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How To Halve Unemployment

How To Halve Unemployment. Michael Dicks Chief Economist (Europe) Tuesday 10th June, 2003. The basis for our policy proposals. A number of people have looked at what causes long-term, or structural, shifts in unemployment:. Steve Nickell and Richard Layard Olivier Blanchard The IMF and OECD.

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How To Halve Unemployment

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  1. How To Halve Unemployment Michael DicksChief Economist (Europe) Tuesday 10th June, 2003

  2. The basis for our policy proposals A number of people have looked at what causes long-term, or structural, shifts in unemployment: • Steve Nickell and Richard Layard • Olivier Blanchard • The IMF and OECD Our own research accords fairly closely with this now voluminous body of evidence

  3. We should not be pessimistic: it can be done! It is easy to lose/forget the historical perspective But, thirty years ago, it was the United States that had the problem

  4. Some good and bad news for Europe The good news is a start has been made. The bad news is that a lot more work needs to be done. • Euro area not as bad as many think • Growth in temporary contracts • More part-time working Wage pressures not turning out as high as generally expected. Profit share on the rise.

  5. Structural Unemployment or the “NAWRU” Non-Accelerating Wage Rate of Unemployment, % of labour force

  6. Two things seem to drive the NAWRU… First, “shocks”, such as: • The big jump in the oil price in the 1970s • The subsequent drop in total factor productivity • Changes in long-term real interest rates • Shifts in the labour share of GDP

  7. The effect of these shocks varies, according to how “fit” an economy is Second, “institutional” or “structural” factors, such as: • Tax rates • Unemployment benefit levels and their duration • Active Labour Market Policies (ALMPs) • Employment Protection Legislation (EPL) and the incidence of temporary contracts • Union density & coverage and the wage bargaining framework

  8. One role for policy: Perhaps the “shocks” are not really exogenous? TFP in the United States TFP in the euro area % changes per annum % changes per annum

  9. One role for policy: Perhaps the “shocks” are not really exogenous? The euro-area labour share Union density % of GDP % of all workers

  10. A second role: Structural factors are certainly worth policymakers attacking… Unemployment rates (current and target), % of labour force

  11. What levers to pull…& what they might end up delivering Impacts on unemployment, % of labour force

  12. Summary • Europe has made some progress, with the NAWRU down to 8% - but needs to do a lot more if it is to get it down to 4%-5% • Cutting taxes (inc. social security contributions) worth 1pp • Benefit reform could lower unemployment by about 1pp • EPL and temp/part-time working worth about 1/2pp • Getting unions to recognise the trade-off between wages and employment the most profitable strategy – worth nearly 2pp

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