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Policy Area Papers on Labour market reform

Measuring the Share of Labour in GDP
Michael Grömling, World Economics, December 2017
There is a view that increasing inequalities in advanced economies are responsible for growth problems and political polarisation. A new impetus has been injected into the analysis of macroeconomic income distribution since if capital’s share is rising this has implications for the personal distribution of income. An international comparison of data from advanced countries does not reveal any widespread or consistent decrease in labour’s share for the past quarter of a century. No pattern is discernible and a number of statistical limitations and data issues need to be taken into account when interpreting the functional distribution of income.
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The Economic Impact of Italian Market Reforms
Giovanna Maria Dora Dore, World Economics, December 2017
Italy’s labour market is highly segmented by gender and age with high labour costs, high rates of self-employment and undeclared work, high minimum wages, strong dismissal constraints and uneven job opportunities between Northern and Southern regions. Italy has experienced three decades of reforms aimed at liberalising its labour market, boosting competitiveness and introducing flexibility to address low productivity and weak employment dynamics. The 2014 Jobs Act is Italy’s latest market labour reforms aimed at rationalising employment protection legislation, improving the effectiveness of social protection and boosting female and youth participation in the labour force. Labour market data for the first 18 months of the implementation of the Jobs Act point to positive upward trends for both employment and job creation as well as to a decrease in unemployment.
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The Impact of Minimum Wage Legislation
Julian Gough, World Economics, March 2017
Minimum wage policies are powerful political tools, but the economic effects are unlikely to be in the interests of society as a whole. Wages should be left to the free operation of market forces. Minimum wage rate policies are only effective in low-wage industries: the hotel sector labour market is used to develop the theory of minimum wages under different competitive conditions. The theoretical impact of a government-imposed minimum wage on the firms in an industry depends upon different competitive conditions in product and labour markets, but in most cases the number of firms falls as does the long-term demand for labour. In the UK, the Office of Budget Responsibility estimates that the National Living Wage will cut the total demand for labour hours by 0.4%, a reduction of 4 million hours of work a week causing 60,000 redundancies as a result of increased wage costs.
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How Managerial Incentives Affect Economic Performance
Andrew Smithers, World Economics, March 2016
The impact of managerial incentive structures on corporate behaviour has been a neglected area of economics. New theoretical work by Nobel Prize winning economist Jean Tirole demonstrates that ‘bonus culture’ managerial incentive systems can increase inequality while lowering investment, work ethics and welfare. The negative impact of managerial incentive systems in the US and the UK have been studied empirically by the author for a number of years and the evidence backs up this theory. Modern management remuneration systems provide strong incentives to change corporate behaviour by encouraging aggressive pricing, discouraging investment and other measures to improve productivity. The author argues that demographic and productivity changes, and not the aftermath of the global financial crisis of 2007-08, are the dominant causes of the current economic slowdown in many of the world’s largest economies. Since this can only be reversed by increasing investment it is necessary to recognise the problem of distorted incentives as the first step to remedial action. Solutions include linking bonuses to increases in productivity and providing tax incentives to reinforce changes in behaviour.
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Youth Employment Crisis in India
Swati Dutta, World Economics, March 2016
The global financial crisis and the subsequent uneven recovery have underscored the need for Africa’s resilience to output and other shocks originated in the rest of the world. A comparison of two regional economic communities – the East African Community (EAC) and the Southern Africa Customs Union (SACU) – suggests that deeper intra-regional, and in particular intra-industry, trade ties have contributed to the EAC’s resilience to external output shocks. More broadly, intra-regional and intra-African trade with fast-growing economies, together with geographically diversified trade links, can strengthen the capacity of African countries to absorb global output shocks. Besides helping shield countries from external shocks, intra-regional trade also supports economic diversification and participation in regional value chains.
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Offshoring and the Labour Share in Germany and US: The Role of Different Policy Regimes
Deborah Winkler & William Milberg, World Economics, December 2015
Despite broad public concern with the effect of offshoring on inequality, there is scant research. The authors shift the focus to the effect of offshoring on the labour share in value added. Regression analysis for a sample of 14 OECD countries in 21 manufacturing sectors covering the period 1995 to 2008 reveals that the effects of offshoring on the labour share are negative. They also show that different policy regimes with regard to labour markets, education and innovation, and trade liberalisation mediate these effects whilst contrasting the experiences of Germany and the U.S. where the manufacturing labour share decline was particularly strong.
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Demystifying Youth Unemployment
Terence Tse, Mark Esposito & Jorgo Chatzimarkakis, World Economics, September 2013
Youth unemployment has become an ever increasing serious socio-economic problem, which deserves far more attention that it has so far received. In this article, we examine the causes of this issue. They include 1) countries losing the ability to compete effectively and therefore cannot create high-quality jobs, 2) inflexible labour markets that prevent young people from being hired, 3) many young labourers prefer not to work (hard), and 4) mismatch of skills and employers’ needs. We urge governments to take decisive and fast actions to combat this problem before it turns itself into a major crisis.
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Alternative Strategies for Fighting Unemployment: Lessons from the European experience
Gilles Saint-Paul, World Economics, March 2008
During more than three decades of protracted high unemployment, European countries have developed a variety of approaches in order to tackle the problem. These strategies differ in their philosophy, scopes and successes. A number of them can be understood in terms of shying away from full-fledged liberalization in order to preserve the "European Social Model". In this paper the author discusses their relative merits. He focuses on strategies that may reasonably be expected to reduce unemployment, and ignores sheer blunders based on a false view of how the economics works (such as working time reduction), as well as measures that may improve the welfare of the unemployed but are nevertheless harmful to the labour market (such as generous unemployment benefits). The general message is that some of the strategies that “preserve the European Social Model” have merits, but are unlikely to lead to an efficient labour market where finding a job or hiring a worker are no longer considered as a painful challenge.
Labour Standards and International Trade
Krisztina Kis-Katos & Günther G. Schulze, World Economics, December 2002
Can a case be made for the imposition of international minimum labour standards? And if so, on what grounds? The authors systematically present the existing theoretical and empirical arguments for and against introducing minimum labour standards on the international level, and discuss whether trade sanctions are the instrument of choice to improve labour standards around the world.
Child Labour: Theory, policy and evidence
Saqib Jafarey & Sajal Lahiri, World Economics, March 2001
The purpose of this paper is to pull together the emerging theoretical and empirical literature on the economics of child labour, and to draw out the underlying commonalities between various contributions in this field. In doing so, the authors also identify various policy options and their relative merits.
Eastern Enlargement and EU Labour Markets: Perceptions, challenges and opportunities
Tito Boeri & Herbert Brücker, World Economics, March 2001
This paper summarises the key findings of a recent study on the impact of Eastern Enlargement of the European Union (EU) on labour markets in the current Member States. The study focuses on three main channels along which enlargement may affect labour markets in the EU, namely i) trade, ii) foreign direct investment, and iii) migration. A main conclusion of the study is that trade and capital movements are very unlikely to lead to an equalisation of factor prices. Thus, strong economic incentives to migration are bound to be present. The study indicates that such an influx of migrants will have only a moderate impact on wages and employment even in Austria and Germany. European leaders will soon have to formulate a joint position regarding this fundamental issue. The authors argue for keeping actual migration flows under control for a transitional period.
The US “Underclass” in a Booming Economy
Richard B. Freeman, World Economics, June 2000
The main failure in the US economy in the 1980s through the mid 1990s was its inability to distribute the gains of economic growth to the bulk of the population. The traditional “rising tide lifts all boats” link between economic growth and poverty seemed broken, creating a large seemingly permanent underclass. To the surprise of many, however, the late 1990s boom has substantially improved the well-being of the disadvantaged and reduced underclass behaviour. Full employment has been a successful anti-poverty policy. But the US is taking a huge risk in placing all of its social policy eggs in the single employment basket. When there are no nuts squirrelled away for winter, one can only hope that the good times will keep rolling.
Understanding Labour Market Institutions
Gilles Saint-Paul, World Economics, June 2000
Labour market rigidities are often considered to be responsible for high unemployment in Europe. This paper outlines a theory explaining why they may be supported by the political system, and where their support comes from. Labour market rigidities are likely to arise as the outcome of microeconomic imperfections which allow incumbent employees to reap rents, and as a device to alleviate redistributive conflicts among groups of workers. Their support depends on the employed’s exposure to unemployment, the degree of underlying inequality in skills, and the responsiveness of employment to labour costs. It is shown that different labour market institutions, such as employment protection, wage rigidities, and unemployment benefits, may mutually reinforce each other, so that we expect to observe them together. Also discussed are implications for the timing and design of reform.
Poles Apart: Labour market performance and the distribution of work across households
Paul Gregg, Kirstine Hansen & Jonathan Wadsworth, World Economics, June 2000
Analysis of labour market performance using individual level data can reach radically different conclusions to those provided by a household-based analysis, using the same source of information. In Britain and other OECD countries the number of households without access to earned income has grown despite rising employment rates. Built around a comparison of the actual jobless rate in households with that which would occur if work were randomly distributed, the authors show that work is becoming increasingly polarised in many countries. Changing household structure can only account for a minority of the rise in workless households, so that labour market failure is the dominant explanation. Polarisation of work will have important welfare and budgetary consequences for any country.
The Thirty-five Hour Working Week: Flexibilité, compétitivité, productivité-a French Revolution
Alan Kirman, World Economics, June 2000
The introduction of a reduced working week (RWW) in France has been widely condemned as an arbitrary additional constraint in an already rigid labour market. This article explores the origins of the law, and the reasons for the negative appreciation by economists of this measure. However, it goes on to suggest that the concessions gained by the employers in terms of flexibility coupled with the state aid involved have resulted in an increase in labour market flexibility in France. This may explain the fact that, contrary to the predictions of many economists, the French economy is now growing faster rather than slower as compared to the period before the introduction of the legislation, and that unemployment is falling.
Welfare-to-work and the New Deal
Richard Layard, World Economics, June 2000
Welfare-to-work is on trial in many countries. In Britain it has become the
government’s most important policy for lowering unemployment and expanding
labour supply. But can it work? And what lessons does Britain’s experience
provide for other countries? This paper argues that whilst the Welfare-to-Work
approach has the power to transform the lives of millions—by making them self-sustaining
rather than dependent—it requires extreme sensitivity. The help must
be of very high quality and the spirit of the policy must be visibly in the clients’
interest. The author concludes that the New Deal has been an extraordinary
success from that angle, with very high levels of client satisfaction. It is a good
example for other countries to follow. But each future step must be as sensitive as
the last.