Institutions have important consequences for the performance of households, companies, governments and entire markets; they determine the welfare of nations. Contributions explore the underlying mechanisms and the politico-economic determinants of such structures.
Government schemes that compensate workers for
the loss of income while they are on short hours (known as short-time work
compensation schemes) make it easier for employers to temporarily reduce
hours worked so that labor is better matched to output requirements. Because
the employers do not lay off these staff, the schemes help to maintain
permanent employment levels during recessions. However, they can create
inefficiency in the labor market, and might limit labor market access for
freelancers and those looking to work part-time.
Laws on hiring and firing are intended to protect
workers from unfair behavior by employers, to counter imperfections in
financial markets that limit workers’ ability to insure themselves against
job loss, and to preserve firm-specific human capital. But by imposing costs
on firms’ adaptation to changes in demand and technology, employment
protection legislation may reduce not only job destruction but also job
creation, hindering the efficient allocation of labor and productivity
All developed economies have unemployment benefit
programs to protect workers against major income losses during spells of
unemployment. By enabling unemployed workers to meet basic consumption
needs, the programs protect workers from having to sell their assets or
accept jobs below their qualifications. The programs also help stabilize the
economy during recessions. If benefits are too generous, however, the
programs can lengthen unemployment and raise the unemployment rate. The
policy challenge is to protect workers while minimizing undesirable side
Despite equal pay legislation dating back 50
years, American women still earn 22% less than their male counterparts. In
the UK, with its Equal Pay Act of 1970, and France, which legislated in
1972, the gap is 21% and 17% respectively, and in Australia it remains
around 17%. Interestingly, the gender pay gap is relatively small for the
young but increases as men and women grow older. Similarly, it is large when
comparing married men and women, but smaller for singles. Just what can
explain these wage patterns? And what can governments do to speed up wage
convergence to close the gender pay gap? Clearly, the gender pay gap
continues to be an important policy issue.
Since the internet’s earliest days, firms and
workers have used various online methods to advertise and find jobs. Until
recently there has been little evidence that any internet-based tool has had
a measurable effect on job search or recruitment outcomes. However, recent
studies, and the growing use of social networking as a business tool,
suggest workers and firms are at last developing ways to use the internet as
an effective matchmaking tool. In addition, job boards are also emerging as
important for the statistical study of labor markets, yielding useful data
for firms, workers, and policymakers.
With aging populations and increased demands on
government revenue, countries need to boost employment and earnings. Tax
policy should focus on labor market entry and retirement. Those are the
points where labor supply is most responsive to tax incentives, which can
enhance the flow into work of people leaving school and women with young
children and can prolong employment among older workers. Human capital
policy has a complementary role in improving the payoff to work and ensuring
that earnings hold up longer over a lifetime.
Since 1989 fertility and family formation have
declined sharply in Central and Eastern Europe and the former Soviet Union.
Fertility rates are converging on—and sometimes falling below—rates in
Western Europe, most of which are below replacement levels. Concerned about
a shrinking and aging population and strains on pension systems, governments
are using incentives to encourage people to have more children. These
policies seem only modestly effective in countering the impacts of
widespread social changes, including new work opportunities for women and
stronger incentives to invest in education.
Temporary agency work has expanded in most
advanced economies since the 1990s, but its growth has been controversial.
Some argue that these jobs offer experience and contact with potential
employers, serving as a path to regular employment, particularly for
low-skilled workers. Others view them as traps, fostering low-wage, unstable
employment and providing little experience and few contacts.
Higher labor costs (higher wage rates and employee
benefits) make workers better off, but they can reduce companies’ profits,
the number of jobs, and the hours each person works. Overtime pay, hiring
subsidies, the minimum wage, and payroll taxes are just a few of the
policies that affect labor costs. Policies that increase labor costs can
substantially affect both employment and hours, in individual companies as
well as the overall economy.
Raising the minimum wage in developing countries
could increase or decrease poverty, depending on labor market
characteristics. Minimum wages target formal sector workers—a minority in
most developing countries—many of whom do not live in poor households.
Whether raising minimum wages reduces poverty depends not only on whether
formal sector workers lose jobs as a result, but also on whether low-wage
workers live in poor households, how widely minimum wages are enforced, how
minimum wages affect informal workers, and whether social safety nets are in
Economic growth requires factor reallocation
across firms and continuous replacement of technologies. Labor market
institutions influence economic dynamism by their impact on the supply of a
key factor, skilled workers to new and expanding firms, and the shedding of
workers from declining and failing firms. Growth-favoring labor market
institutions include portable pension plans and other job tenure rights,
health insurance untied to the current employer, individualized
wage-setting, and public income insurance systems that encourage mobility
Fixed-term contracts have become a major form of
employment in Europe. Available evidence about whether temporary jobs are a
stepping stone to a permanent employment or are a dead end is mixed. The
usefulness of these jobs depends on the institutional and economic
environment. Fixed-term contracts can be a pathway from unemployment to
employment, but their potential as a stepping stone to permanent employment
is undercut if there is a strong degree of segmentation in labor markets. If
that is the case, the labor flexibility motive of employers ends up
dominating the screening function in offering a fixed-term contract.
There is evidence that better performing firms
tend to enter international markets. Internationally active firms are
larger, more productive, and pay higher wages than other firms in the same
industry. Positive performance effects of engaging in international activity
are found especially in firms from less advanced economies that interact
with partners from more advanced economies. Lowering barriers to the
international division of labor should be part of any pro-growth policy.
Taxpayer effects are a central part of the total economic
costs and benefits of immigration, but they have not received much study. These effects
are the additional or lower taxes paid by native-born households due to the difference
between tax revenues paid and benefits received by immigrant households. The effects
vary considerably by immigrant attributes and level of government involvement, with
costs usually diminishing greatly over the long term as immigrants integrate fully into
For decades, pension systems were based on the
rising revenue generated by an expanding population (demographic dividend).
As changes in fertility and longevity created new population structures,
however, the dividend disappeared, but pension systems failed to adapt. They
are kept solvent by increasing redistributions from the shrinking
working-age population to retirees. A simple and transparent structure and
individualization of pension system participation are the key preconditions
for an intergenerationally just old-age security system.
Motivations for introducing a statutory minimum
wage in developing countries include reducing poverty, advancing social
justice, and accelerating growth. Attaining these goals depends on the
national context and policy choices. Institutional capacity tends to be
limited, so institutional arrangements must be adapted. Nevertheless, a
statutory minimum wage could help developing countries advance their
development objectives, even where enforcement capacity is weak and
informality is pervasive.
High unemployment and its social and economic
consequences have lent urgency to the question of how to improve
unemployment insurance in bad times without jeopardizing incentives to work
or public finances in the medium term. A possible solution is a rule-based
system that improves the generosity of unemployment insurance (replacement
rate, benefit duration, eligibility conditions) when unemployment is high
and reduces the generosity when it is low.
Economists once believed firms do not pay to
develop occupational skills that workers could use in other, often
competing, firms. Researchers now recognize that most firms benefit from
investing in apprenticeship training. Evidence indicates that financial
returns to firms vary. Some recoup their investment within the
apprenticeship period, while others see their investment pay off only after
accounting for reduced turnover, recruitment, and initial training costs.
Generally, the first year of apprenticeships involves significant costs, but
subsequently, the apprentice’s contributions exceed his/her wages and
supervisory costs. Most participating firms view apprenticeships as offering
certainty that all workers have the same high level of expertise and
ensuring a supply of well-trained workers during sudden increases in demand
and to fill leadership positions.
Governments regulate employment to protect
workers and to improve labor market efficiency. However, employment
regulations can be controversial, often complicated by opposing ideological
views. Thus, it is important for policymakers in developing countries to
base decisions on empirical evidence of the impacts of these regulations.
The majority of the evidence suggests that most countries have set their
regulations in the appropriate range. But it can be costly when countries
either overregulate or underregulate their labor market.
The potential benefits of higher minimum wages
come from the higher wages for affected workers, some of whom are in poor or
low-income families. The potential downside is that a higher minimum wage
may discourage employers from using the low-wage, low-skill workers that
minimum wages are intended to help. If minimum wages reduce employment of
low-skill workers, then minimum wages are not a “free lunch” with which to
help poor and low-income families, but instead pose a tradeoff of benefits
for some versus costs for others. Research findings are not unanimous, but
evidence from many countries suggests that minimum wages reduce the jobs
available to low-skill workers.
A key way for the world’s poor—nearly half of
humanity—to escape poverty is to earn more for their labor. Most of the
world’s poor people are self-employed, but because there are few
opportunities in most developing countries for them to earn enough to escape
poverty, they are working hard but working poor. Two key policy planks in
the fight against poverty should be: raising the returns to self-employment
and creating more opportunities to move from self-employment into higher
paying wage employment.
Outsourcing public provision of services tends to
lower labor intensity and increase its efficiency. Costs are usually lower,
but quality problems can affect services like health care and residential
youth care. Consumer choice has stimulated innovation in education, but the
picture is ambiguous for health care. Natural monopolies are unsuitable for
outsourcing. Network services (public transportation) may be outsourced
through public tenders. While some jobs may be lost in the short run, the
long-term effects are generally positive for a wide variety of
The micro- and macroeconomic effects of the
declining power of trade unions have been hotly debated by economists and
policymakers. Nevertheless, the empirical evidence shows that the impact of
the decline on economic aggregates and firm performance is not an
overwhelming cause for concern. However, the association of declining union
power with rising earnings inequality and a loss of direct communication
between workers and firms is potentially more worrisome. This in turn raises
the questions of how supportive contemporary unionism is of wage solidarity,
and whether the depiction of the nonunion workplace as an authoritarian
“bleak house” is more caricature than reality.
Arguments for increasing gender diversity on
boards of directors range from ensuring equal opportunity to improving firm
performance, but the empirical results are mixed and often negative. Current
research does not justify gender quotas on grounds of economic efficiency.
Furthermore, in most countries the number of women qualified to join boards
of directors is limited, and it is not clear from the evidence that quotas
lead to a larger pool of qualified female candidates in the medium and long
Entrepreneurs are a rare species. Even in
innovation-driven economies, only 1–2% of the work force starts a business
in any given year. Yet entrepreneurs, particularly innovative entrepreneurs,
are vital to the competitiveness of the economy. The gains of
entrepreneurship are only realized, however, if the business environment is
receptive to innovation. In addition, policymakers need to prepare for the
potential job losses that can occur in the medium term through “creative
destruction” as entrepreneurs strive for increased productivity.
The fiscal sustainability of state pensions is a
central concern of policymakers in nearly every advanced economy.
Policymakers have attempted to ensure the sustainability of these programs
in recent decades by raising retirement ages. However, there are concerns
that keeping older workers in the workforce for longer might have negative
consequences for younger workers. Since youth unemployment is a pressing
problem throughout advanced and developing countries, it is important to
consider the impact of these policies on the employment prospects of the
In-plant alliances that tailor specific
deviations from sectoral collective agreements on wages and working time are
intended to hold down labor costs. These agreements enable reorganizations
to respond to an imminent economic crisis or to improve competitiveness.
They encourage social partners to take greater responsibility for employment
issues. Both unions and works councils agree to such contracts because they
see them as inevitable to avoid severe employment losses. Thus, these
alliances substantially unburden public employment policy.
Environmental regulations such as air quality
standards can lead to notable improvements in ambient air quality and to
related health benefits. But they impose additional production costs on
firms and may reduce productivity, earnings, and employment, especially in
sectors exposed to trade and intensive in labor. The limited empirical
evidence suggests that the benefits are likely to outweigh the costs.
Despite declining bargaining power, unions
continue to generate a wage premium. Some feel collective bargaining has had
its day. Politicians on both sides of the Atlantic have recently called for
the removal of bargaining rights from workers in the name of wage and
employment flexibility, yet unions often work in tandem with employers for
mutual gain based on productivity growth. If this is where the premium
originates, then firms and workers benefit. Without unions bargaining
successfully to raise worker wages, income inequality would almost certainly
be higher than it is.
Unemployment insurance schemes face a well-known
trade-off between providing income support to those out of work and reducing
their incentive to look for work. This trade-off between benefits and
incentives is central to the public debate about extending benefit periods
during the recent economic crisis. Often overlooked in this debate is that
such support can increase the quality of the work found by the unemployed.
This quality rise, in terms of both wages and duration, can be achieved by
increasing the time and resources available to an individual to obtain a
Regulation of the minimum age of employment is
the dominant tool used to combat child labor globally. If enforced, these
regulations can change the types of work in which children participate, but
minimum age regulations are not a useful tool to promote education. Despite
their nearly universal adoption, recent research for 59 developing countries
finds little evidence that these regulations influence child time allocation
in a meaningful way. Going forward, coordinating compulsory schooling laws
and minimum age of employment regulations may help maximize the joint
influence of these regulations on child time allocation, but these
regulations should not be the focus of the global fight against child
Persistent unemployment after recessions and the policies
required to bring it down are the subject of an ongoing debate. One view suggests there
are fundamental changes in the labor market that imply a long-term higher rate of
unemployment, requiring the implementation of structural policy reforms. The alternative
view is that the slow recovery of the economy is due to cyclic reasons coming from lack
of demand which prevents unemployment from falling quickly. Knowing whether higher
unemployment is caused by structural change in the labor market or whether the problem
is cyclic determines how effective policy can be in addressing the problem.
The main purpose of minimum pension benefit
programs and old-age social assistance programs is to guarantee a minimum
standard of living after retirement and thus to alleviate poverty in old
age. In many developing and developed countries, the minimum pension program
is a key welfare program and a major influence on the retirement decisions
of low-income workers and workers with erratic work histories. The design of
many minimum pension programs tends to create strong incentives for
low-income workers to retire as soon as they become eligible for the
program, which is often earlier than the normal retirement age.
Alternative dispute resolution procedures such as
arbitration and mediation are the most common methods for resolving wage,
contract, and grievance disputes, but they lead to varying levels of success
and acceptability of the outcome depending on their design. Some innovative
procedures, not yet implemented in the real world, are predicted to improve
on existing procedures in some ways. But controlled tests of several
procedures show that the simple addition of a nonbinding stage prior to
binding dispute resolution can produce the best results in terms of cost
(monetary and “uncertainty” costs) and acceptability.
Trade regulation can create jobs in the sectors
it protects or promotes, but almost always at the expense of destroying a
roughly equivalent number elsewhere in the economy. At a product-specific or
micro level and in the short term, controlling trade could reduce the
offending imports and save jobs, but for the economy as a whole and in the
long term, this position has neither theoretical support nor empirical
evidence in its favor. Given that protection may have other—usually
adverse—effects, understanding the difficulties in using it to manage
employment is important for economic policy.
Immigrants are widely perceived to be highly
entrepreneurial, contributing to economic growth and innovation, and
self-employment is often viewed as a means of enhancing labor market
integration and success among immigrants. Accordingly, many countries have
established special visas and entry requirements to attract immigrant
entrepreneurs. Research supports some of these stances, but expectations may
be too high. There is no strong evidence that self-employment is an
effective tool of upward economic mobility among low-skilled immigrants.
More broadly prioritizing high-skilled immigrants may prove to be more
successful than focusing on entrepreneurship.
The potential economic outcomes resulting from a
flat rate of income tax have been the subject of an ongoing academic and
political debate. Many observers have suggested that the introduction of a
flat tax would be beneficial for a country’s economy, having a positive
influence on the labor market and the gross domestic product by enhancing
incentives to work, save, invest, and take risks. A flat tax also
significantly simplifies income taxation which increases tax compliance and
reduces tax planning, avoidance, and evasion. However, despite flat taxes
being on the political agenda in many countries, in practice their
implementation has mostly been restricted to the transition economy
countries of Eastern Europe. There is no one single flat tax system in place
in these countries though; one rate does not fit all.
Regulation of standard workweek hours and
overtime hours and pay can protect workers who might otherwise be required
to work more than they would like to at the going rate. By discouraging the
use of overtime, such regulation can increase the standard hourly wage of
some workers and encourage work sharing that increases employment, with
particular advantages for female workers. However, regulation of overtime
raises employment costs, setting in motion economic forces that can limit,
neutralize, or even reduce employment. And increasing the coverage of
overtime pay regulations has little effect on the share of workers who work
overtime or on weekly overtime hours per worker.
Entrepreneurship has a cyclical component,
raising two questions. Is the entrepreneurship cycle related to the business
cycle? And is there causality? A two-way relationship between
entrepreneurship and the business cycle would be in line with the two faces
of entrepreneurs: as agents of change creating upswings (opportunity
entrepreneurship) and as rational actors escaping unemployment by setting up
a business (necessity entrepreneurship). Nascent entrepreneurship can indeed
be precyclical, implying that the two faces of entrepreneurship also show up
in the business cycle, with promising policy implications.
To determine the full effects of taxation on
income distribution, policymakers need to consider the impacts of tax
evasion. In the standard analysis of tax evasion, all the benefits are
assumed to accrue to tax evaders. But tax evasion has other impacts that
determine its true effects. As factors of production move from tax-compliant
to tax-evading (informal) sectors, changes in relative prices and
productivity reduce incentives for workers to enter the informal sector. At
least some of the gains from evasion are thus shifted to the consumers of
the output of tax evaders, through lower prices.
Conventional wisdom and prevailing economic
theory hold that the new owners of a privatized firm will cut jobs and
wages. But this ignores the possibility that new owners will expand the
firm’s scale, with potentially positive effects on employment, wages, and
productivity. Evidence generally shows these forces to be offsetting,
usually resulting in small employment and earnings effects and sometimes in
large, positive effects on productivity and scale. Foreign ownership usually
has positive effects, and the effects of domestic privatization tend to be
larger in countries with a more competitive business environment.
Many studies document a large negative effect of
unemployment on happiness. Recent research has looked into factors related to impacts on
happiness, such as adaptation, social work norms, social capital, religious beliefs, and
psychological resources. Getting unemployed people back to work can do more for their
happiness than compensating them for doing nothing. But not all unemployed people are
equally unhappy. Understanding the differences holds the key to designing effective
policies, for helping the unemployed back into work, and for more evenly distributing
the burden of unemployment resulting from economic restructuring.
A considerable part of the poverty that is
measured in a single period is transitory rather than persistent. In most
countries, only a portion of people who are currently poor are persistently
poor. People who are persistently poor or who cycle into and out of poverty
should be the main focus of anti-poverty policies. Understanding the
characteristics of the persistently poor, and the circumstances and
mechanisms associated with entry into and exit from poverty, can help to
inform governments about options to reduce persistent poverty. Differences
in poverty persistence across countries can shed additional light on
possible sources of poverty persistence.
In recent decades, women’s participation in the
labor market has increased considerably in most countries and is converging
toward the participation rate of men. Though on a lesser scale, a similar
movement toward gender convergence seems to be occurring in the criminal
world, though many more men than women still engage in criminal activity.
Technological progress and social norms have freed women from the home,
increasing their participation in both the labor market and the crime
market. With crime no longer just men’s business, it is important to
investigate female criminal behavior to determine whether the policy
prescriptions to reduce crime should differ for women.
Flexible work time and retirement options are a
potential solution for the challenges of unemployment, aging populations,
and unsustainable pensions systems around the world. Voluntary part-time
workers in Europe and the US are happier, experience less stress and anger,
and are more satisfied with their jobs than other employees. Late-life
workers, meanwhile, have higher levels of well-being than retirees. The
feasibility of a policy that is based on more flexible work arrangements
will vary across economies and sectors, but the ongoing debate about these
multi-tiered challenges should at least consider such arrangements.
Social assistance programs are intended to
improve people’s well-being. However, that goal is undermined when eligible
people fail to participate. Reasons for non-participation can include
inertia, lack of information, stigma, the time and “hassle” associated with
applications and program compliance, as well as some programs’
non-entitlement status. Differences in participation across programs, and
over time, indicate that take-up rates can respond both positively and
negatively to policy change. However, there are clearly very identifiable
ways in which relevant agencies can improve take-up.
According to economic theory, a minimum wage
reduces the number of low-wage jobs and increases the number of available
workers, allowing greater hiring selectivity. More competition for a smaller
number of low-wage jobs will disadvantage immigrants if employers perceive
them as less skilled than native-born workers—and vice versa. Studies
indicate that a higher minimum wage does not hurt immigrants, but there is
no consensus on whether immigrants benefit at the expense of natives.
Studies also reach disparate conclusions on whether higher minimum wages
attract or repel immigrants.
Debate over labor market flexibility focuses
mainly on firing costs, while largely ignoring wage determination and the
need for collective bargaining reform. Most countries affected by the euro
debt crisis have two-tier bargaining structures in which plant-level
bargaining supplements national or industrywide (multi-employer) agreements,
taking the pay agreement established at the multi-employer level as a floor.
Two-tier structures were intended to link pay more closely to productivity
and to allow wages to adjust downward during economic downturns, while
preventing excessive earning dispersion. However, these structures seem to
fail precisely on these grounds.
Deregulation and managerial compensation are two
important topics on the political and academic agenda. The former has been a
significant policy recommendation in light of the negative effects
associated with overly restrictive regulation on markets and the economy.
The latter relates to the sharp increase in top executives’ pay and the
nature of the link between pay and performance. To the extent that
product-market competition can affect the incentive schemes offered by firms
to their executives, the analysis of the effects of competition on the
structure of compensation may be informative for policy purposes.
The rise in the average age of women bearing
their first child is a well-established demographic trend in recent decades.
Postponed childbearing can have important consequences for the mother and,
at a macro level, for the country as a whole. Research has focused on the
effect postponing fertility has on the labor market outcomes for mothers and
on the total number of children a woman has in her lifetime. Most research
finds that postponing the first birth raises a mother’s labor force
participation and wages but may have negative effects on overall fertility,
especially in the absence of supportive family-friendly policies.
In many countries, ethnic minority groups are
over-represented in self-employment compared with the majority community.
The kind of work done by minority entrepreneurs can therefore be an
important driver of the economic well-being of their ethnic group.
Furthermore, growing the self-employment sector is a policy objective for
many governments, which see it as a source of innovation, economic growth,
and employment. While self-employment might offer economic opportunities to
minority groups, it is important to understand the factors that underlie the
nature and extent of ethnic entrepreneurship to evaluate whether policy
measures should support it.
Income inequality is a critical issue in both
political and public debate. Educational attainment is a key causal factor
of continuing inequality, since it influences human capital accumulation
and, as a consequence, the unequal distribution of earnings. Educational
inequality displays a racial dimension that is particularly persistent and
difficult to eradicate through policy measures. Its roots lie in the
colonial institution of slave labor, which was widespread in the US and
Latin America up until the 19th century. However, the influence of slavery
differs significantly across countries and between regions.
The shadow (underground) economy plays a major
role in many countries. People evade taxes and regulations by working in the
shadow economy or by employing people illegally. On the one hand, this
unregulated economic activity can result in reduced tax revenue and public
goods and services, lower tax morale and less tax compliance, higher control
costs, and lower economic growth rates. But on the other hand, the shadow
economy can be a powerful force for advancing institutional change and can
boost the overall production of goods and services in the economy. The
shadow economy has implications that extend beyond the economy to the
Automation and globalization have brought about a
tremendous increase in productivity, but also accelerated job destruction, systemic
risks, and greater income inequality. Current social policies may not be adequate for
achieving the goals of redistributing the gains from automation and globalization,
providing efficient buffers against economic shocks, and advancing the reallocation of
jobs and skills. Under certain circumstances, an unconditional basic income might be a
better alternative for achieving those goals. It is simple, transparent, and has low
administrative costs, though it may require higher taxes.
In many countries, the minimum wages and working
conditions set in collective bargaining contracts negotiated by a limited set of
employers and unions are subsequently extended to all the employees in an industry.
Those extensions ensure common working conditions within the industry, limit wage
inequality, and reduce gender wage gaps. However, several studies suggest that those
benefits come at the cost of reduced employment levels, especially during recessions.
The income losses of workers who are displaced because of a collective contract
extension can offset the wage gains among workers who keep their jobs.
The German model of co-determination (Mitbestimmung) with works councils, in which workers are involved in the
management of a company, was a role model for other countries for many years. However,
since the 1990s the appeal of works councils has been declining, to the extent that now
even employees are sometimes voting against representation. This was recently
demonstrated by workers at the Volkswagen factory in Chattanooga, Tennessee, who voted
against union representation. An important question for firms and for policymakers is
whether the adoption of a works council has a positive influence on a firm’s
productivity and what the consequences are for a firm’s profits.
People who are unable to maintain the same
standard of living as others around them experience a sense of relative
deprivation that has been shown to reduce feelings of well-being. Relative
deprivation reflects conditions of worsening relative poverty despite
striking reductions in absolute poverty. The effects of relative deprivation
explain why average happiness has been stagnant over time despite sharp
rises in income. Consumption taxes on status-seeking spending, along with
official and traditional sanctions on excess consumption and redistributive
policies may lessen the negative impact of relative deprivation on well-being.
Rising life expectancy and the growing fiscal
insolvency of public pension systems have prompted many developed countries
to raise the pension entitlement age. The success of such policies depends
on the responsiveness of individuals to such changes. Retirement has
increasingly become a decision made jointly by a couple rather than
individually by one partner. The empirical evidence indicates that almost a
third of dual-earner couples in Europe and the US coordinate their
retirement decision despite age differences between partners. This joint
determination of retirement has important implications for policies intended
to reduce the burden of pension costs.
There are large international differences in the
gender pay gap. In some developed countries in 2010–2012, women were close
to earnings parity with men, while in others large gaps remained. Since
women and men have different average levels of education and experience and
commonly work in different industries and occupations, multiple factors can
influence the gender pay gap. Among them are skill supply and demand,
unions, and minimum wages, which influence the economywide wage returns to
education, experience, and occupational wage differentials. Systems of wage
compression narrow the gender pay gap but may also lower demand for female
Measures of individual happiness, or well-being,
can guide labor market policies. Individual unemployment, as well as the
rate of unemployment in society, have a negative effect on happiness. In
contrast, employment protection and unemployment benefits can contribute to
happiness—though when such policies prolong unemployment, the net effect on
national happiness is negative. Active labor market policies that create
more job opportunities increase happiness, which in turn increases
productivity. Measures of individual happiness should therefore guide labor
market policy more explicitly.
An increase in the minimum wage in immigrant
destination countries raises the earnings that low-skilled migrants could
expect to attain if they were to migrate. While some studies for the US
indicate that a higher minimum wage induces immigration, contrasting
evidence shows that immigrants are less likely to move into areas with
higher or more frequent increases in the minimum wage. These different
findings seem to reflect different relocation decisions by immigrants who
have lived in the US for several years, who are more likely to move in
response to higher minimum wages, and by new immigrants, who are less likely
Many firms offer employees a remuneration
package that links pay to performance as a means of motivation. It also
improves efficiency and reduces turnover and absenteeism. The effects on
productivity depend on the type of scheme employed (individual or group
performance) and its design (commissions, piece-rate or sharing schemes).
Individual incentives demonstrate the largest effect, while group or team
incentives are smaller in magnitude. The case for government intervention
through tax breaks and other financial incentives is highly debated due to
differences across firms and the potential for economic inefficiencies.
Minimum wage increases are not an effective
mechanism for reducing poverty. And there is little causal evidence that
they do so. Most workers who gain from minimum wage increases do not live in
poor (or near-poor) families, while some who do live in poor families lose
their job as a result of such increases. The earned income tax credit is an
effective way to reduce poverty. It raises only the after-tax wage rates of
workers in low- and moderate-income families, its tax credit increases with
the number of dependent children, and evidence shows that it increases labor
force participation and employment in these families.
Studies find that technological change has
contributed to the decline in manufacturing and to persistent unemployment
in many advanced economies. While process innovation can be job-destroying,
product innovation can imply the emergence of new firms, new sectors, and
thus new jobs. But even for process innovation, the final impact on labor
demand is shaped by market mechanisms that can compensate for the direct
job-destroying impact if market and institutional rigidities do not impede
them. Policies should maximize the job-creation effect of product innovation
and minimize the direct labor-saving impact of process innovation.
Robots, that is any sort of machinery from
computers to artificial intelligence programs that provides a good
substitute for work currently performed by humans, can increasingly replace
workers, even highly skilled professionals, and thus reduce opportunities
for good jobs and pay. But, with appropriate policies, the higher
productivity due to robots can improve worker well-being by raising incomes
and creating greater leisure for workers. Consider the way Google reduces
the need for reference librarians and research assistants, or the way
massive open online courses reduce the need for professors and lecturers.
How these new technologies affect worker well-being and inequality depends
on who owns them.
Because entrepreneurial activity can stimulate
job creation and long-term economic growth, promoting entrepreneurship is an
important goal. However, many financial, bureaucratic, and social barriers
can short-circuit the process of actually starting a business, especially in
transition economies that lack established institutional systems and
markets. The main obstacles are underdeveloped financial markets,
perceptions of administrative complexity, political and economic
instability, and lack of trust in institutions. Gender disparities in the
labor market are also reflected in less entrepreneurial activity among women
Direct wage comparisons show that public-sector
employees earn around 15% more than private-sector employees. But should
these differences be interpreted as a “public-sector premium”? Two points
need to be considered. First, the public and private sectors differ in the
jobs they offer and the type of workers they employ, which explains a large
share of the wage gap. Second, public- and private-sector careers also
differ in other important dimensions, such as job stability and income
progression, which are relevant to individual career choices. So any
comparison of the two sectors should take these points into account.
Long-term unemployment can lead to skill
attrition and have detrimental effects on future employment prospects,
particularly following periods of economic crises when employment growth is
slow and cannot accommodate high levels of unemployment. Addressing this
problem requires the use of active labor market policies targeted at the
unemployed. In this context, hiring subsidies can provide temporary
incentives for firms to hire unemployed workers and, when sensibly targeted,
are a very cost-effective and efficient means of reducing unemployment,
during both periods of economic stability and recovery.
Can entrepreneurship programs be successful
labor market policies for the poor? A large share of workers in developing
countries are self-employed in low-paying work or engage in low-return
entrepreneurial activities that keep these workers in poverty.
Entrepreneurship programs provide business training and access to finance,
advisory, and networking services with the aim of boosting workers’ earnings
and reducing poverty. Programs vary in design, which can affect their impact
on outcomes. Recent studies have identified some promising approaches that
are yielding positive results, such as combining training and financial
The impact of offshoring on domestic jobs is
more complicated than it first appears. In the standard narrative,
offshoring production is thought to harm domestic workers by providing cheap
alternative sources of labor. However, while offshoring may directly
displace domestic workers, the resulting foreign market access and lower
production costs allow domestic firms to increase efficiency, expand
production, and thus create new jobs for domestic workers. These new jobs
often involve more complex tasks, as revealed by the positive relation
between the share of offshored jobs and the average cognitive and
interactive task content of domestic jobs.
Before the great recession of 2008–2009, the
“flexicurity” model (with flexibility for firms to adjust their labor force
along with income security for workers through the social safety net)
attracted attention for its ability to deliver low unemployment. But how did
it fare during the recession, especially in Denmark, which has been
highlighted as having a well-functioning flexicurity model? Flexible hiring
and firing rules are expected to lead to large adjustments in employment in
a recession. Did the high rate of job turnover continue or did long-term
unemployment rise? And did the social safety net become overburdened?
The trend towards labor market flexibility in
Europe has typically involved introducing legislation that makes it easier
for firms to issue temporary contracts with low firing costs, while not
changing the level of protection that is in place for permanent jobs. This
has created a strong “dualism” in some European labor markets, which might
affect turnover, wage setting, and human capital accumulation. In view of
this, some economists propose replacing the existing system of temporary and
permanent contracts by a single open-ended contract for new hires, with
severance pay smoothly increasing with tenure on the job.
As part of a more general process of employment
reallocation from less to more productive employers, job-to-job flows tend
to be beneficial for productivity and for workers. Thus, when this rate
slows, it is important to understand why. In the US, for example, the
job-to-job flow rate is now at an all-time low. While job-to-job flows are a
means of boosting wages and productivity, a decline could indicate
improvements for workers if it means that they are now better matched to
their jobs. Furthermore, when job-to-job flows are lower, firms and workers
incur fewer costs related to job transitions, such as job search and hiring
The demand for institutional long-term care is
likely to remain high in OECD countries, because of longer life expectancy
and falling cohabitation rates of the elderly with family members. As
shortages of qualified nurses put a cap on the supply of beds at nursing
homes, excess demand builds. That puts upward pressure on prices, which may
not reflect the quality of the services that are provided. Monitoring the
quality of nursing home services is high on the agenda of OECD governments.
Enlisting feedback from family visitors and introducing portable benefits
might improve quality at little extra cost.
In the transition from central planning to a
market economy in the 1990s, governments focused on privatizing or closing
state enterprises, reforming labor markets, compensating laid-off workers,
and fostering job creation through new private firms. After privatization,
the focus shifted to creating a level playing field in the product market by
protecting property rights, enforcing the rule of law, and implementing
transparent start-up regulations. A fair, competitive environment with
transparent rules supports long-term economic growth and employment creation
through the reallocation of jobs in favor of new private firms.
Because theoretical arguments differ on the
economic impact of collective bargaining agreements in developing countries,
empirical studies are needed to provide greater clarity. Recent empirical
studies for some Latin American countries have examined whether industry- or
firm-level collective bargaining is more advantageous for productivity
growth. Although differences in labor market institutions and in coverage of
collective bargaining agreements limit the generalizability of the findings,
studies suggest that work rules may raise productivity when negotiated at
the firm level but may sometimes lower productivity when negotiated at the
The earned income tax credit provides important
benefits to low-income families with children in the US. At an annual cost
of about $60 billion, it increases the incomes of such families while
encouraging parents to work more by subsidizing their incomes. But
low-income adults without children and non-custodial parents receive only
very low payments under the program, providing them with little income
benefits or work incentives. Many of these adults are low-income young men
whose wages and employment rates have been declining for years and who might
benefit substantially from expanded eligibility for the earned income tax
Active labor market programs continue to receive
high priority in wealthy countries despite the fact that the benefits appear
small relative to the costs. This apparent discrepancy suggests that the
programs may have a broader purpose than simply increasing employment—for
instance, preventing anti-social behavior such as crime. Indeed, recent
evidence shows that participation in active labor market programs reduces
crime among unemployed young men. The existence of such effects could
explain why it is the income-redistributing countries with greater income
equality that spend the most on active labor market programs.
Population aging in many developed countries has
motivated some governments to provide wage subsidies to employers for hiring
or retaining older workers. The subsidies are intended to compensate for the
gap between the pay and productivity of older workers, which may discourage
their hiring. A number of empirical studies have investigated how wage
subsidies influence employers’ hiring and employment decisions and whether
the subsidies are likely to be efficient. To which groups subsidies should
be targeted and how the wage subsidy programs interact with incentives for
early retirement are open questions.
A considerable share of the labor force consists
of underemployed part-time workers: employed workers who, for various
reasons, are unable to work as much as they would like to. Offering
unemployment benefits to part-time unemployed workers is controversial. On
the one hand, such benefits can strengthen incentives to take a part-time
job rather than remain fully unemployed, thus raising the probability of
obtaining at least some employment. On the other hand, these benefits weaken
incentives for part-time workers to look for full-time employment. It is
also difficult to distinguish people who work part-time by choice from those
who do so involuntarily.
Although coverage of collective bargaining
agreements has been declining for decades in most countries, it is still
extensive, especially in non-Anglo-Saxon countries. Strong unions may
influence firms’ incentives to invest in capital, particularly in sectors
where capital investments are sunk (irreversible), as in research-intensive
sectors. Whether unions affect firms’ investment in capital depends on the
structure and coordination of bargaining, the preference of unions between
wages and employment, the quality of labor-management relations, and the
existence of social pacts, among other factors.
The minimum wage has never been as high on the
political agenda as it is today, with politicians in Germany, the UK, the
US, and other OECD countries calling for substantial increases in the rate.
One reason for the rising interest is the growing consensus among economists
and policymakers that minimum wages, set at the right level, may help
low-paid workers without harming employment prospects. But how should
countries set their minimum wage rate? The processes that countries use to
set their minimum wage rate and structure differ greatly, as do the methods
for adjusting it. The different approaches have merits and shortcomings.
Many measures of job satisfaction have been
trending downward. Because jobs are a key part of most people’s lives,
knowing what makes a good job (job quality) is vital to knowing how well
society is doing. Integral to worker well-being, job quality also affects
the labor market through related decisions on whether to work, whether to
quit, and how much effort to put into a job. Empirical work on what
constitutes a good job finds that workers value more than wages; they also
value job security and interest in their work. Policy to affect job quality
requires information on the cost of the different aspects of job quality and
how much workers value them.
Standard hours, a major component of total work
hours, vary considerably across Europe. Many countries lowered their
standard work hours during the 1980s and 1990s, attempting to boost
employment by splitting up a fixed number of worker-hours among more
workers. Germany has seen a partial reversal of the trend as several
companies increased their standard hours to reduce their labor costs in the
early 2000s. The employment effect of increased standard hours depends on
the time horizon examined, how wages respond, whether employees collected
overtime pay before the change, and the productivity of hours worked, among
Globalization brings both good and bad job news.
The bad news is that jobs will be outsourced from high-cost developed
countries into lower-cost locations as soon as the associated economic
activity becomes mechanized and predictable. The good news is that
globalization creates opportunities that can be realized by people bold
enough to transform new ideas and knowledge into innovations. In that way,
entrepreneurs will play a vital role in creating the jobs of the future by
transforming ideas and knowledge into new products and services, which will
be the competitive advantage of the advanced economies.
Proponents of minimum wage increases have argued
that such hikes can serve as an engine of economic growth and assist
low-skilled individuals during downturns in the business cycle. However, a
review of the literature provides little empirical support for these claims.
Minimum wage increases redistribute gross domestic product away from
lower-skilled industries and toward higher-skilled industries and are
largely ineffective in assisting the poor during both peaks and troughs in
the business cycle. Minimum wage-induced reductions in employment are found
to be larger during economic recessions.
Aside from employment protection laws, which
have been converging, other labor market institutions in new and old EU
member states, such as wage bargaining coordination and labor union density,
still differ considerably. These labor market institutions also differ among
the new EU member states, with the Baltic countries being much more liberal
than the others. Research that pools data on old and new EU member states
shows that wage coordination mechanisms can improve a country’s
macroeconomic performance. Stronger wage coordination and higher union
density reduce the response of inflation to the business cycle.
Economists typically predict that people are
inherently selfish; however, experimental evidence suggests that this is
often not the case. In particular, delegating a choice (such as a wage) to
the performing party may imbue this party with a sense of responsibility,
leading to improved outcomes for both the delegating entity and the
performing party. This strategy can be risky, as some people will still
choose to act in a selfish manner, causing adverse consequences for
productivity and earnings. An important issue to consider is therefore how
to encourage a sense of responsibility in the performing party.
Profit sharing can lead to higher productivity
and thus to higher firm profitability and employee wages. It may also
enhance employment stability by enabling firms to adjust wages during
downturns rather than lay off workers. While adoption of profit sharing
increases earnings fluctuations, it also increases earnings growth in the
longer term. As with any group incentive plan, profit sharing may result in
some workers benefiting from the effort of others without themselves
exerting greater effort (“free-rider problem”). However, there is evidence
that in team-based production workplaces, profit sharing may reduce shirking
and thus contribute to productivity growth.
Imagine a government confronted with a
controversial policy question, like whether it should cut the level of
unemployment benefits. Will social welfare rise as a result? Will some
groups be winners and other groups be losers? Will the welfare gap between
the employed and unemployed increase? “Happiness data” offer a new way to
make these kinds of evaluations. These data allow us to track the well-being
of the whole population, and also sub-groups like the employed and
unemployed people, and correlate the results with relevant policy
Policymakers in many OECD countries are
increasingly concerned about high and rising inequality. Much of the
evidence (as far back as Adam Smith’s The Wealth of
Nations) points to the importance of skills in tackling wage
inequality. Yet a recent strand of the research argues that (cognitive)
skills explain little of the cross-country differences in wage inequality.
Does this challenge the received wisdom on the relationship between skills
and wage inequality? No, because this recent research fails to account for
the fact that the price of skill (and thus wage inequality) is determined to
a large extent by the match of skill supply and demand.
Many OECD countries have, or have had, a policy
that exempts older unemployed people from the requirement to search for a
job. An aging population and low participation by older workers in the labor
market increasingly place public finances under strain, and spur calls for
policy measures that activate labor force participation by older workers.
Introducing job search requirements for the older unemployed aims to
increase their re-employment rates. Abolishing the exemption from job search
requirements for these workers has been shown to initiate higher outflow
rates from unemployment for the older unemployed.
Policymakers often propose a minimum wage as a
means of raising incomes and lifting workers out of poverty. However,
improvements in some young workers’ incomes as a result of a minimum wage
come at a cost to others. Minimum wages reduce employment opportunities for
youths and create unemployment. Workers miss out on on-the-job training
opportunities that would have been paid for by reduced wages upfront but
would have resulted in higher wages later. Youths who cannot find jobs must
be supported by their families or by the social welfare system. Delayed
entry into the labor market reduces the lifetime income stream of young
High risk of poverty and low employment rates
are widespread among low-skilled groups, especially in the case of some
household compositions (e.g. single mothers). “Making-work-pay” policies
have been advocated for and implemented to address these issues. They
alleviate the above-mentioned problems without providing a disincentive to
work. However, do they deliver on their promises? If they do reduce poverty
and enhance employment, can we further determine their effects on indicators
of well-being, such as mental health and life satisfaction, or on the
acquisition of human capital?
Low fertility rates are a cause of social
concern in many developed countries, with growing youth unemployment often
being considered a primary cause. However, economic theory is not conclusive
about whether deterioration in youth employment prospects actually
discourages family formation or for how long the effect might persist. In
addition, recessions can affect the divorce rate. Therefore, understanding
the relationship between labor market conditions and family formation can
provide important insights into the type of policies that would be most
effective in promoting fertility.
Current cohorts of young adults entered
adulthood during an international labor and housing market crisis of a
severity not experienced since the Great Depression. Concerns have arisen
over the impacts on young adults’ employment, income, wealth, and living
arrangements, and about whether these young adults constitute a “scarred
generation” that will suffer permanent contractions in financial well-being.
If true, knowing the mechanisms through which young adults’ finances have
been affected has important implications for policy measures that could
improve the financial well-being of today’s young adults in the present and
About one in five workers across OECD countries
is employed part-time, and the share has been steadily increasing since the
beginning of the economic and financial crisis in 2007. Part-time options
play an important economic role by providing more flexible working
arrangements for both workers and firms. Part-time employment has also
contributed substantially to increasing the employment rate, especially
among women. However, part-time work comes at a cost of lower wages for
workers, mainly because part-time jobs are concentrated in lower paying
occupations and sectors, while the impact on firms’ productivity is still
not very clear.
Entrepreneurship is essential to job creation
and to productivity growth and therefore is an important matter for
government policy. However, policymakers face a difficult challenge because
successful growth for a few firms—which cannot easily be identified in
advance—is accompanied by widespread failure for most other new firms.
Predicting which firms will fail and which will succeed is nearly
impossible. Instead of futilely trying to pick winners, governments can play
a useful role in facilitating the growth of the most promising firms by
setting the conditions for efficient trial-and-error experimentation across
In Europe, about one in eight people of working
age report having a disability; that is, the presence of a long-term
limiting health condition. Despite the introduction of a range of
legislative and policy initiatives designed to eliminate discrimination and
facilitate retention of and entry into work, disability is associated with
substantial and enduring employment disadvantages. Identifying the reasons
for this is complex, but critical to determine effective policy solutions
that reduce the social and economic costs of disability disadvantage.
A pieceworker receives a fixed rate for each
unit (“piece”) produced or action performed. In part, the rate reflects a
cost of monitoring output. A timeworker receives a fixed wage rate per hour
that, in the short term, does not vary with output performance. From the
18th century up to the last third of the 20th century these were the two
dominant payment methods in the manufacturing and production industries.
Yet, today the incidence of piecework in advanced economies is very small,
having lost considerable ground to time rates and to other forms of
incentive pay. What caused this transformation, and has the movement away
from piecework gone too far?
Female-led ventures that are market-expanding,
export-oriented, and innovative contribute substantially to local and
national economic development, as well as to the female entrepreneur’s
economic welfare. Female-led ventures also serve as models that can
encourage other high-potential female entrepreneurs. The supply of
high-potential entrepreneurial ventures is driven by individuals’
entrepreneurial attitudes and institutional factors associated with a
country’s conditions for entrepreneurial expansion. A systematic assessment
of those factors can show policymakers the strengths and weaknesses of the
environment for high-potential female entrepreneurship.
Corporate income taxation influences the
quantity and type of entrepreneurship, which in turn affects economic
development. Empirical evidence shows that higher corporate income tax rates
reduce business density and entrepreneurship entry rates and increase the
capital size of new firms. The progressivity of tax rates increases
entrepreneurship entry rates, whereas highly complex tax codes reduce them.
Policymakers should understand the effects and underlying mechanisms that
determine how corporate income taxation influences entrepreneurship in order
to provide a favorable business environment.
Economic self-interest and social considerations
are the key determinants of public support for market reforms in transition
countries. However, political strategies that rely mainly on public support
for pushing through economic reforms have limited relevance if the
prevailing institutional environment is weak or corrupt. Poor governance and
under-developed democracy significantly reduce the level of support. A good
institutional framework allows the potential gains from reforms to be
realized in a beneficial way, while corruption and poor governance deny the
prospect of gains for individuals and for society.
Income inequality has been rising in many
countries. Is this bad? One way to decide is to look at the change in
incomes across generations (intergenerational mobility) and, more generally,
at the extent to which income differences among individuals are traceable to
their social origins. Inequalities that reflect factors largely out of one’s
control—such as local schools and communities—require attention in order to
reduce income inequality. Evidence shows a negative association between
income inequality and intergenerational mobility. The debate on whether
community effects exert additional effects is still open.
Family and kinship networks are important in
helping people get jobs and start companies, as statistics for developing
countries show. Promising new research has begun to assess the positive and
negative effects of these family and kinship ties on entrepreneurial
success. To what extent, and why, are family networks used, and do they
result in better economic outcomes for entrepreneurs? Results point to the
need for policymakers to identify and emulate efficient informal networks in
order to develop innovative support policies for vulnerable entrepreneurs,
especially for those who are attached to weak or inefficient networks.
The evidence is mixed on whether informal labor
in developing countries benefits from trade and labor market reforms.
Reforms lead to higher wages and improved employment conditions in the
informal sector in some cases, and to the opposite effect in others. At a
cross-country level, lifting trade protection boosts informal-sector
employment. The direction and size of the impacts on informal-sector
employment and wages are determined by capital mobility and the interactions
between trade and labor market reforms and public policies, such as
monitoring the formal sector. To guarantee best practice policymakers need
to take these interdependencies into account.
New environmental technologies
(environmental/eco-innovations) are often regarded as potential job creators—in addition
to their positive effects on the environment. Environmental regulation may induce
innovations that are accompanied by positive growth and employment effects. Recent
empirical analyses show that the introduction of cleaner process innovations, rather
than product-based ones, may also lead to higher employment. The rationale is that
cleaner technologies lead to cost savings, which help to improve the competitiveness of
firms, thereby inducing positive effects on demand.
Most OECD countries have recently introduced
product market reforms with the objective of lowering barriers to entry and
increasing competition in many sectors, such as telecommunications,
utilities, and transport. The timing and extent of regulatory reform have
varied significantly, starting in the US in the early 1980s and in the
mid-1990s in many European countries. Will these developments improve
economic performance in terms of creating jobs, fostering investment, and
encouraging innovations—all of which are important factors for
Unemployment not only causes material hardship but can also
affect an individual’s sense of identity (i.e. their perception of belonging to a specific
social group) and, consequently, feelings of personal happiness and subjective well-being.
Labor market policies designed to help the unemployed may not overcome their misery: wage
subsidies can be stigmatizing, workfare may not provide the intended incentives, and
flexicurity (a system that combines a flexible labor market with active policy measures), may
increase uncertainty. Policies aimed at bringing people back to work should thus take the
subjective well-being of the affected persons more into consideration.
In addition to the heart-breaking human costs,
violent civil rebellion is a cause of chronic economic under-development.
Employment programs with former combatants and at-risk youth have improved
their livelihoods, but not their support for non-violence and respect for
law. Rebel groups provide security and social benefits that formal
employment does not offer, possibly making switching out of rebellion into
formal employment unappealing. However, a jobs program that addressed the
psycho-social motivations to join rebel groups resulted in significant
reductions in crime and violence. This is an important step forward in our
understanding of how to lure people away from violent rebellion.
Economic growth is essential, though not
sufficient, for poverty reduction in developing countries. Research based on
many different approaches and including both cross- country and
intra-country studies shows that international trade can contribute to
economic growth, and thus can help many poor people escape poverty. However,
the domestic environment has to be conducive to realizing the
poverty-reduction benefits of increased trade. Complementary domestic
policies and institutions needed include regulations that foster labor
mobility, adequate financial development, and good public
Higher wages increase labor costs but also
improve the productivity of the labor force in several ways. If firms take
this into account and set their wages accordingly, the resulting wages could
fail to adjust demand and supply but may induce phenomena like
over-education, discrimination, regional wage differentials, and a tendency
for larger firms to pay higher wages. All these phenomena are quantitatively
important and well-established empirically. Efficiency wage theory provides
an integrated theoretical explanation rather than a sundry list of reasons,
and offers an efficiency argument for progressive income taxation.
Low-wage employment has become an important
feature of the labor market and a controversial topic for debate in many
countries. How to interpret the prominence of low-paid jobs and whether they
are beneficial to workers or society is currently an open question. The
answer depends on whether low-paid jobs are largely transitory and serve as
stepping stones to higher-paid employment, whether they become persistent,
or whether they result in repeated unemployment. The empirical evidence is
mixed, pointing to both stepping-stone effects and “scarring” effects (i.e.
long-lasting detrimental effects) of low-paid work.
The Mincer equation—arguably the most widely
used in empirical work—can be used to explain a host of economic, and even
non-economic, phenomena. One such application involves explaining (and
estimating) employment earnings as a function of schooling and labor market
experience. The Mincer equation provides estimates of the average monetary
returns of one additional year of education. This information is important
for policymakers who must decide on education spending, prioritization of
schooling levels, and education financing programs such as student
In transition economies, a significant number of
companies reduce their tax and social contributions by paying their staff an
official salary, described in a registered formal employment agreement, and
an extra, undeclared “envelope wage,” via a verbal unwritten agreement. The
consequences include a loss of government income and a lack of fair play for
lawful companies. For employees, accepting under-reported wages reduces
their access to credit and their social protections. Addressing this issue
will help increase the quality of working conditions, strengthen trade
unions, and reduce unfair competition.
The Great Recession that began in 2008–2009
dramatically increased youth unemployment. But did it have long-lasting,
adverse effects on the careers of youths? Are cohorts that graduate during a
recession doomed to fall permanently behind those that graduate at other
times? Are the impacts different for low- and high-educated individuals? If
recessions impose penalties that persist over time, then more government
outlays are justified to stabilize economic activity. Scientific evidence
from a variety of countries shows that rigid labor markets can reinforce the
persistence of these setbacks, which has important policy implications.
Recessions are complex events that affect
personal health and behavior via various potentially opposing mechanisms.
While recessions are known to have negative effects on mental health and
lead to an increase in suicides, it has been proven that they reduce
mortality rates. A general health policy agenda in relation to recessions
remains ambiguous due to the lack of consistency between different
individual- and country-level approaches. However, aggregate regional
patterns provide valuable information, and local social planners could use
them to design region-specific policy responses to mitigate the negative
health effects cause by recessions.
Expenditures on job placement and related
services make up a substantial share of many countries’ GDP. Contracting out
to private providers is often proposed as a more efficient alternative to
the state provision of placement services. However, the responsible state
agency has to design and monitor sufficiently complete contracts to ensure
that the private contractors deliver the desired quality of services. None
of the recent empirical evidence indicates that contracting out is
necessarily more effective or more efficient than public employment
Global value chains (GVCs) describe the
cross-national activities and inputs required to bring a product or service
to the market. While they can boost exports and productivity, the resulting
labor market impacts vary significantly across developing countries. Some
experience large-scale manufacturing employment, while others see a shift in
demand for labor from manufacturing to services, and from lower to higher
skills. Several factors shape the way in which a country’s labor market will
be impacted by GVC integration, including the type of sector, lead firms’
strategies, domestic skills base, and the institutional environment.
Activation programs, such as job search
assistance, training, or work experience programs for unemployed workers,
typically initially produce negative employment effects. These so-called
“lock-in effects” occur because participants spend less time and effort on
job search activities than non-participants. Lock-in effects need to be
offset by sufficiently large post-participation employment or earnings for
the programs to be cost-effective. They represent key indirect costs that
are often more important than direct program costs. The right timing and
targeting of these programs can improve their cost-effectiveness by reducing
The internet has transformed the way in which
voters access and receive political information, such that it has
circumvented the filtering of information previously undertaken by editorial
offices. Consequently, consumers have had to learn how to filter relevant
information themselves. The introduction phase of the internet coincided
with a decreasing voter turnout, possibly due to “information overload” or
less-focused political information. However, the subsequent rise of social
media may help reverse the negative effect on turnout. But this poses
challenges for regulatory policy. Understanding the internet’s effects on
the consumption of information is also relevant for how voters view labor
Unemployment insurance can be an efficient tool
to provide protection for workers against unemployment and foster formal job
creation in developing countries. How much workers value this protection and
to what extent it allows a more efficient job search are two key parameters
that determine its effectiveness. However, evidence shows that important
challenges remain in the introduction and expansion of unemployment
insurance in developing countries. These challenges range from achieving
coverage in countries with high informality, financing the scheme without
further distorting the labor market, and ensuring progressive
Productive inclusion programs provide an integrated
package of services, such as grants and training, to promote self-employment and wage
employment among the poor. They show promising long-term impacts, and are often proposed
as a way to graduate the poor out of social assistance. Nevertheless, neither productive
inclusion nor social assistance will be able to solve the broader poverty challenge
independently. Rather, the future is in integrating productive inclusion into the
existing social assistance system, though this poses several design, coordination, and
Social networks, or “job-referral” networks, can help make
labor markets become more efficient. Outside the firm, they help workers obtain employment
after displacement and secure higher-paying jobs. They can also match highly-skilled workers
to more productive employment. Inside the firm, referrals facilitate employment relationships
that are more stable, productive, and profitable. In aggregate, referral networks help “grease
the wheels” of a labor market that can be beset by a range of information problems. However,
such networks can also be segmented along racial, ethnic, and socio-economic lines, which
brings into question the effect they may have on inequality between and within different
groups of workers.
The number of immigrants from developing countries living
in richer, more developed countries has increased substantially during the last decades.
At the same time, the quality of institutions in developing countries has also improved.
The data thus suggest a close positive correlation between average emigration rates and
institutional quality. Recent empirical literature investigates whether international
migration can be an important factor for institutional development. Overall, the
findings indicate that emigration to institutionally developed countries induces a
positive effect on home-country institutions.
Public schemes for sickness benefits and disability insurance
are often criticized for the lack of incentive they provide for preventive and reintegration
activities by employers. To stimulate the interest of employers in engaging with these
schemes, several modes of privatization could be considered, including the provision of
sickness benefits by employers, “experience rating” of disability insurance costs, employer
self-insurance, or insurance by private insurance providers. These types of employer
incentives seem to lower sickness rates, but they also come at the risk of increased
under-reporting and less employment opportunities for workers with disabilities or bad health
conditions. Policymakers should be aware of this trade-off.
Gender wage gaps and women’s underrepresentation
in leadership positions exist at remarkably similar magnitudes across
countries at all levels of income per capita. Women’s educational attainment
and labor market participation have improved, but this has been insufficient
to close the gaps. A combination of economic forces, cultural and social
norms, discrimination, and unequal legal rights appear to be contributing to
gender inequality. A range of policy options (such as quotas) have been
implemented in some countries; some have been successful, whereas for others
the effects are still unclear.
Policymakers rely on entrepreneurs to create
jobs, provide incomes, innovate, pay taxes to support public revenues,
create competition in industries, and much more. Due to its highly
heterogeneous nature, the choice of entrepreneurship measures is critically
important, impacting the diagnosis, analysis, projection, and understanding
of potential and existing policy. Some key aspects to measure include the
how (self-employment, new firm formation),
why (necessity, opportunity), and what (growth). As such, gaining better insight into
the challenges of measuring entrepreneurship is a necessary and productive
investment for policymakers.
Employment tribunals or labor courts are
responsible for enforcing employment protection legislation and adjudicating
rights-based disputes between employers and employees. Claim numbers are
high and, in Great Britain, have been rising, affecting both administrative
costs and economic competitiveness. Reforms have attempted to reduce the
number of claims and to improve the speed and efficiency of dealing with
them. Balancing employee protection against cost-effectiveness remains
difficult, however. Gathering evidence on tribunals, including on claim
instigation, resolution, decision making, and post-tribunal outcomes can
inform policy efforts.
Public sector jobs are created because governments opt to
provide goods and services produced directly by public employees. Governments, however, may
also choose to regulate the size of the public sector in order to stabilize targeted national
employment levels. However, economic research suggests that these effects are uncertain and
critically depend on how public wages are determined. Rigid public sector wages lead to
perverse effects on private employment, while flexible public wages lead to a stabilizing
effect. Public employment also has important productivity and redistributive effects.
Supportive institutional environments help build
the foundations for innovative and productive entrepreneurship. A few
post-Soviet countries have benefitted from international integration through
EU membership, which enabled the development of democracy and free market
principles. However, many post-Soviet economies continue to face high levels
of corruption, complex business regulations, weak rule of law and uncertain
property rights. For them, international integration can provide the needed
support to push through unpopular yet necessary stages of the reform
Apprenticeships offer workers the chance to learn valuable occupational skills. Apprentices earn salaries, receive instruction in relevant concepts, contribute to production, and attain occupational q...
by Craig Riddell, Pierre Cahuc, Ulf Rinne, Daiji Kawaguchi, Alex Bryson, Daniel Hamermesh
In the US Donald Trump begins his presidency. Next door Canada experiences sluggish growth and a weak labor market which will worsen if Trump attempts to renegotiate or pull out of NAFTA. Across the A...
Globalization and digitalization go hand in hand. While international trade and labor mobility had already intensified before the invention of the internet, only with modern information and communicat...
Investment in new ideas was supposed to be the universal remedy in developed countries (most notably North America and Europe) for resisting the downward economic spiral triggered by globalization. In...
Perhaps I should not be commenting on the Brexit referendum, as I cannot vote on it. But even if I did not hold a professorship in England, it would still concern me directly, both as an economist and...
In most countries May 1 celebrates workers, as it has since it was created by the Second Socialist International. Interestingly, it is not celebrated in the US, which instead observes the first Monday...
I am continually amazed at the absurdities of proposals that one sees made by politicians searching for votes. One of the most ridiculous labor-related proposals that I have seen in recent years was m...
In this opinion series, part of our FutureWork campaign, we are asking key figures from the IZA World of Labor community to speculate on the future of the global labor economic landscape. Our Subject ...
Employment has, at last, been growing over the past year in Spain. Are young people benefiting from this growth? The answer, unfortunately, is no. Whereas total employment has grown by 1.6% between th...
The minimum wage debate is making headlines again, with recent studies fueling arguments on both sides. The discussion is global, from the US to Russia and China. Germany will also gradually introduce...