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Stronger wage coordination and higher union
density are associated with lower unemployment and higher inflation
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.
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Wage-setting institutions narrow the gender pay
gap but may reduce employment for some women
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
workers.
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Unemployment insurance generosity should be
greater when unemployment is high—and vice versa
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.
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With rising international migration, how
transferable are benefits, and how can transferability be increased?
The importance of benefit portability is
increasing in line with the growing number of migrants wishing to bring
acquired social rights from their host country back to their country of
residence. Failing to enable such portability risks impeding international
labor mobility or jeopardizing individuals’ ability to manage risk across
their life cycle. Various instruments may establish portability. But which
instrument works best and under what circumstances is not yet
well-explored.
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Enhancing the earned income tax credit would do
more to reduce poverty, at less cost, than increasing the minimum wage
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, the tax credit increases with
the number of dependent children, and evidence shows that it increases labor
force participation and employment in these families.
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Wage subsidies to encourage employers to hire
older workers are often ineffective
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.
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Minimum wages reduce entry-level jobs, training,
and lifetime income
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
unskilled workers.
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Keeping older workers in the workforce longer
not only doesn’t harm the employment of younger workers, but might actually
help both
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
young.
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