Job Creation: Lessons from Abroad - Touchstone Extras pamphlet

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Touchstone Extras #10 | Download Job Creation: Lessons from Abroad [PDF]

In this Touchstone Extras pamphlet we look at the international experience of employment change since the recession, at how the British experience compares with other countries and at the lessons we can learn from this comparison.

Given the depth of the recession and the feeble recovery, we might have expected unemployment to rise by a million more than it actually did. There is no consensus among economists about why this should be the case, but one strong explanation has been the shift to 'activation' policies by successive governments and reforms by the last government to 'make work pay', including the introduction of the minimum wage and tax credits. Suggestions that the de-regulation of the UK labour market is responsible for this performance are more contentious, with international comparisons not showing much of a relationship between labour market flexibility and job losses during the recent recession.

Only looking at UK experience can be misleading, however. Five years ago, the world passed through the worst recession since the 1930s (in some cases even worse) and the industrialised democracies still face tremendous difficulties because of it. But while labour market performance has varied, economists have been surprised that across many countries the rise in unemployment has generally been much less marked than might have been expected after such a large loss of output.

In this context the performance of Britain's economy could better be described as moderate than outstanding. The 'Okun's coefficient' (the ratio of the rise in unemployment to the fall in GDP) for the UK has been 0.36, roughly the OECD average. Other countries, not just Germany, but also Japan, Belgium, Austria, Norway and Australia have seen unemployment return to near pre-recession levels. It is noticeable that these are typically countries that saw only a small increase in unemployment straight after the recession.

Across the OECD, governments increased spending on temporary programmes and in most (but not the UK) schemes to subsidise a period of short-time working was an important element. These schemes made it easier for employers and workers to adjust working hours to preserve jobs and studies found that hundreds of thousands of jobs were saved. The timing of these schemes is important - once a recovery has begun, governments should re-orient their efforts towards helping disadvantaged unemployed people.

Some politicians have argued that the short-time working scheme was not the only reason for Germany's labour market success, and have pointed to a number of reforms introduced before the recession. In Britain commentators have concentrated on the role that 'mini-jobs' have played in boosting employment growth, though their impact is questionable: the German 'miracle' has centred on rising manufacturing employment, but mini-jobs have been concentrated in the service sector.

Most OECD countries had direct job creation programmes before the recession, and many expanded them as the crisis deepened. The UK introduced the Future Jobs Fund, abolished immediately after the election by the current government. Studies have since shown that the Fund had a substantial and positive impact on the employment prospects of participants; internationally, however, there is no clear picture - some countries with substantial direct job creation saw lower than expected increases in unemployment but others fared less well.

These programmes are very diverse and the quality of design and implementation seems to be a key factor. If this is high, these schemes can help to keep disadvantaged unemployed people close to the labour market.

This paper suggests practical lessons that Britain can learn from other countries - although our employment performance was better than expected, other countries did even better. Measures include:

  • Short-time working subsidies can help firms to make it through the recession by reducing their costs, but not their workforce. Such support should only be offered to firms that are viable in the long-term, combined with a requirement that participants get training to maintain their skills and withdrawn once the recovery has begun.
  • Direct job creation can make a difference in recessions, especially for disadvantaged workers. Programmes should be targeted at particular groups (like young unemployed people), of limited duration and participation should be combined with continuing job search.
  • Hiring subsidies may be another strategy for keeping disadvantaged people in touch with the labour market. They can be complex and there is a risk of displacement and deadweight, so it is important that they should be targeted at the groups who are less likely to succeed in the open labour market such as young people or the long term unemployed, and that they are used at the right point in the economic cycle.

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