Labor markets and institutions

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 implementing 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.

The earned income tax credit provides important benefits to low-income families with children. At substantial costs (over $70 billion to the US federal government), 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 very low payments under the program in most years. Many of these adults are less-educated men, whose labor force participation rates and relative wages have been declining for years. They might benefit significantly from a more generous earned income tax credit for childless adults.

Since the collapse of the Soviet Union, the differing impact of institutions on entrepreneurship development is undeniable. Several post-Soviet countries benefitted from early international integration by joining the EU, adopting the euro, and becoming OECD members. This process enabled entrepreneurship to develop within institutional contexts where democratic and free market principles were strengthened. In general, however, post-Soviet economies continue to be characterized by higher levels of corruption, complex business regulations, weak rule of law, uncertain property rights and often, lack of political will for institutional change.

Job displacement represents a serious earnings risk to long-tenured workers through lower re-employment wages, and these losses may persist for many years. Moreover, this risk is often poorly insured, although not for a lack of policy interest. To reduce this risk, most countries mandate scheduled wage insurance (severance pay), although it is provided only voluntarily in others, including the US. Actual-loss wage insurance is uncommon, although perceived difficulties may be overplayed. Both approaches offer the hope of greater consumption smoothing, with actual-loss plans carrying greater promise, but more uncertainty, of success.

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, the structure of corporate governance, and the existence of social pacts, among other factors.

Denmark is often highlighted as a “flexicurity” country with lax employment protection legislation, generous unemployment insurance, and active labor market policies. This model has coped with the Great Recession and the Covid-19 pandemic, avoiding large increases in long-term and structural unemployment. The recovery from Covid-19 alongside re-openings has been swift, so labor market effects were temporary. A string of recent reforms has boosted labor supply and employment; although fiscal sustainability is ensured, demographic changes challenge the labor market. Real wage growth has been positive and responded—with some lag—to unemployment.

Digital payment systems can conveniently and affordably connect entrepreneurs with banks, employees, suppliers, and new markets for their goods and services. These systems can accelerate business registration and payments for business licenses and permits by reducing travel time and expenses. Digital financial services can also improve access to savings accounts and loans. Electronic wage payments to workers can increase security and reduce the time and cost of paying employees. Yet, there are challenges as many entrepreneurs and employees lack bank accounts, digital devices, and reliable technology infrastructure.

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. 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.

In the early 2000s, Poland's unemployment rate reached 20%. That is now a distant memory, as employment has increased noticeably and the unemployment rate had dropped to 3.4% in 2021. The labor force participation of older workers increased following reforms aimed at prolonging careers. However, participation remains low compared to most developed countries and the reversal of the statutory retirement age in 2017 leaves Poland vulnerable to the effects of population aging. Rising immigration has eased the resulting labor shortages, but women, people with disabilities, and agricultural workers remain underemployed. During the Covid-19 pandemic the slowdown in economic growth and increase in unemployment were small.

The responses of working hours and employment levels to temporary negative demand shocks like those caused by the Great Recession in 2007–2008 and the Covid-19 pandemic in 2020–2022 have shown that consideration of both is important. Workers’ desired rises in working hours in times of recession also serve to modify the standard measure of unemployment. During Covid-19, both jobs and earnings were temporarily protected among workers forced into short-time work schemes, providing a useful comparison with the provision of improved unemployment insurance to unemployed workers at that time.