Understanding Recent Labour Market Developments in OECD Countries

Structural Challenges of the Slovenian Economy 8th July 2014 RECENT LABOUR MARKET DEVELOPMENTS AND POLICY REFORMS Sandrine Cazes Senior Economist Employment, Labour and Social Affairs OECD

Outline 1. Latest developments in the labour market situation in OECD countries 2.A key challenge: growing labour market segmentation 3.Recent reforms to employment protection legislation 4.Policy options 5.Concluding remarks 2

The labour market impact of the crisis and recovery has been highly uneven across countries Unemployment rate, percentage of the labour force % 13 12 Euro area Japan United States 11 10 9 8 7 6 5 4 3 Source: OECD Short-Term Labour Market Statistics Database (Cut-off date: 5 March 2014). 3

Labour market conditions vary dramatically within the Euro area Unemployment rate, percentage of the labour force % 30 France Germany Greece Unemployment rate, percentage of the labour force Portugal Spain 25 Italy 20 15 10 5 0 Source: OECD Short-Term Labour Market Statistics Database (Cut-off date: 5 March 2014). 4

Unemployment has been rising in Slovenia Unemployment has been rising in Slovenia Harmonised unemployment rate, percentage of the labour force % SVN:Slovenia OECD 14 European Union (28 countries) Euro area (18 countries) 12 10 8 6 4 2 0 Source: OECD Short-Term Labour Market Statistics Database (Cut-off date: 7 April 2014). 5

Long-term unemployment account for more than one in three unemployed persons in the OECD areaa,b Percentage of the unemployed % 90 Q4 2007 Q3 2013 80 70 60 50 40 30 20 10 0 Note: Countries are shown by ascending order of the incidence of long-term unemployment in Q3 2013 . a) Data are not seasonally adjusted but smoothed using three-quarter moving averages. OECD is the weighted average of 32 OECD countries excluding Chile and Korea. b) 2012 for Israel. Source: OECD calculations based on quarterly national Labour Force Surveys (Cut-off date: 5 March 2014). 6

Youth unemployment has reached very high levels in some OECD countries Percentage of youth (aged 15-24) labour force, Q4 2007a- Q4 2013b % 70 Q4 2007 Peak Q4 2013 60 50 40 30 20 10 0 Note: Countries shown in ascending order of the youth unemployment rates in Q4 2013. a) Q2 2007 for Switzerland. b) Q3 2013 for Estonia, Greece, Turkey and the United Kingdom. Source: OECD Short-Term Labour Market Statistics Database (Cut-off date: 5 March 2014). 7

Temporary work has been growing in EU countries 40 Europe 30 20 10 0 EU 28 EU 15 Germany Spain France Italy Poland Slovenia 8

reducing job quality Temporary workers tend to cumulate unfavourable conditions Less job protection and security Wage penalty Lower access/exclusion to social security schemes and pensions or other working conditions (De Jure/de Facto) Temporary workers may not have access to credit, housing, etc. and those disparities likely to generate persisting divides Lower transition to permanent contracts Temporary workers receive less training (on average probability of receiving employer-sponsored training - 14%) 9

Costs of labour market segmentation Equity issue, but not only Efficiency as well Depress productivity growth Excessive adjustment at the margin (volatility) Reduce the labour market divide and alleviate contractual labour market segmentation Avoid excessive use of temporary (non-regular) employment 10

A key structural reform response: employment protection legislation EPL & LM segmentation, Argument: Reform of EP via asymmetric liberalisation of temporary contracts (e.g. while maintaining regular EP for permanent workers) leads firms to substitute temporary for permanent workers--increase in the % of workers on fixed-term contracts (Boeri and Garibaldi, 2007; Bentolila et al., 2008) In addition, a large asymmetry between the EP provisions applying to the two types of contracts will reduce the conversion rate of fixed- term contract into permanent ones (Boeri, 2011) 11

Recent reforms to Employment Protection Main focus is on reducing regulation on permanent contracts, contrast with two-tier reforms of the 1990s and early 2000s: Reduction in up-front severance costs and compensation for unfair dismissal Expansion of definition of fair dismissal, alongside improvements in functioning of courts should allow firms to make dismissals for economic reasons more easily Extension of trial period for new hires, likely to be an important measure for encouraging hiring of youth Different approaches to the gap between temporary and permanent workers Some countries (GRC, PRT and ESP) also reduced scope, cost or complexity of collective dismissals 12

Main elements of the EPL reforms in Greece, Portugal, Spain and Italy GRC PRT ESP ITA Reduce severance pay for permanent contracts X X Reduce red tape for individual dismissals X X Extend probation period for new hires X X Expand the definition of fair dismissal X X Improve functioning of courts in dismissal cases X X Reduce compensation for unfair dismissal X X Reduce regulation on collective dismissals X X X Reduce regulation on non-permanent contracts X X X Increase regulation on non-permanent contracts X X 13

Policy options Make hiring on temporary contract more difficult & costly Restricting renewals, duration and/or scope of use of FT. Difficult to enforce May be counterproductive if too restrictive No evaluation yet Reduce the wedge between termination costs of regular and non-regular contracts Single Employment Contract or Unified contract proposals have been put forward (mostly in Europe) Risk of introducing excessive rigidity in hiring decision, could even lead to employment losses & displacement on DSEWs (Single Contracts) Important reforms of judicial review necessary (Single Contracts, Unified Contracts) Difficult to implement 14

Policy options Enhance convergence between contracts (more homogeneous employment protection, notably in terms of termination costs) Few examples of countries with same termination costs As well as in more protective countries Convergence of EP regime likely to reduce duality without negatively affecting efficient reallocation of resources, but will not eliminate all forms of duality (e.g. differences across social security contributions create incentives to employ those under more favourable regime, DSEW) 15

Concluding remarks Over the past decades, many OECD countries have introduced reforms to foster LM flexibility and activate the unemployed Several different options to reform EP as part of a comprehensive package Very important to evaluate the impacts of those recent reforms (for ex. 2012 Spanish labour market reform seems to be a significant step in the right direction according to preliminary assessment, but further monitoring will be necessary) 16

Thank you Contact: Sandrine.Cazes@oecd.org OECD Directorate for Employment, Labour and Social Affairs, via www.oecd.org/els Brochure Instit ELS 2013 OECD Employment Outlook, via www.oecd.org/employment/outlook OECD Employment database, via www.oecd.org/employment/database www.oecd.org/site/piaac 17

Protection of permanent workers against individual and collective dismissals, 2008 and 2013 2013 2008 Scale 0-6 4.0 3.5 3.0 OECD average 2.5 2.0 1.5 1.0 0.5 0.0 18

Slide title Slide title can be extended to two lines OECD average 4.5 Protection of permanent workers against individual dismissal 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 CAN KOR JPN CZE FIN CHE SVN LUX ITA SWE PRT 2012 PRT 2009 PRT 2008 FRA CHL GRC 2011 TUR AUT ISL DNK GRC 2008 ESP 2012 ESP 2008 NLD BEL EST AUS NOR DEU POL HUN ISR PRT 2013* GBR SVK IRL MEX USA NZL 5.0 Regulation on temporary forms of employment 4.5 4.0 3.5 3.0 2.5 OECD average 2.0 1.5 1.0 0.5 0.0 CAN KOR JPN CZE FIN CHE SVN LUX SWE PRT 2012 PRT 2008 PRT 2009 FRA CHL ISL AUT TUR DNK GRC 2011 GRC 2008 NLD BEL ESP 2008 ESP 2012 EST ITA POL AUS NOR DEU HUN ISR PRT 2013* GBR SVK IRL MEX USA NZL All data for 2008 unless otherwise noted. * PRT for 2013 is an estimate based on proposed changes. 19 Stefano Scarpetta, OECD

The labour market impact of the 2012 reform Estimation strategy: Regression-discontinuity model joint effect of all the provisions included in the reform by comparing labour market performance (wages, worker flows, etc) before and after February 2012 (discontinuous patterns occurring at the time of its enforcement) the business-cycle is modelled through observable controls and non-linear time trends. Robustness tests undertaken using fictitious placebo reforms taking place in a earlier date Not possible to distinguish the impact of the reform from other changes in February 2012 or from subsequent policy adjustments (underestimation?) 20