After three recessions, a new emphasis on the importance of collective institutions and social dialogue is emerging
Old and new EU member states still adopt quite different labor market institutions and policies: convergence has been partial and limited. Nevertheless, a new agreement is spreading on the importance of well-developed, coordinated institutions, supported by social dialogue, in view of the increasing challenges posed by the macro economy and by the increasing fragmentation of labor markets.
Better understanding of skills mismatch is essential to finding effective policy options
Evidence suggests that productivity would be much higher and unemployment much lower if the supply of and demand for skills were better matched. As a result, skills mismatch between workers (supply) and jobs (demand) commands the ongoing attention of policymakers in many countries. Policies intended to address the persistence of skills mismatch focus on the supply side of the issue by emphasizing worker education and training. However, the role of the demand side, that is, employers’ rigid skill requirements, garners comparatively little policy attention.
Countries set minimum wages in different ways, and some countries set different wages for different groups of workers
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 boosts income and work effort among low-income parents, especially single mothers, and has contributed to the steep rise in employment among single mothers in the 1990s.
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.
When workers and firms cannot commit to
long-term contracts and capital investments are sunk, union power can reduce
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
Sectoral collective contracts reduce
inequality but may lead to job losses among workers with earnings close to
the wage floors
In many countries, the wage floors and
working conditions set in collective contracts negotiated by a subset of
employers and unions are subsequently extended to all employees in an
industry. Those extensions ensure common working conditions within the
industry, mitigate wage inequality, and reduce gender wage gaps. However,
little is known about the so-called bite of collective contracts and whether
they limit wage adjustments for all workers. Evidence suggests that
collective contract benefits come at the cost of reduced employment levels,
though typically only for workers earning close to the wage floors.
Do performance-related pay and financial
participation schemes have an effect on firms’ performance?
A growing number of firms offer compensation
packages that link pay to performance. The aim is to motivate workers to be
more efficient while also increasing their attachment to the company,
thereby reducing turnover and absenteeism. The effects of
performance-related pay on productivity depend on the scheme type and
design, with individual incentives showing the largest effect. Governments
often offer tax breaks and financial incentives to promote
performance-related pay, though their desirability has been questioned due
to large deadweight losses involved. The diffusion of remote work will
increase the relevance of performance-related pay.
Reducing under-reporting of salaries requires
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.
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.
To boost the employment rate of the low-skilled
trapped in inactivity is it sufficient to supplement their earnings?
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, is it possible to determine their effects on
indicators of well-being, such as mental health and life satisfaction, or on
the acquisition of human capital?