Labor markets and institutions

Finland's population is aging rapidly by international comparison. The shrinking working-age population means that the burden of increasing pension and health care expenditures is placed on a smaller group of employed workers, while the scope for economic growth through increased labor input diminishes. Fiscal sustainability of the welfare state calls for a high employment rate among people of working age. Recent increases in employment contribute favorably to public finances, but high overall unemployment and a large share of the long-term unemployed are serious concerns.

Spain, the fourth largest eurozone economy, was hit particularly hard by the Great Recession, which made its chronic labor market problems more evident. Youth and long-term unemployment escalated during the crisis and, despite the ongoing recovery, in 2018 were still at very high levels. The aggregate rate of temporary employment declined during the recession, but grew among youth. Most interesting have been the narrowing of the gender gap in labor force participation, the decline in the share of immigrants in employment and the labor force, and the overall increase in wage inequality.

Globally, the share of income going to labor (the “labor income share”) is declining. However, this aggregate decline hides more than it reveals. While the labor income share has decreased for low-skilled workers, this has been concurrent with an increase for high-skilled workers. Globalization leading to a growing skill premium and an increasing complementarity between capital and skill through the advancement of technology explains the polarization of labor income shares across the skill spectrum.

Trade regulation can create jobs in the sectors it protects or promotes, but almost always at the expense of destroying a roughly equivalent number of jobs 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 has neither theoretical support nor 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.

How does tax evasion affect the distribution of income? In the standard analysis of tax evasion, all the benefits are assumed to accrue to tax evaders. However, tax evasion has other impacts that determine its true effects. As factors of production move from tax-compliant to tax-evading (informal) sectors, these market adjustments generate changes in relative prices of products and factors, thereby affecting what consumers pay and what workers earn. As a result, at least some of the gains from evasion are shifted to consumers of goods produced by tax evaders, and at least some of the returns to tax evaders are competed away via lower wages.

The micro- and macroeconomic effects of the declining power of trade unions have been hotly debated by economists and policymakers, although the empirical evidence does little to suggest that the impact of union decline on economic aggregates and firm performance is an overwhelming cause for concern. That said, the association of declining union power with rising earnings inequality and the loss of an important source of dialogue between workers and their firms have proven more worrisome if no less contentious. Causality issues dog the former association and while the diminution in representative voice seems indisputable any depiction of the non-union workplace as an authoritarian “bleak house” is more caricature than reality.

Experiences during the Great Recession support the view that the UK labor market is relatively flexible. Unemployment rose less and recovered faster than in most other European economies. However, this success has been accompanied by a stagnation of productivity and wages; an open question is whether this represents a cyclical phenomenon or a structural problem. In addition, the effects of the planned exit of the UK from the EU (Brexit), which is quite possibly the greatest current threat to the stability of the UK labor market, are not yet visible in labor market statistics.

The number of people holding non-traditional jobs (independent contractors, temporary workers, “gig” workers) has grown steadily as technology increasingly enables short-term labor contracting and fixed employment costs continue to rise. For many firms that need less than a full-time person for short-term work and for many workers who value flexibility this has created a great deal of surplus. During slack economic periods, non-traditional work also serves as an alternative safety net. Non-traditional jobs will continue to become more common, though policy changes could slow or accelerate the trend.

Ireland was hit particularly hard by the global financial crisis, with severe impacts on the labor market. Between 2007 and 2013, the unemployment rate increased dramatically, from 5% to 15.5%, and the labor force participation rate declined by almost five percentage points between 2007 and 2012. Outward migration re-emerged as a safety valve for the Irish economy, helping to moderate impacts on unemployment via a reduction in overall labor supply. As the crisis deepened, long-term unemployment escalated. However, since 2013, there is clear evidence of a recovery in the labor market with unemployment, both overall and long-term, dropping rapidly.

South Korea has boasted one of the world's most successful economies since the end of World War II. The South Korean labor market has recovered quickly from the depths of the Asian crisis in 1998, and has since remained surprisingly sound and stable. The unemployment rate has remained relatively low, and average real earnings have steadily increased. The South Korean labor market was resilient in the wake of the global financial crisis. However, there are issues that require attention, including high earnings inequality, an aging labor force, increasing part-time jobs, and rising youth unemployment rates.