labour costs (rather than wages per se) seem to penalize particularly the use of such workers (the tax wedge) and influence adversely the individual preferences in the lower-income segments between earned income and reliance on social benefits. It seems therefore generally accepted that the tax wedge should be decreased as it is applied to workers with a high risk of exclusion at the low-skill and low-wage end. The results will, however, depend on what element of the decomposed tax wedge is being used for this purpose. Decreasing the employers non-wage contribution may simply lead to wage slides and few new jobs will emerge. Decreasing the wage-earners tax may require long delays until the cut works its way to new employment demand, but may on the other hand decrease the propensity to work in the "black economy". Decreasing the consumer tax will have a differential impact on employment depending on its effect on the composition of consumer demand. The adverse impacts may be avoided if the tax wedge cuts are targeted on those jobs which are close to the effective minimum wage.

But for the effects of such measures to be neutral as far as public revenue and expenditure are concerned would require compensating adjustments to taxes levied on other groups of income earners, or on energy or capital. And action via social charges needs to be weighed against alternatives such as the direct subsidy of employment.

In countries where wage dispersion has increased, the low level of earnings at the bottom of the scale poses two problems: the emergence of a large category of poorly paid workers accentuates poverty and the rift in society, and unattractive wages deplete the supply of labour. The latter phenomenon is particularly disturbing if the net income of less skilled workers does not visibly improve as they return to work because the difference between their low and heavily taxed earnings and their overall entitlements when unemployed is too small. Countries in this kind of situation are faced with the dilemma of having to curb poverty among low-income workers and the unemployed while at the same time providing more incentive to work. Reducing social benefits does induce more workers to accept a job, but it also spreads poverty. The solution of course is to raise the net wages of workers at the bottom of the scale. One way of doing this is to lower the effective level of taxation of the lowest wages by fiscal devices such as negative income tax or tax credit systems, along the lines of the "earned income tax credit" of the United States or the "family credit" of the United Kingdom. Here again, though, as with the reduction in social charges on low wages, the question is how to finance these measures.

7.3 Reforming and restructuring working time

Historically, there has been a decreasing trend in weekly, annual and lifetime working time. In the first place, this trend has been motivated both by improvements in the welfare of workers and by their interest in taking part of productivity increases and corporate profits in the form of increased leisure rather than increased nominal wages.

Parallel to this decrease, there have been secular increases in delayed entry of youth into the workforce, in early retirement (reflected in the decreasing participation rates of older age-groups referred to above), and in part-time employment, which reflects structural change from manufacturing to services (where the incidence of part-time employment is higher) and the massive entry into the labour market of women, who have combined part-time work with family responsibilities. These developments have, in fact, marked a major change in the organization and length of working time. They have also brought issues related to equal treatment into the debate beyond employment and working conditions as such.

A third phenomenon is the increasing disaggregation in the duration of work and the growing diversity of working time arrangements reflecting the introduction of new technologies, individual worker preferences and the increasing need for a flexible organization of production in order to remain competitive and cater for changing demand patterns. Flexi-time, shift work, compressed work weeks, staggered hours, hours-averaging schemes, and time-autonomous work groups do not only tend to combine "just-in-time production" with "just-in-time workers"; they also tend to blur the traditional, standard work-week and replace it with a myriad of different working patterns. Furthermore, beyond the general trend of decreasing working time, sectoral analysis shows a variety of developments across the G7. In some sectors working hours have actually increased over the last 15 years. While total employment in the manufacturing sector is declining in all G7 countries, annual hours of work in this sector have increased in Canada, Italy and the United States, almost 120 per cent in the latter. This may be due to the "working poor" phenomenon, which obliges workers to work for longer hours to maintain consumption levels, or to an increased use of overtime by the enterprises in this sector.

Is it in these circumstances possible and feasible to use working time arrangements as an employment-generating instrument, and is it feasible to coordinate this internationally?

Collective agreements at the enterprise or industry level that link working-time reductions and more flexible working-time arrangements with employment levels, wage moderation and productivity increases, have been motivated by the employment crises. Their success as a means of creating a net addition to employment has been questioned, but they at least contribute to the maintenance of employment levels in the industries and enterprises concerned. Their success is related to the internal solidarity and the bargaining power of the workers employed in those industries and the fact that they are prepared to accept a partial cut in income. The fact that negotiations over working time are being related to a broader set of issues can enhance both their acceptability and their employment impact.

Modest overall decreases in working hours, such as in France in 1982 when the work-week was reduced by law from 40 to 39 hours and a mandatory fifth week of vacation was introduced, have shown limited or negligible results in terms of new jobs created. Employers have tended to react with productivity increases or an absorption of excess workers rather than new recruitments.

Similarly, restrictions in the use of overtime for reasons of creating additional jobs have, according to a number of studies, tended to result in decreased flexibility of enterprises to respond to changing demand or simply in a cut of production rather than new jobs, inter alia, because it may have been difficult to find the requisite skills to handle the tasks performed by overtimers.

Some lifetime working-time arrangements have also provided mixed results. Early retirement schemes which reduce labour supply, even when they are implemented with the objective of providing younger groups with better access to employment, have proved to be irreversible and costly for the public purse.

Reorganization of working time through teamwork, staggered hours, hours-averaging schemes, etc. have advantages in terms of economic efficiency and flexibility, although care must be taken that this is not at the cost of workers' protection and autonomy. Many countries are also experimenting with schemes combining assistance for long-term leave (sabbatical, parental leave, etc.) with a substituting recruitment of replacements from among the ranks of the unemployed. These measures, while not necessarily leading to direct additional employment, have the combined effect of reducing the labour supply, providing access for the unemployed to the labour market, and increasing the quality and productivity of the labour force.

Four main conclusions seem to emerge from the analysis and experience summarized above:

Voluntary agreements between the social partners on the reduction of working time may be useful as a strategy to protect the jobs of workers in particular sectors who are prepared to accept greater wage moderation. They may also in some cases be used to provide additional employment in enterprises, at constant production cost. Such agreements are, however, perhaps most efficiently managed through bipartite negotiation among the parties concerned.
Mandatory incremental working-time reductions through legislation have tended to produce only marginal results in terms of overall levels of employment, although they may be motivated on grounds of working conditions.
While some theoretical simulations of major overall working-time reductions, of the order of 10 per cent or more, point to a net positive impact on employment, it is doubtful whether this would materialize in a real-life situation because of the major socio-political prerequisites they imply. It would be important to ensure, among other things, that neither production costs nor overall demand are affected. Moreover, they require a corresponding restructuring of production, a strong involvement of the social partners and a social consensus in order to benefit the vulnerable groups excluded from the labour market.
The increased diversification of working-time arrangements suggests that there are powerful reasons for opting for other than regular full-time employment in a number of activities. Reorganization of production,with corresponding innovations in working-time arrangements, offers potentially positive benefits in terms of the efficiency of the economy and of increased options for the workers. However, in order to enable them to reap those benefits and avoid social costs, there is a strong policy interest in monitoring and adapting the labour market in such a way that increased flexibility is combined with worker protection and security.

Specific policies and programmes targeted at improving the situation of vulnerable groups

The macroeconomic and other policies described above will create room for an expansion of employment, on the one hand, and improve efficiency and the functioning of the labour markets, on the other. Yet, given the time lags involved to make the impact of such policies felt, and given the large backlog of unemployment, it is unlikely that all of the excluded will be provided with access to the jobs they need over the next few years. A range of selective measures are therefore required which are consistent with the macroeconomic objectives and which are geared towards the reinsertion of the vulnerable groups while maintaining an adequate level of social protection.

How to target these measures is the key issue, which raises a number of difficult but unavoidable policy choices:

The choice between reinsertion and solidarity. How to identify those groups/individuals who have a capacity and potential to be reinserted, and those who require social solidarity in terms of continued income support.
The choice between incentives and sanctions, or "carrots" and "sticks". Incentives and programmes should not be wasted on individuals who do not need them (dead-weight, creaming) or do not have the capacity to benefit from them. Nor should sanctions be used against those who cannot respond. A tightening of the eligibility criteria, reducing benefit levels and replacement rates and shortening the duration of benefits may foster job search and mobility for some; for others they may merely result in a move into other benefit programmes. Thus they may not really improve the functioning of the labour market nor ease the fiscal burden of the government.
The choice between preventive action and remedial support. For instance, how effectively can continuous training and upgrading of skills create safety nets against unemployment? How much can the efficiency of local adjustment strategies be enhanced by preventive action within enterprises with the involvement of the social partners concerned?
The choice between action with immediate effects and programmes with a longer lead time.
The choice between measures affecting labour supply and labour demand.

These choices are not always mutually exclusive. Just as the distinction between "active" and "passive" labour market measures is in real life often artificial and just as benefits have to be combined with reinsertion, the policy choices below are a matter of degree of policy orientation.

Recent research results covering the industrial countries suggests that labour market policy programmes were successful in reducing structural unemployment during the period of strong employment growth in the OECD area. Especially training programmes and public employment service seem to have had mutually enforcing employment effects during that period. There is also evidence (Robinson, 1995) of the beneficial effects of improved placement and job search assistance. The results are, however, mitigated during periods of slow growth and high unemployment.

8.1 Targeted training programmes

In most OECD countries so-called labour-market training programmes, supported partly or totally by the public purse, have been developed with the specific aim of improving the quality of labour supply and reinserting displaced or vulnerable groups into the labour market. The G7 countries devote between 25 and 55 per cent of their labour market expenditure to such programmes (see figures 7 and 8).

While there is little support for the view that untargeted or broadly targeted training programmes would have significant beneficial effects on the future employment of the participants, smaller programmes aimed at groups facing only moderate problems in the labour market have been found to yield positive results (OECD, 1993). Thus, in an experiment in New Jersey covering a large-scale training programme and additional assistance in job search, the latter was found to have positive effects on employment and earnings, whereas training had no additional effect. In the United Kingdom, significant positive effects were recorded in a relatively small-scale training opportunities programme in the mid-1980s. An ILO study found that the British youth training schemes enhanced the young participants' prospects of receiving a job offer and also made their earnings expectations more realistic. However, caution must be expressed as to possible dead-weight effects; some of the objectives might have been reached by more cost-effective measures.

The fact that the impact of training and other labour market programmes correlates strongly with cyclical factors is demonstrated by the case of Sweden where, in 1989, three-quarters of the participants completing a labour-market training programme were employed within a period of six months. By 1993 this figure had fallen to just 25 per cent. While these figures cast some doubts as to the employment effects of training programmes, they also pose a challenge to design and target them in such a way that they meet labour market requirements and focus on groups that are in need of them and can benefit from them.

8.2 Public employment schemes and subsidized employment

While training programmes have an impact on the quality of labour supply, demand patterns can be influenced by subsidized employment and relief work. A vast literature exists on the possible macroeconomic impact — and also on the micro-economic dead weight and displacement effects — of marginal wage subsidies, relief work and public investment with quotas for the employment of targeted groups of unemployed jobseekers. Thus, it is argued that employment in public services or public procurement are more expensive than wage subsidies as a means of creating employment. On the other hand, tax-financed expenditure programmes often involve a redistribution of personal consumption which may have a smaller negative effect on, for example, imports, whereas an expansion of market sector production, which is inherent in a wage subsidy, will inevitably lead to higher imports and to unfair competition between those enterprises which benefit from it and those which do not. Marginal employment subsidies may increase the labour intensity of employment and encourage some switching towards domestic production, but they may still be insufficient to permit the desired expansion of employment without balance of payments problems intervening (Glyn and Rowthorn, 1994).

As regards dead weight and displacement effects, in Sweden for example they amounted to 60-70 per cent of the gross employment generated in construction, according to an OECD survey (OECD, 1993). There was little evidence of such effects in more welfare-oriented programmes. Yet, adult participants in relief work schemes in Sweden were not significantly more likely to find a regular job than the openly unemployed. The survey also found that wage subsidies to private sector employers to hire unemployed workers had a combined dead weight and substitution effect ranging between 76 and 95 per cent.

However, measures affecting the demand of vulnerable groups should not be dismissed merely on the basis of displacement and dead weight problems identified in past programmes. While such programmes do not seem to provide desired results as isolated instances they can be a useful tool for providing less competitive groups with a hold on the labour market as part of a carefully designed, tailor-made and well sequenced strategy of combating exclusion. The lessons to be drawn from evaluations of impact, such as those referred to above, are that subsidized employment programmes must: (i) be closely targeted; (ii) carefully monitored to avoid dead weight and substitution effects; and (iii) combined with elements of training and follow-up in terms of placement assistance. They also must (iv) be time bound, thus avoiding the creation of groups or individuals that are dependent on permanent subsidies to remain employed.

8.3 Local initiatives

All countries have in recent years experimented with various programmes supporting local employment initiatives to combat exclusion. These range from using time-bound equivalents of unemployment benefits to financing self-employment and micro-enterprise creation and subsidizing socially useful services, environmental work or local community groups. While not a panacea, such programmes contain many promising elements. Beyond the economic argument of both increasing local supply and satisfying unmet local demand, there are social arguments for increasing the viability of local communities and promoting solidarity among their members. Ideally, the role of the public authorities would be to allocate seed money, provide for capacity building and create support structures.

Experience has shown that, if appropriately monitored, decentralized delivery and "self-management" of labour-market policy programmes increase both their cost efficiency and their employment impact as compared with centrally delivered programmes. Developing public/private partnerships by involving civil society and consulting the social partners at the local level helps to match the needs of the unemployed to prevailing labour market circumstances. For example, in Denmark an earlier system of regulations governing unemployment benefits has been replaced by a new system based on a series of regional councils composed of the social partners and local authorities. These set guidelines for the functioning of the employment service. Each Council has a fixed budget which the employment service can spend on various programmes. The needs of the unemployed are set out in written individual action plans. Entitlement to unemployment benefit is time-bound and split into two parts, and comprises the right to one year of employment and/or training. The second part of the entitlement to unemployment benefit places a more stringent obligation on the unemployed person to accept job/training offers. The system described above includes an educational leave scheme whereby a person taking such leave receives compensation equal to the unemployment benefit, while the employer is compensated if he or she recruits a replacement from the ranks of the unemployed.

Solidarity at the national and international level: The case for social dialogue

In the world of increasing interdependence of national economies, complex labour markets and widespread disillusionment about the impact of past policies on unemployment, the success of any strategy to combat exclusion, and promote employment and growth will depend on the ability of the government to secure broad-based support for the chosen package of economic policies. The interplay of relevant players at the local, national and international level will exert a powerful influence on public perception of both the macroeconomic framework and the labour market policies being pursued. The achievement of a genuine consensus on the appropriate components of the economic strategy would be desirable. In the real world, however, this is not always politically attainable. Nevertheless, governments can maximize support and encourage influential groups in society to adopt sectional policies that are broadly consistent with the chosen economic course. The involvement of representative organizations of workers and employers in a dialogue with government about economic and social issues could contribute to this goal. Tripartite dialogue will enhance the acceptability of measures and help focus scarce public resources on those most in need. It will also increase the sustainability of reforms, thereby having a beneficial effect on investor confidence and volatile capital markets.

In fact, many OECD countries are already drawing on the strength that social partnership can bring to the difficult task of balancing economic and social policies. Recent examples, like the tripartite round-table discussions in Germany, demonstrate how governments have turned to unions for support in establishing an overall agreed framework for pay rises, working-time arrangements, training and other productivity enhancing measures. "Social pacts" in other industrialized countries have contained the necessary accompanying measures to stabilize inflation, exchange rates and budgets and to promote more and better jobs. Even greater reliance on this type of tripartite partnership may be desirable in the future. The successful implementation of the expansionary macroeconomic policies advocated in this document, without dissipating the benefits of faster growth in a destructive struggle over income shares rather than increased employment, will require a strengthening of social dialogue.

The exact form of social dialogue varies from country to country and depends on the institutional arrangements and historical trends in the country concerned. For example, in some countries attempts are being made to promote national-level negotiations between the government and the social partners in order to ensure that the macroeconomic implications of any wage bargains, or other changes that affect labour costs, are fully considered. Given that avoiding the re-emergence of a wage-price spiral or any significant decrease in profit shares is an essential precondition for an easier demand policy designed to reduce unemployment substantially, this is probably best handled at a national level. Mass unemployment is a national problem; it is not inherently an issue in negotiations at the level of the firm or industry. Normally, in more decentralized negotiations workers and their representatives will tend to focus on having wage increases and levels in line with those of other groups, on keeping abreast of the cost of living and on sharing in improvements in prosperity and productivity. In the case of nationwide agreements the need for moderation in labour costs may be more easily accepted without having to resort to labour market deregulation or restraints on aggregate demand. Such negotiations can therefore produce greater macroeconomic labour cost flexibility and an improved inflation/unemployment trade-off.

However, in order for these nationwide approaches to be successful, three essential conditions need to be met. First, employer and trade union organizations need to be convinced of the need to give priority to national macroeconomic problems over their more specific concerns in their respective sector of activity. Second, there must be sufficient common understanding both within and amongst the central organizations and the government on basic economic and social issues to enable them to reach compromise agreements on appropriate wage adjustments or other changes that affect labour costs and employment at the national level. For example, this might result in the acceptance of wage restraint in return for tax concessions or other improvements in the social wage and/or commitments from employers about job security or investment levels. Third, the central organizations of employers and employees must be able to demonstrate convincingly to their affiliates or rank and file the benefits they continue to derive by conforming to the undertakings entered into.

Even those countries with the necessary institutions and considerable experience in operating a centralized approach have encountered difficulties in meeting all these requirements over prolonged periods. For those countries which do not have the basic institutional requirements this model is bound to appear untenable. However, even in those countries where there is no realistic possibility of elaborating a comprehensive "social pact", it would still be reasonable to expect two worthwhile results from non-binding national tripartite consultations. First, there may be a heightened appreciation of the need to work constructively together to meet the challenges confronting each country; second, there would be an increased likelihood of all parties tailoring their expectations and claims upon the community's resources to the capacity of the economy concerned, and to the requirements for faster economic growth and greater prosperity.

Such an approach would be in line with the ILO principle of tripartite consultation and cooperation for the promotion of mutual understanding. An aspect of these discussions could be the linkages and possible trade-offs between wage adjustments; reductions in standard working hours or overtime; more flexible working-time arrangements, including part-time work; measures to promote productivity; as well as training arrangements and policies to enhance human capital. Dialogue of this nature could help precondition collective bargaining at the industry/enterprise level and encourage the partners involved at the local level to consider innovative strategies and trade-offs while also making the outcome of decentralized bargaining more sensitive to prevailing macroeconomic conditions. The advantage of this approach is that the flexibility to tailor arrangements to the individual industry or enterprise is maintained and greater emphasis can be placed on productivity improvements while still providing some insurance against inflationary outcomes from the decentralized bargaining process. However, to capture the interest and support of the social partners and exert real influence over the decentralized bargaining process, the national consultations should not be restricted to the contribution which wage and salary earners can make to improving macroeconomic performance through reduced labour costs. Taxation and other matters of public regulation may be involved. These include the financing and administration of social security, the functioning of employment services, concern with vocational training, legal rules concerning job security and working time, the promotion of private investment and the best direction of public investment, competition in markets for goods and services, prices charged by public utilities, etc. All these, and other questions of government policy as well, affect both employers and trade unions.

In addition to promoting a national industrial relations environment that is conducive to the macroeconomic and labour market policies suggested in this document, there may be merit in facilitating greater social and economic dialogue at the international level. It is now becoming more widely accepted that closer collaboration be promoted between international agencies with a broad social vocation, such as the ILO and the international financial institutions and the WTO. Such collaboration would also make it possible for employers' and workers' organizations, through their participation in the ILO, to be involved in a closer working relationship with the major international economic organizations, and could be a vehicle for discussing and seeking support — at the international level — for wage and employment policies that enjoy broad tripartite support and are compatible with coordinated macroeconomic expansion.

References

Bazen, Stephen; Benhayoun, Gilbert. 1995. "Minimum wage protection in Western industrialized economies", in G. Standing and D.V. Whitehead (eds.), Minimum wages in Central and Eastern Europe: From protection to destitution. Budapest, CEU.

Card, David; Kruger, Alan, B. 1995. Myth and measurement: The new economics of the minimum wage. Princeton, New Jersey, Princeton University Press.

Eatwell, John. 1995. Disguised unemployment: The G7 experience. Geneva, UNCTAD Discussion Paper No. 106.

European Commission. 1995a. INFORMISEP, No. 49, Spring, Brussels. ---. 1995b. Employment in Europe. Brussels.

Freeman, Richard B. 1994. "Minimum wages — Again!", in International Journal of Manpower, Nos. 2-3, 1994, pp. 8-25.

Glyn, A.; Rowthorn, B. 1994. "European employment policies", in Michie and Grieve Smith (eds.), op. cit. pp. 118-206

ILO. 1995. World employment 1995: An ILO report. Geneva. ILO 1996. Employment policies in a global context. Report V, International Labour Conference, 83rd Session 1996. Geneva, forthcoming.

Michie, Jonathan; Grieve Smith, John (eds.). 1994. Unemployment in Europe. London, Academic Press.

OECD. 1993. Employment Outlook. Paris.

---. 1994. "The OECD jobs study: Evidence and explanations", Parts I and II. Paris

---. 1995a. "Economic Outlook", No. 58, Dec. Paris.

---. 1995b. "Employment Outlook". Paris.

---. 1995c. "Adaptability versus flexibility", Paris. Trade Union Advisory Committee to the OECD.

Robinson, R. 1995. "The decline of the Swedish model and the limits to active labour market policy". London, LSE, Centre for Economic Performance, Discussion Paper No. 259, Aug. 1995.

Globalization and Workers' Rights
HOME GLOBALIZATION NATIONAL FRAMEWORK MULTINATIONALS INVESTMENT FUNDS INTERNATIONAL LABOUR LAW CODES OF CONDUCT FOR MULTINATIONALS CORPORATE CODES OF CONDUCT LABOUR MARKET TRENDS AND GLOBALIZATION'S IMPACT	International Labour Office Bureau for Workers' Activities CH-1211 Geneva 22 Fax: +41 22 799 6570 ACTRAV Homepage: http://www.ilo.org/actrav/