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Wages and employment
Employment policy
Social policy

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EC/DG V - OECD/DEELSA seminar:
Wages and employment
Employment $* social affairs t and European Social Fund
European Commission
Directorate-General for Employment, Industrial Relations
and Social Affairs
Directorate V/A.1
Manuscript completed in 1998 The contents of this publication do not necessarily reflect the opinion or position of the European Commission,
Directorate-General for Employment, Industrial Relations and Social Affairs.
A great deal of additional information on the European Union is available on the Internet.
It can be accessed through the Europa server (http://europa.eu.int).
Cataloguing data can be found at the end of this publication.
Luxembourg: Office for Official Publications of the European Communities, 1999
ISBN 92-828-6770-6
© European Communities, 1999
Reproduction is authorised provided the source is acknowledged.
Printed in Belgium
PRINTED ON WHITE CHLORINE-FREE PAPER Table of contents
INTRODUCTION
Allan Larsson, EC/DGV and John Martin, OECD/DEELSA 5
EMPLOYMENT AND WAGES: SUMMARY REPORT
Mary Gregory & Wiemer Salverda 7
KEY NOTE SPEAKER
WAGES, EMPLOYMENT AND UNEMPLOYMENT: AN OVERVIEW
CAN THE EU PASS THE JOBS TEST?
Richard B. Freeman 21
Session I : Wage dispersion, employment and unemployment:
possible trade-offs 33
WAGE DISPERSION, EMPLOYMENT AND UNEMPLOYMENT: POSSIBLE TRADE-OFFS
Niels Westergaard-Nielsen "..... 35
Session 2: Earnings inequality, mobility and low pay 49
EARNINGS MOBILITY: TAKING A LONGER RUN VIEW 51
Summary of chapter 2 of the 'employment outlook' 1997, OECD
CAREER MOBILITY IN THE PRIVATE SECTOR - ARE WOMEN TRAPPED IN 'BAD' JOBS?
Lena Granqvist & Helena Persson 7
Session 3: Wage differentials between regions and sectors 93
WAGE DIFFERENTIALS ACROSS FIRMS
Ana Rute Cardoso 95
WAGES AND UNEMPLOYMENT IN ITALY: A REGIONAL PERSPECTIVE
Claudio Lucifora & Federica Origo 107
Session 4: Mobility across countries and European integration 123
FACTOR MOBILITY, EUROPEAN INTEGRATION AND UNEMPLOYMENT
Daniel Gros & Carsten Hefeker 12Introduction
by Allan Larsson' and John Martin1
structural changes in the functioning of labour and In December 1997 the Directorate General for
product markets. These policies are to rest on four pillars: Employment and Social Affairs of the European Com­
mission, and the Directorate for Education, Employ­ • improving employability,
ment, Labour and Social Affairs of the Organisation for • developing entrepreneurship,
Economic Co-operation and Development jointly • encouraging adaptability in businesses and their
organised a seminar on Wages and Employment. The employees,
purpose of this seminar was to have an overview of the • strengthening the policies for equal opportunities.
state of the art concerning some of the issues relating to
wage differentials and employment. The event brought One important issue in the guidelines is how to make
together about 50 participants, representing the the taxation system more employment-friendly and to
Commission, the OECD, the Member States and the reverse the long-term trend towards higher taxes and
scientific Community. charges on labour. Each Member State has the option to
set a target for gradually reducing the tax burden and
Academics presented papers which guided the discus­ particularly to reduce non-wage labour costs on rela­
sions. These were structured around four sessions: the tively unskilled and low-paid labour.
first session concentrated on Wage dispersion, employ­
ment and unemployment: possible trade-offs; the second The OECDs Jobs Study, which set out a wide-ranging
session analysed Earnings inequality, mobility and low and balanced set of policy recommendations for durably
pay; the third session looked at Wage differentials reducing high and persistent unemployment and tack­
between regions and sectors and the fourth session ling the problems of low pay and poverty, also provides
analysed Mobility across countries and European an important backdrop to the seminar. Since its publica­
Integration. A final panel session took into account the tion in 1994, the OECD Jobs Strategy has followed two
view of the social partners. tracks. First, a series of thematic reviews - making work
pay is one example - have explored policy orientations in
specific fields. Second, detailed policy recommendations The seminar took place in the context of important
have been developed for all 29 OECD Member coun­recent commitments on employment policies from the
tries and the implementation of theses European Council in Amsterdam. The governments
is being monitored closely. of the member states, accepting that employment policy
is a national responsibility, acknowledged that employ­
ment is a matter of common concern. The Council has In the context of this work, much has been learned and
pledged active co-ordination of employment policies at the Jobs Strategy has evolved in line with this new
the EU level, with the objective of achieving conver­ knowledge. In particular, it is apparent that the issues of
gence among members towards high levels of equity and efficiency are central to the policy debate. In
employment and low unemployment. This programme seeking to respond to these issues, the OECD has under­
for convergence in employment is to parallel the pro­ taken much work particularly related to the links
grammes for economic convergence. The Heads of between relative wages, labour costs and employment,
Government at the 'Jobs Summit' in Luxembourg in and on low pay and earnings mobility.
November 1997 have endorsed a positive stance
throughout the EU towards the promotion of employ­ Low-skilled workers account for a big share of the unem­
ment opportunities, including particularly the ployed and long-term unemployed. In most Member
commitment to ensuring early identification and reme­ States unemployment rates are higher for persons with
dial action in situations where unemployment brings the lower education levels. There has been a strong long-
threat of longer-term disadvantage. The Commission term shift in the structure of jobs from less skilled to
has been charged with the preparation of guidelines for more skilled so that a large proportion of the unem­
this co-ordination. ployed have low skill levels and are unlikely to find
suitable jobs even when the economy is recovering.
Indeed we saw this at the end of the 1980s when about The main lines of EU policy towards fostering high lev­
two thirds of the 9 million new jobs which were created els of employment and low unemployment are based on
went to new entrants on the labour market. the combination of sound macroeconomic policies with
' European Commission Employment, Industrial Relations and Social Affairs.
" OECD, Directorate for Education, Employment, Labour and Social Affairs. I
6
It is often argued that the demand for unskilled workers
will be strengthened by reducing wage costs or to by
increasing wage differentials. We all agree that wages and
wage costs are important for employment. But there are
obviously many different views on the relationship
between jobs and wages. The purpose of the seminar was
to allow an in-depth discussion of the underlying issues
concerned with employment and wages, and to draw out
their implications for policies. Both DG V and OECD
are interested in shedding some light on the relationship
between wages and employment in an analytical and
non ideological way. The questions addressed are:
• Would a widening of wage differentials at the lower
end of the wage scale improve job prospects for the
unskilled workers ande employment and
earnings or just lead to a more uneven distribution of
income and opportunities.
• Is there a choice between a lowering of taxes and social
charges on the one hand, and on the other hand, of
investment in human resources to move people
upwards from low productivity and low wage jobs to
more productive jobs.
• Whether low-pay jobs may be a transitory event of a
worker's life or a stepping stone to other more well-
paid jobs. Maybe a low-paid entry job is better than
no job at ail. But how do we get people to move on
from those low wage jobs to better paid jobs.
• How will these differentials be affected by the intro­
duction of a single currency and the transparency that
will follow.
This publication presents the summary report of the
seminar as well as some of the papers presented during
the conference. The discussions during the two days
clearly indicated that there is no simple relationship
between wages and employment. Various interactions
have to be considered such as: the effect of low or high
wage differentials on employment and non employment
at both ends of the wage scale, the importance of low
wages as a stepping stone into the labour market, the
possibility of wage mobility and the link between low
wages and non employment. Employment and Wages: Summary Report
by Mary Gregory and Wiemer Salverda
tions have been widely supported by member govern­
Employment and Wages:
ments and the social partners. A number of member
countries, notably in the EU, have however been reluc­an Issue for Europe
tant to implement the recommendations relating to
labour market flexibility. As the OECD itself acknowl­
edges (OECD, 1997a) this is due to concern that The high and persistent unemployment which has been
policies to achieve greater flexibility in the labour market a central concern throughout the European Union since
would be at odds with objectives concerning equity and the early 1980s has increasingly been recognised as part
social cohesion. The trade-off posed is clearly a difficult of a wider 'jobs deficit', in which unemployment is only
one. In the subsequent debate flexibility has become the most visible part. Non-employment rates for men
have been declining in many countries. For some time something of a buzz-word, covering a whole set of issues
including the nature of the wage-setting process, espe­this was explained away by trends to earlier retirement,
cially the role of collective bargaining, the level and greater educational participation and other special fac­
structure of social benefits, employment protection, new tors. It is now clear, however, that the decline in male
types of employment contract, and new systems in the labour force participation is pervasive, with increasing
organisation of work. Debate has centred above all on non-employment of men in their prime working years.
wage flexibility, especially the dispersion of wages. Participation rates for women, on the other hand, have
Would a widening of wage differentials within the EU been rising steadily throughout the EU, but remain well
economies bring increased employment? In particular, below US levels; and women's expectations of being
are lower wages necessary or sufficient to secure this involved in paid employment will almost certainly con­
increase? How far do minimum wages contribute to tinue to grow. Against this background the European
unemployment within the EU? Is wage inequality part Union has now accepted a major commitment to achiev­
of the cure for the EU's employment problem - or poten­ing convergence towards high levels of employment and
tially a further part of the problem? low unemployment, including specifically meeting the
deficit in employment opportunities for women.
The purpose of the meeting, with the papers and discus­
Unemployment, and the jobs deficit more widely, are sion reported here, was to gain an overview of the 'state
not new issues, but analysis of their causes is by no of the art' in the economic analysis of the complex of
means unanimous, and effective policies to combat them issues centring on employment, unemployment and
are still lacking. Among the substantial volume of analy­ wages. The over-arching theme was the functioning of
sis devoted to these issues pre-eminence must be given to labour markets in the European economies, with a par­
the JOBS STUDY produced by the OECD in 1994. This ticular focus on how far the EU's poor record in job
study, the outcome of several years of research, gives an growth is to be attributed to its wage structures. Four
extensive and in-depth analysis, culminating in a wide- dimensions were reviewed. The most difficult and con­
ranging set of policy recommendations. The OECD tentious issue centred on assessing the possible trade-offs
continues to carry forward this work through its on­ between wage inequality on the one side and employ­
going programme IMPLEMENTING THE OECD JOBS ment and unemployment on the other. How far does a
STRATEGY, which reviews the extent and effectiveness compressed wage distribution, with a low level of wage
with which the policy recommendations are imple­ inequality, inhibit job creation? Would a widening of
mented in member countries (OECD, 1997b; also wage differentials increase employment of the low-
OECD, 1996, 1997a). The analysis and recommenda­ skilled? Does minimum wage protection impede the
tions developed by the OECD provide much of the creation of low-paid jobs in Europe? How far is it the case
context for the policy initiatives and debate on employ­ that wage-setting arrangements, including collective bar­
ment and unemployment in both national and gaining, advance the interests of workers already in jobs
international forums. to the disadvantage of those seeking work? In short, what
do we know, or believe, about the trade-off between
wages and jobs? The ten main policy recommendations of the JOBS
STUDY cover a wide range, from macroeconomic
stabilisation, through the promotion of technological The second dimension, earnings mobility, examines how
know-how, entrepreneurship and skill acquisition, to far any wages/employment trade-off disappears in a
product market competition. Many of the recommenda­ dynamic context. This centres on the role of low-paid jobs in the worker's life-cycle. For many employees a
The EU has a Jobs
low-paid job serves as a stepping-stone, allowing the
acquisition of work-experience and employment-based Problem because...
skills, and bringing enhanced employabiiity.
To the extent that this is the case, the efficiency/equity
trade-off dissolves and impediments to the creation of Many explanations are offered for the slow employment
low-wage jobs, such as wage floors, can be seen as growth and high levels of unemployment in the EU - its
inequitable as well as inefficient. Against this, a low-paid 'jobs problem'. The obvious comparison is with the expe­
job may mark the beginning of a lifetime of low level rience of the other advanced regional economy - the US.
jobs, possibly interspersed with spells of unemployment. Over the past quarter-century the US economy has
The disadvantage may be further transmitted to the next achieved a remarkable record of job creation, with total
generation as the children from low-income households employment expanding by 50 percent while unemploy­
perform less well in formal education, gain fewer quali­ ment has remained essentially untrended around its level
fications and are already handicapped as they enter the of the early 1970s. This contrasts dramatically with the
labour market. These alternative scenarios have very dif­ sluggish level of employment growth achieved across the
ferent implications for public policy towards the European economies. On the other hand, the level of real
development of low-paid jobs, and call for detailed eval­ wages has risen steadily in much of Europe over this
uation of the extent and patterns of upwards mobility by period, while it has remained static in the US. Further,
low-paid workers. the degree of inequality in earnings in Europe has shown
relatively little change, with at most a modest widening
(except in the UK), while the earnings distribution has The economies of the European Union are not a single
widened markedly in the US. As part of this increasing labour market, either collectively or even within the indi­
inequality, the earnings of low-paid workers in the US vidual nation states. The stylised fact that unemployment
have fallen substantially in real terms, while they have tends to be low in high-wage regions and high in low-
wage regions calls into question a simple prescription of continued to rise throughout the European economies.
wage reductions to increase employment. The third aspect
reviewed was therefore wage differentials between regions The juxtaposition of these empirical trends leads to the
and between sectors. The objective was to gain a picture stereotype view, particularly favoured in North America,
of the patterns of differentials and how they are changing. that the flexibility of the American labour markets,
In particular, does the pattern of differentials encourage notably in terms of wages but also in the restricted role of
the view that widening the wages structure would expand employment regulation and social income support, has
employment? Are regional differentials narrowing as the fostered job growth there, although admittedly at a price
Single Market gains momentum and the imminence of in terms of growing wage inequality, low pay and insecu­
monetary union encourages comparisons and trans­ rity. The structure of labour markets in the European
parency? Or how far are differentials, even substantial economies, on the other hand, according to this stereo­
ones, an equilibrium? What progress is being achieved in
type, has protected the jobs of those in employment, and
reducing gender differentials in pay, a priority of EU pol­
supported wages, particularly for the low-paid, while the
icy? More widely, what insights can be gained from the
price has been paid through the stifling of job creation.
examination of wage structures into the ways in which
Wages are less flexible downwards in Europe because of
widely differing institutional arrangements impact on
the floors set by legal minima, unions, insiders and wel­
wage outcomes?
fare programmes. In the US, where fewer than 10 percent
of private sector workers are unionised, wage floors from
This establishes the focus for the final topic, the labour collective bargaining are effective only in limited areas.
market implications of European integration. EMU will While minimum wages are in place at the federal level
bring transparency between countries in the level of and in a number of states, their level is extremely low by
wages and benefits. How far will the move to monetary European standards, $5.25 per hour following the recent
union bring 'real' convergence, in employment condi­ increase, after falling in real terms throughout the 1980s.
tions, unemployment rates and wage levels? Which The falling demand for unskilled workers throughout the
structural differences are likely to persist, and what will advanced economies has been reflected in lower real
be their implications for the process of integration? wages for the unskilled in the US, and in unemployment
for the low-skilled in Europe.
To start the seminar Richard Freeman gave a comprehen­
sive review (printed in full in the following chapter) of
the main candidate explanations for the jobs deficit in the
EU, and his assessment of how each performed against