EMPLOYMENT AND DEVELOPMENT IN OECD COUNTRIES

Revision of a paper presented at the Friedrich Ebert Stiftung’s International Conference on Employment and Development - Europe and Southeast Asia

Bali, Indonesia 25-26 November, 1996

Andreas Botsch^*

The Trade Union Advisory Committee

The World Economy on the Eve of the Third Millennium
A new Social Contract ?
Identifying the Problems of Globalisation
Economic Policies for Growth with Equity
Employment and Labour Markets
Technology, Productivity and Job Creation: The knowledge-based economy
Adaptable Labour Markets and the Quality of Jobs, Wages and Skills

The World Economy on the Eve of the Third Millennium

At the end of the 20th century, the world economy is at cross-roads. For the first time in decades, cyclical conditions in the whole of the OECD area are converging on a path of low growth and low inflation. Inflation in OECD countries is at its lowest level for decades, standing at 1.7% on OECD average and reaching record lows in absolute terms in many OECD countries. In Japan and continental Europe, substantial output gaps have kept inflationary pressures in check. Despite of continuing expansion of the US economy and the lowest unemployment rate since 1973 there are no convincing indications that inflation may be rising in the short term. Corporate profits have risen to record highs, yet no country is achieving the growth, employment, and social progress demanded of them. Real wages are depressed, poverty and social discord are increasing. In Europe, high real interest rates, public expenditure cutbacks and labour market deregulation have led to depressed investment and consumer demand, growing insecurity and fear of the future. Governments in the three economic regions of the OECD have embarked on a course of fiscal consolidation at the same time. These elements risk triggering a new recession.

"Shareholder values" have found their way in each day's press headlines. Financial markets react negatively at good job creation figures in the United States citing inflation fears, even though inflation is at its lowest level for decades. Corporations' stock values rise when they lay off staff and fall when they recruit staff. Stockbrokers are giving advice to their customers investing in equity under the motto: "people and profits don't mix" There is much talk of incentives as a means to improve economic efficiency. When applied to top management this means stock options and golden handshakes. But when applied to the weakest in society it means cuts in unemployment and welfare benefits and reductions in the minimum wage.

Table 1: Real GDP growth in OECD countries

Annual percentage change

Source: OECD

There is also a risk of polarisation between countries. In developing countries a few have enjoyed rapid industrialisation yet more than one billion people live in poverty and one third of the world's labour force are unemployed or under-employed. Basic worker rights are denied especially in the growing number of Export Processing Zones. Fiscal austerity in the aid donor countries has reduced official development aid flows as a proportion of GNP to record low levels and aid is being replaced with private investment flows which have doubled over a period of just three years. Private investment has been concentrated on a limited number of relatively rich (high or middle income) countries with fast economic growth. Investment for the few, however, does not replace official aid for the many. The poorest are being bypassed, they remain trapped in poverty, famine and ethnic conflict.

The multilateral trade and investment system which governs the world economy is perceived by many as a threat not as an asset. Working men and women and not just financial markets need confidence in the future through the credibility of policies. The OECD and the international institutions face a critical period. A system of global economic governance is not yet in place so as to balance global markets and add a social dimension to international economic integration.

The industrialised countries must implement a strategy to expand growth and relink economic and social development. They must create more and better quality jobs, prepare workers for those jobs and protect the worse off and most vulnerable in society. In several European countries trade unions have taken the lead in proposing and negotiating employment pacts, yet these negotiations are in crisis. Employers, governments and central banks must now accept their responsibilities in partnership with labour. Failure to do this may lead to a popular backlash against globalisation.

A new Social Contract ?

Despite of their different historical backgrounds and cultural differences, OECD economies have experienced a tendency of growing economic convergence and integration. The founding members of the Organisation expressed their objective in Article 1 of the Convention (1960) to promote policies designed "to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy". The Preamble of the Convention talked of the need for Members to consult and co-operate "to promote the highest sustainable growth of their economies and improve the economic and social well-being of their peoples". At the heart of this mission lies the imperative to keep in harmony and balance the three poles of a triangular paradigm, namely economic growth, social stability and political stability.

The elements of this paradigm are broad and encompass all aspects of our lives:

Economic growth, the product of a climate where goods and services are able to be readily converted to capital, and capital, united with innovation, is in turn reconverted into goods and services in the continuing spiral of wealth creation;

Social stability, which demands that economic opportunities and rising living standards and quality of life are perceived to be equitably shared in each society; this is not just an issue of the distribution of income and wealth but also the distribution of education provision, employment and job opportunities, earnings opportunities (and the chance to be upwardly mobile), access to health care, and a clean, healthy environment, as well as intergenerational equity;

Political stability, the product of a stable and effective system of democratic governance providing a consistent public policy environment, which is supportive of the first two elements and ensures an even-handed brokering of competing interests in societies based on political pluralism, the respect of human rights and the rule of law.

Maintaining an equilibrium among these three elements of the paradigm has been the core of the economic development strategy in the industrialised countries after the Second World War. The post-WW II social contract with workers (and organised labour) consisted in full employment, comprehensive social welfare and the prospect of ever-rising living standards for future generations. Today, OECD societies are running the risk of a breakdown in the balance, which in turn would lead to a collapse of the model, a backlash against multilateralism and a surge of economic and political nationalism. It is therefore imperative to identify the problems arising from international economic integration or globalisation.

Identifying the Problems of Globalisation

"International economic integration is not some uncontrollable fact of life, but has deepened because of a series of policy decisions taken by the major industrialised powers (...)" (Ethan Kapstein (1996))

There are both macro- and micro-economic forces driving globalisation today. One factor has been the move to deregulate markets in the late 1970s. A second factor is the globalisation of financial markets, facilitated through service and product market deregulation and advanced information and communication technologies. This is the principle cause of the continuing loss of national sovereignty in economic policy making. According to figures of the Bank for International Settlements, some $1.4 trillion US dollars in foreign exchange transactions are floating around the globe per day, or the equivalent of 100 times the value of all trade in goods and services. A third factor is the opening of non-OECD economies in Asia, Latin America and eastern Europe, to market forces. The forth factor has been the rapid diffusion of new microelectronics-based information and communication technologies, facilitating global sourcing and production and enhancing competitiveness. Charles Oman points to these four factors as the key driving forces of the current - third - wave of globalisation.

In addition to these elements, I would point to the rapid growth of foreign direct investment (FDI) which has grown four times as fast as GDP and three times as fast as trade over the last decade. Inflows of global FDI in 1995 increased by 40 per cent to reach $315 billion, a third of which flew into developing countries ($100 billion). There are around 40,000 multinational enterprises with more than 300,000 foreign affiliates employing directly more than 80 million people world-wide and an unknown number indirectly through sub-contracting.

Significant parts of OECD populations perceive that "something has gone wrong" with the world being shaped by global market forces. A gulf is appearing between on the one hand, the interests of narrow elites, and on the other hand, the interests of the rest of society. The former appear to be detaching themselves from society and their responsibility to it. The latter see themselves and their families as losers in the globalisation process. This is leading to an erosion of social cohesion and social responsibility. This is at the root of the breakdown in the balance in the "triangular paradigm". Governments everywhere in the OECD area are telling their workers that they can no longer afford the post-war deal and that they must minimize their obligations. Governments themselves have come under "globalisation stress".

Increasingly trade unions are finding that in their relations with governments and in their relations with the employers, the actions of the negotiating parties are likely to be constrained by the international situation far more than before. With regard to government action whether it be in setting tax rates, economic policy management, interest rate policy or exchange rate policy, international constraints are increasingly cited as reasons for the inability of government to fulfil the tasks that trade unions naturally look to it to fulfil. With regard to the employers, their attitude to trade unions generally, their policy towards labour costs and their attitude to technological change and work organisation are again increasingly dictated by international competitivity and international trends.

The result is relentless competition in a footloose international production system where capital is mobile and labour is not. Trade union members feel the impact of international economic developments more directly than at any time in the recent past. Hard fought gains or difficult sacrifices can be swept away overnight by volatile decisions of financial markets. Multinationals increasingly threaten to relocate production in their negotiations with trade unions. This is increasingly creating an imbalance of relative power of unions and employers in the labour market. At the same time many of the policies to which trade unions looked to governments to fulfil are being undermined. The reappearance of neo-liberalism and conservative economic theory as a predominant economic creed in the 1980's and its continuation in the 1990's has given ideological encouragement to this process.

Yet it would be misleading to attribute these problems solely to globalisation. It is also wrong to assert that globalisation prevents an effective policy response by governments if political will is present. The catchword "globalisation" is being used by many employers to falsely claim that, despite their own soaring profits, living standards must be lowered to be "competitive". It is being used by some governments to plead an inability to act. As a result a form of policy paralysis has set in. Yet the global economy can only function with domestic support. Market economies need to be appropriately governed if they are to function effectively in meeting the expectations of their societies. This is true in a global environment even if the means may differ. Public confidence in the legitimate role of the state has to be restored. It has to be a counterweight to what the French President Jacques Chirac has called the "pensée unique" of much of the thinking on globalisation.

Economic Policies for Growth with Equity

Isolated national responses to the challenge of globalisation are likely to fail, as any government that moves away from "responsible" economic policies will infallibly be punished by financial markets and corporate bondholders. Trade unions together with eminent economists (James Tobin and others) have formulated proposals for a comprehensive set of international regulations covering the operation of financial markets to dampen speculation and rebuild the relationship between these markets and the real economy.

The concept of the NAIRU (the so-called Non-Accelerating-Inflation Rate of Unemployment) is used as a justification for blocking fiscal and monetary policies which would bring about distinctively higher levels of employment if not full employment. For more than 15 years now its defenders have dominated financial markets’ assessments of economic trends and paralysed macroeconomic policy aimed at the full employment target which was ubiquitously consensual in the post-war period.

There are various reasons for why the theory does not hold. A combination of high unemployment and falling demand leads to more competition in limited markets which in turn is checking inflation as firms are having to keep down prices and workers are discouraged to press for higher wages. Conversely, low unemployment may also keep inflation low as it is usually associated with an efficient use of all resources, including human resources. Potential wage pressures arising at unemployment rates below the NAIRU usually encourages the substitution of capital for labour, thus raising potential productivity and curbing inflation. Firms also tend to keep down prices so as to discourage competitors to enter their markets.

But whether the NAIRU exists or not, sophisticated empirical analysis is built on it and used to prove that policy attempts to raise nominal output growth will only lead to inflation, not employment growth. The reality in the largely de-regulated labour markets of the UK and the US is that real wages have not kept speed with productivity increases but have fallen whereas prices have not. A remedy for this dilemma would consist of an internationally co-ordinated economic programme to raise sustainable growth in the OECD countries through a bold reduction in interest rates, and a reorientation of government expenditures to investment in infrastructure and human capital. Another positive approach could be the continuation and wider imitation of the most recent US Federal Reserve’s resistance to market pressure to raise interest rates any time that unemployment figures have come down, thereby testing ever lower levels of the NAIRU - a powerful demonstration that job creation leading to full employment and low inflation are not incompatible.

Employment and Labour Markets

In the early 1990s the advanced industrialised economies of the OECD have gone through the worst economic recession of the post war era. In each successive recession since 1968 the level of unemployment in the OECD countries has risen more than it has fallen in the subsequent recovery. As a result the "floor" level of unemployment has ratcheted up by 50% in each business cycle:- 7 million in 1966; 10 million in 1973; 18 million in 1979; 24 million in 1992; and 33 million in 1995. In 1996, more than 35 million workers (of a total of 400 million) are without jobs and projections for 1997 forecast no significant changes in aggregate numbers.

In the current OECD "recovery" the main reason for slower job growth has been slower output growth in the initial phase of the upturn. Only two OECD countries (Italy and Switzerland) had strikingly higher rates of productivity growth in this cycle compared to the mid 1980's. The striking difference for most countries appears to be that output growth has failed to match this productivity growth and as a result employment growth has been significantly lower. It also appears that at least in some economies, most notably the U.S., real wage growth has been suppressed in this recovery, leading to lower output growth. It remains to be seen whether this will be compensated for by a longer recovery eventually yielding stronger job growth. The likelihood of this remains weak in economies characterised by economic uncertainty in the new "flexible" labour markets of the 1990's.

OECD projections of unemployment remaining at 7 % at the end of the decade are based upon GDP growth of 2.9 % between 1997 and 2000. This is barely enough to cover productivity growth and labour force growth and so it is no surprise that unemployment is not projected to fall significantly. The policy questions at a macro-economic level in the OECD should therefore be:- what can be done to raise output growth over the medium term and what can be done to make this growth more job creating without falling into the trap of a low wage path.

Table 2: Employment and employment growth in OECD countries

Annual percentage change

Source: OECD

There are some common features in the structure of employment changes in the OECD countries:-

(1) there has been a decline in the relative importance of manufacturing industries in almost all countries with a corresponding rise in the share of service sector employment;

(2) there has been a "hollowing-out" of manufacturing employment itself. On the one hand there has been a modest expansion of high-technology high-skill jobs on the other there has been a decline in medium and low wage manufacturing sectors;

(3) employment growth has taken place in science-based industries, whereas employment in scale-intensive industries has remained stable and employment in resource-intensive industries has fallen. It is significant that employment in OECD labour intensive industries in 1991 was 30% below its 1970 level;

(4) the share of blue collar workers in the total workforce has been shrinking;

(5) the "non-employment rates" (taking account of unemployment and falling participation) have been rising for prime age men;

there has been increasing women's participation and a rise in part-time, and temporary work. This has been accompanied by a rise in insecure short-term contracts in many countries.

Alongside the background of slowing growth, the traditional "Taylorist" industries and jobs on which employment growth in the OECD depended in the post-war period have declined. A polarisation has occurred between high technology jobs on the one hand and service sector jobs on the other. This has also been reflected in growing income inequality throughout the OECD area, although the incidence of this has differed greatly between OECD regions.

Table 3: Unemployment in OECD countries

Percentage of labour force (excluding Mexico)

Source: OECD

The 1994 OECD Jobs Study pointed to the different employment performance of different "models" of capitalism in the OECD. Five different patterns have become evident:-

(1) Continental Europe has experienced the biggest problem of persistent unemployment. It has the highest rates of long-term unemployment in the OECD. Over the period 1970-92 real wages rose by 50% whereas employment only rose by 15%. So far the growth of income inequality has been less marked than in other OECD regions.

(2) The United States has seen employment increase by 50% between 1970 and 1992, but real wages have only grown by 10%. There has also been sharply growing inequality. In 1993 the hourly real wage of males leaving high school was 30% lower than in 1979. The 8% of the workforce with an advanced or professional degree saw real increases in earnings over the same period. As there are unemployment benefit cut offs after 6-9 months there is little long- term unemployment. It is also significant that only one third of those currently unemployed are entitled to benefit payments. Europe's joblessness is manifested in the United States as "the working poor."

(3) The Nordic Countries as a group were successful in maintaining both full employment and real wage growth for most of the 1970's and 80'. However, there was no net job growth in the private sector in most countries. The public sector acted as the main motor of employment creation. The nature of capital market liberalisation after 1990 resulted in a dramatic rise in unemployment in Sweden, whereas Finland is only slowly recovering from the external shock resulting from the disintegration of the Soviet Union.

(4) Japan has experienced very low unemployment for most of the period but there has been high divergence between the labour shortage in the manufacturing sector with high productivity driven by firms competing for exports and the service and agricultural sectors which have been low productivity labour surplus sectors not facing competition. The relative prices of these sectors have therefore been very different. In current circumstances unemployment in Japan has risen to record levels. Open unemployment is measured at over 3% but including hidden unemployment raises the level to 6%, with some measures of labour slack pointing to 10%.

(5) Australasia and to a certain extent Canada has experienced high unemployment and significant industrial restructuring with subsequent employment growth. Australia has managed this through a consensus based approach and an Accord between the unions and government. New Zealand has adopted a radical free market approach of deregulation and union busting. But the macroeconomic results have been no better.

No single OECD region has therefore had a satisfactory response to the employment crisis. Each of the "competing models" of capitalism is under threat from the social and economic damage created by high and persistent unemployment. No region has been able to satisfactorily match a "post Taylorist" tradable sector capable of driving productivity growth with a service sector capable of providing jobs of good quality.

In the face of fiscal consolidation, cuts in finance for active labour market programmes, and withdrawal from training programmes and their implementation at firm level, the problem of labour market segmentation can only get worse - with negative implications for the widespread diffusion of technology, both for firms and workers alike. "Partnership" at least puts in place some procedures for getting out of this trap.

Graph 1: Job Creation and Destruction in the US and Europe

The Conclusions agreed by Ministers at the G7 Lille Jobs Conference provide the building blocks to reverse labour market instability, including measures to ensure well functioning labour markets, and to improve the adaptability of economies. Increased innovation, diffusion of technology, greater investment in worker education and training and new forms of work organisation were called for by Ministers. On these points it was agreed that reforms will be effective in a climate of "renewed partnership, confidence and hope, ... through co-operation between workers and employers". OECD governments must now put this approach into practice. The trade union movement has proposed a policy agenda to manage faster structural change, maintain social cohesion and avoid the risk of higher inflation in the future. This includes:-

- the implementation of lifelong learning for all workers. The agreement by the January 1996 OECD Meeting of Education Ministers to develop a "social partnership" route for the implementation of lifelong learning has pointed in this direction and should now be implemented;

- a partnership for change at the workplace to enhance competitiveness. New forms of work organisation that enhance innovation, increase productivity, secure higher and more diversified skills and high trust relations work best through the active involvement of workers and trade unions. Governments should set a target that all firms are moving to become "high performance workplaces" by the year 2000, supported through a guarantee of employment rights for workers; this would build the basis for a socially acceptable model of competitiveness;

- the reduction and reorganisation of working time and the extension of learning time. Productivity gains should be more evenly distributed to achieve hours reductions and job creation: learning time and training could also be increased by hours reductions. Systematic and excessive overtime should be eliminated, and where exceptional overtime is worked negotiated safeguards should ensure that as a principle it be compensated by time off.

- the expansion of service sector employment on the basis of decent wages and labour standards. Almost limitless job creation potential exists in areas of unmet social needs. The public sector will have to continue to meet these demands, but innovative public/private partnerships are emerging alongside the development of co-operative sectors. These should be encouraged, but the public sector has to guarantee the provision of quality services and employment standards however delivered. Moreover, these jobs embody high skills and productivity. Measurement systems must be re-defined to put a fair price on this form of employment.

- the "double dividend of environment improvement and sustainable jobs. Sustainable development and employment creation goes hand in hand when policies are implemented to diffuse environment technology and environmental skills training, and support the creation of environmental services industries. Local and regional environmental schemes should be widely implemented to provide opportunities for the young and long-term unemployed. Trade unions are sceptical as to the feasibility of complete tax switching between taxes on labour and natural resources, but more can be done that increases employment, militates against negative income effects and provides a sustainable tax and social security payments base.

- rebuilding social solidarity. Well-functioning social security systems make economic and social sense. They contribute to private sector productivity growth and can give security in a period of rapid change. Where social security is weak or absent, the costs of unemployment or working poverty are pushed onto society in other ways:- worsening public health, crime and rising prison populations. But social security systems have to be part of wider strategies to reintegrate the most vulnerable and worse off groups in society. A guarantee for young people of a decent job, training place or place in a worthwhile government scheme.should be introduced. The long term unemployed must also be offered job places to give them contact with the labour market. Tax and benefit systems should be harmonised with minimum wage systems to provide an entry point into decent employment.

Technology, Productivity and Job Creation: The knowledge-based economy

"If men have the talent to invent new machines that put men out of work, they have the talent to put those men back to work." John F. Kennedy

Technology, it is said, especially information technology, is destroying millions of jobs. In the past 200 years since the early days of industrialisation, millions of manual workers have been replaced by machines. Over the same time, trend employment has grown almost continuously, and the new jobs have led to rising real incomes for most people in the industrialised countries. Each wave of technological innovations has provoked new debates on the technology-employment relationships.

It can be no surprise that the current information and communication technology (ICT) revolution has given way for growing fears that within the next century, the world's richest economies will have virtually no need of workers. This fear is strongly growing in the middle classes of skilled white-collar workers that ICT will make them redundant and that there are no other jobs to take on. Juxtaposed is the general hope (though not certainty) that technology will continue to create more new jobs than it destroys old ones.

A set of answers to what extent this will remain true and what sort of policy is required for technological innovation to increase labour demand (and thus to keep the job curve out of the red) has recently been given by an in-depth analysis commissioned to the OECD by the G-7 at the occasion of its 1994 Detroit Jobs Summit. The report comes to the following conclusion: "The policy challenges raised by the technology and employment issue in an increasingly global environment go well beyond traditional demands for more flexible labour or product markets. There is no simple policy answer to problems as complex as those raised by the relationships between technology and employment in an increasingly world-wide knowledge-based economy. ... "

"Knowledge" has become the important driving force of economic growth in the advanced economies of the OECD, together with the structural and job changes which arise from the formalisation and codification of knowledge. Deriving from this, the OECD/G-7 Report endorses a new conceptual framework for a modern theory of innovation based on four elements:

(1) Innovation and creation of technology is defined as a learning process, an accumulation of knowledge over time, whose paradigms also shift over time.

(2) Technical knowledge consists of highly bonded (codified) as well as tacit knowledge.

(3) The creation of knowledge is an interactive process between individuals, firms and organisations.

Institutional and social structures at local, regional and national level play a key role in shaping the innovative capacity of the economy.

As outlined above, OECD countries are characterised by macroeconomic convergence but remain very specific and largely different in their organisational structures and technology paradigms. In contrast to many countries in Asia, the Western economies reward competition more than co-operation. Competition may be an important incentive, but co-operation is necessary for economic success. In addition to the traditional thrive for competitive advantage, there is undoubtedly a "co-operation advantage" within and between national economies.

Adopting the right policy mix for technological change and innovation provides the most hopeful route for job creation by trading-off static efficiency (labour market flexibility) and economic short-termism for dynamic efficiency and economic performance in the long-run. Flexibility should be thought of in a wider context than just external labour market flexibility. For innovation is a learning process in firms it is insufficient for policy to ensure flexibility and stable framework conditions: strategies for innovation are strategies for learning and ultimately employment, not just a maximisation of transactions.

I suggest to compare the concept of the knowledge-based economy with the patterns of technological progress, economic growth and employment which dominated the period following the Second World War. This witnessed the second globalisation wave based on what commentators have dubbed the "Fordist growth regime" of industrial mass production. At that time the following factors were present which led to a virtuous circle of innovation/productivity growth/employment growth:

- a large inventory of innovations due to the Second World War;

- an implicit "social contract" with a focus on real wages and productivity growth;

- a steady growth of demand and consumption coupled with liberalisation of domestic post-war investment planning regimes coupled with trade liberalisation.

A return to the "Golden Age" of growth and employment is hardly imaginable under the new conditions of the Post-Taylorist "flexible" forms of organisation of production which now drives and shapes globalisation. However, the dominant ideology and current policy approaches of most OECD governments will not either reap the benefits and the potential of the knowledge-based economy.

The American economist Robert Solow first observed a combination of rapid technological change and a steady slowdown in productivity growth (the so-called "Solow Paradox"). Today, we dispose of three explanations for the productivity paradox from which important policy conclusions can be drawn covering measurement, innovation and macro-economic policy:

(i) productivity and a variety of output indicators are often severely under-estimated: Research and Development expenditure (R&D) can only be used as a proxy for technical advance but falls short of explaining more than half of it. Mismeasures can be assumed for small and medium-sized enterprises (SMEs), the service sector (the size and relative weight of which is constantly increasing!) and access to information. Patents say nothing on the economic content of inventions and do not take into account productivity increases arising elsewhere. Human capital accounting is technically underdeveloped, however constitutes a major challenge for firm as well as national accounting and key decisions in policy making. Price indicators fail to measure quality improvements of innovation, the best example for this being advances in ICTs (mainly in telecommunication technologies, computers and equipment, but also networking software). Conventional productivity growth measures substantially understate quality-adjusted figures (up to 20 per cent!). In any case, without technology productivity would have even more slowed down. It can be concluded that OECD countries are on aggregate in a deeper deflationary situation than we think. There is greater growth potential and capacity in the economy to be used.

(ii) time and organisational lags in the innovation system: new technologies require learning time both in terms of ensuing R&D efforts and training, the effect of which is increased knowledge. These resources are taken away from direct (and measurable) production and productivity consequently falls. Faster market introduction of innovations (e.g. increased quality, product differentiation and customer-oriented production, just-in-time) tend to create less "generic" knowledge with potential spill-over effects for other sectors. Managerial resistance to organisational change in firms hinders the new paradigm to develop more quickly. The decline in the price for both information and information technology finally tends to shift the innovation process towards more marginal as opposed to radical innovations and at the same time favours job saving process innovations (making things more efficiently) as opposed to product innovations (making new things). In short, (i) and (ii) explain that technological innovation advances, investment increases and productivity slows down at the same time. It derives that more social innovation and organisational change is needed, learning from and building on best practice to take up economic slack.

(iii) interaction between macro-economic framework conditions and the innovation process: the technology creation process has shifted R&D expenditure towards more short-term goals and hence lower long-term productivity gains which generally take more time to be obtained. This occurred in parallel with the rise of real interest rates to historically high levels, which acted as a disincentive for longer-term goals. The conclusion here is that the impact of high real interest rates is devastating for innovation as investors prefer to wait in view of the rapid decline in prices for information technology equipment.

The issues discussed above have favoured short-termism of investment decisions of firms. For technology to create demand, growth and jobs (either by increasing productivity and hence real income, or by creating new goods as set out above), governments must change course. Innovation conceptualised as learning in the knowledge-based economy calls for a full scale reorientation of public policy to promote education and training, life-long learning and firms' and individuals' capacity and adaptation to change. In the United States this is has been dubbed "worker empowerment", in Europe there is talk of "adaptable labour markets".

Adaptable Labour Markets and the Quality of Jobs, Wages and Skills

The evidence that new technologies and worker skills are complementary is overwhelming, for a variety of reasons. How new technologies affect workers depends on the characteristics of labour markets. In countries with flexible wages (such as the US) there is a technology wage premium. In other countries, the wage premium may be less significant, but high-skilled workers use advanced technologies and enjoy more stable employment. Technological change is an important factor in the decreased demand for low-skilled workers, though the extent to which this is responsible is subject to debate.

Whilst accepting that it is difficult to predict future skill requirements the employment prospects for low-skilled workers are not bright. Market forces may operate to increase the supply of skilled workers, the supply of low-skilled workers will diminish, thereby increasing their wages. However, it is accepted that this optimistic scenario would be slow to materialise, and that the workforce may take years to adjust, and that it is no guarantee against the continuing exclusion of those workers who will not be able to adapt to the new skill requirements.

In general systems to provide workers with adequate new skills are required, which in turn will lead to increased standards of living. Policies for this have proven difficult to implement, in part because technology and skills are endogenous: technologies and skills are interdependent, to receive the benefits of one you have to have the other. The question then arises how to achieve the virtuous circle of technology and skill upgrading.

If one compares the differing possible outcomes for countries with strong external labour markets (increased wage dispersion and wage differentials between skilled and unskilled workers), and those with strong internal labour markets, then in the former the low wage trap may occur, as workers unable to find high skilled employment find themselves in low-technology, low paid jobs, with little opportunity to acquire the skills necessary for better paid jobs. By contrast, in the latter firms will be discouraged from hiring low-skilled workers since they are unable to adapt to new technologies. However, firms with high technology are the firms that pay higher wages, spend more on training, and are more likely to be future innovators. Policies that impede the growth of these firms will also impede progress and wage growth.

Education and training programmes in OECD countries would need to assist this process, and in the face of changing skill requirements and labour market outcomes (relative wages and employment) it is difficult to know which programmes will provide workers with the necessary skills for the future. Countries are slowly shifting to a focus on continuous lifelong learning, but as yet do not have clear and well defined strategies for changes in education and training; rather they are in a period of experimentation and flux. Firms appear to be moving to a system of "just-in-time" learning that delivers training in a way that is linked directly to the productive system.

The OECD has found evidence that the provision of skill training is linked to the length of job tenure within the firm. High rates of job turnover observed in most OECD economies do entail substantial costs. They reduce the firm's stock of specific skills, discourage employers from investing in training and disrupt the continuity needed for on-the-job training. The OECD has found that those countries with longer employment tenure are also those where young people are likely to receive comparatively high levels of training. Strong employer-employee attachment is associated with skill training at all levels of employment, and are therefore beneficial for both. The observed evidence is generally referred to as the training-employment security trade-off and bears important policy implications.

Policy should aim to tilt labour markets away from the situation where the apparent choice is between strong external and internal labour markets. Both need to function on the basis of giving workers the confidence and security to change skills. For this to occur trade unions have to be involved in both the formulation of policy frameworks to develop a "win-win situation", and in implementing a strategy for positive change. It reinforces the need to adopt the "partnership approach" agreed by OECD Education Ministers in January 1996. And, as the 1994 Employment Outlook points out, it raises the issue of "the role(s) of governments and/or collective bargaining agreements in providing some degree of employment protection as a way of dealing with the costs identified above (...)."

The trade union agenda for "security in change" juxtaposes negative external flexibility with positive adaptability. This is based on strengthening labour market institutions so as to give workers confidence in change, rather than on insecurity through fear within the new global environment. Moreover, it is not merely designed to overcome the present crisis but looks towards the longer term. The trade union agenda "Adaptability versus Flexibility" highlights the areas where in the OECD countries this is developing at local level and shows how trade unions have adapted their bargaining strategies to changing circumstances.

References

Eisner, Robert (1995) Our NAIRU Limit. The Governing Myth of Economic Policy, in: The American Prospect, Spring 1995.

Galbraith, James K. (1996) The Surrender of Economic Policy, in: The American Prospect, March-April 1996.

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