Talk given at the ECB/CEPR Labour market workshop, December 2010

1. Policies for a sustainable labour market recovery
Post-crisis challenges
Ekkehard Ernst
International Institute for Labour Studies
ILO
ECB/CEPR Labour market workshop
Dec 17th, 2010

2. Post-crisis challenges
Take-home message
Make labour market measures center-piece
Despite output recovery, gap in hours
worked remains persistent
Policy makers have started focusing
unilaterally on consolidation
Remaining policy space needs to target
measures that support employment
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 2 / 15

3. Post-crisis challenges Hours gap is closing slowly
The hours gap remains large
Total working hours wrt. trend
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 3 / 15

4. Post-crisis challenges Inactivity has increased
Long-term unemployment has increased sharply
Change in long-term unemployment (2009Q1-2010Q1, in %)
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E. Ernst (ILO) Sustainable labour market recovery Dec 2010 4 / 15

5. Deviation of investment from trend
(in per cent)
E. Ernst (ILO)
−30 −20 −10 0
Iceland
Estonia
Ireland
Poland
Denmark
Slovak Republic
Luxembourg
Spain
New Zealand
United States
Finland
Czech Republic
Post-crisis challenges
United Kingdom
Sweden
Japan
Mexico
Norway
Belgium
Israel
Australia
Sustainable labour market recovery
France
Portugal
Netherlands
Austria
Switzerland
Low investment hampers job creation
Canada
Investment: Deviation from trend (2010Q2)
Korea
Italy
Germany
Job creation is bugged down by low investment
Dec 2010
5 / 15

6. Post-crisis challenges Public finances are no longer supportive
Public finances concentrate on consolidation
Stimulus vs. consolidation packages
10
5
Fiscal package
(in % of GDP)
0
−5
−10
Denmark
Hungary
Netherlands
Germany
Portugal
Slovenia
France
Spain
United Kingdom
Earlier announced stimulus package Fiscal consolidation package
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 6 / 15

7. Policy recommendations for a successful recovery Don’t consolidate all at the same time
Further stimulus might support employment
Stimulus vs. baseline scenario
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 7 / 15

8. Policy recommendations for a successful recovery Don’t consolidate all at the same time
Don’t consolidate all at the same time
Stimulus vs. global consolidation scenario
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 8 / 15

9. Policy recommendations for a successful recovery Labour market policies have not been used much so far
Spend more on labour market measures
Forecast of public spending on labour market policies
4.0
Labour market spending (in % of GDP)
3.0
2.0
1.0
0.0
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Active Labour market spending Passive labour market spending
Total projected labour market spending in 2010
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 9 / 15

10. Policy recommendations for a successful recovery Target labour market measures
Target most effective measures
Labour market spending: Contributions to job creation
39.2
40
30
Contributions (in %)
25.7
20
15.0 15.7 15.6
10
7.5
5.3
3.4 4.0 3.5 3.5 2.8
0
Generic Unemployment Hiring Training Public employment Direct job
public benefits incentives expenditures services creation
spending
Short−term on Long−term on
job creation job creation
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 10 / 15

11. Policy recommendations for a successful recovery Tax cuts are not effective
Forget about tax cuts !
Annual cost per additional job created
Policy measure Cost per job (in US$)
Gov. Consumption 83,700
Gov. investment 79,900
Personal tax cut 152,500
Investment tax credit 200,100
Source: Adams and Gangnes (2010), “The employment effects of fiscal policy: How costly are ARRA jobs?”, preliminary draft
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 11 / 15

12. Policy recommendations for a successful recovery Policy effectiveness at different levels of structural unemployment
Don’t wait until unemployment becomes structural
Structural unemployment lowers policy effectiveness
Unemployment benefits Hiring incentives
20
150
Coefficient estimate
Coefficient estimate
10
100
0
50
−10
0
−20
−50
Low Intermediate High Low Intermediate High
Structural unemployment rate Structural unemployment rate
Note: 1−stage estimates Note: Iterated estimates
Direct job creation Training expenditures
100
60
Coefficient estimate
Coefficient estimate
40
50
20
0
0
−20
−50
Low Intermediate High Low Intermediate High
Structural unemployment rate Structural unemployment rate
Note: Iterated estimates Note: Iterated estimates
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 12 / 15

13. Policy recommendations for a successful recovery Internal flexibility and policy effectiveness
Allow for more internal flexibility
Internal flexibility improves policy effectiveness
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 13 / 15

14. Summary Successful exit strategies
Summarizing exit strategies
How should countries adjust their exit strategies?
1 Don’t start too early with the consolidation process
2 Labour market policies often more effective than generic
government spending or tax cuts
3 Focus on most effective measures and expand them
4 As economy recovers, switch gradually from demand
management to labour market policies
5 Target risk of rapid increase in long-term unemployment:
Spend it now, spend it fast
6 Allow for more internal flexibility to strengthen policy
effectiveness
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 14 / 15

15. Summary Successful exit strategies
Thank you !
Just out !
World of Work 2010
http://www.ilo.org/inst
E. Ernst (ILO) Sustainable labour market recovery Dec 2010 15 / 15