Sandrine Cazes and Sher Verick
International Labour Office
Starting in the middle of 2007, the crisis has grown from a meltdown in the housing and financial sectors in the United States to a downturn with global reach and a deep impact on the real economy, particularly on the labour market. As evident from previous crises, labour markets tend to recover slowly after such an economic contraction, with unemployment persisting at above pre-crisis levels for a number of years. For this reason, it is crucial for policymakers to consider various labour market policy measures that both mitigate the impact of the crisis on workers and help reduce the lag between economic growth and improvements in the labour market.
The role of labour market policies in mitigating the impact of a downturn
The labour market policy response to a crisis should aim to achieve goals in four main areas: labour demand, match between demand and supply, income support and targeting of vulnerable groups. The relationship between these goals and labour market policies are listed in Table 1.
Table 1 Matching goals and labour market policies in times of crisis
||Types of labour market policies
|Maintain labour demand
|Keeping people in jobs
||Work-sharing; on-the-job-training (both can be subsidized or unsubsidized
|Creating new jobs
||Job/wage subsidies; public works programmes
|Improve the employability of the unemployed
|Job search assistance; work experience and apprenticeship programmes; training;
|Provide income support
||Unemployment benefits; social assistance; other social protection measures (including
conditional cash transfers
|Target the most vulnerable (youth, women, etc)
||Includes all of the above policies but typically consists of hiring subsidies and training
As illustrated in Table 1, there are a range of different labour market policy tools available to policymakers; however, these interventions all require a certain institutional and financial capacity of governments to fund and successfully implement interventions. Policies that maintain labour demand can be particularly expensive as they require compensation for workers. For example, work-sharing is a scheme where employers reduce the number of hours worked to avoid laying off staff, which directly reduces labour costs and helps them survive a period of low demand. In most European countries, work-sharing is subsidised by the State (typically through unemployment benefits schemes) to prevent a loss in income for workers. Measures that support the unemployed such as job search assistance or training require an effective public employment service and providers of training. Despite the best institutional set-up, these policies can, nonetheless, be ineffective in a period where demand is low and firms are not hiring.
Labour market policy response during the global financial crisis
Drawing on a range of recent surveys on the response to the current global financial crisis, it is apparent that a large number of high-income countries have implemented various policy measures that address the different goals of labour market policies (Figure 1). The most commonly used intervention
in high-income countries is training for both those threatened by layoffs and the unemployed (including work experience and apprenticeship initiatives) (27 countries), followed by work sharing (24 countries), increased resources for public employment services, including job search assistance measures (20 countries), and job and wages subsidies (20 countries). The least-implemented intervention in this group of countries is public works programmes (5 countries), which is not surprising given the limited effectiveness of this intervention in such advanced labour markets. In terms of security provided by passive labour market policies, 17 high-income countries have made changes to unemployment benefits schemes (usually extensions of coverage and broader eligibility criteria).
Overall, the use of labour market policies in terms of scope and diversity is declining with the income-level of countries, which reflects the financial and technical constraints hindering the response of these governments. Nonetheless, a range of policies have been utilized in low and middle-income countries, in some cases in a similar fashion to more developed nations. As displayed in Figure 1, the most utilized policy response in the middle-income group is training (with 25 countries) followed by job search assistance, entrepreneurship incentives and public works programmes. There are far fewer low-income countries implementing such policies in response to the crisis. In general, low and middle-income countries tend to rely on labour market policy measures that do not require complex institutional structures and social dialogue. Nonetheless, some governments are turning to more innovative policies that have not been widely used before such as providing subsidized training for threatened workers.
Labour market policies to mitigate the jobs crisis and support a jobs-led recovery
Now that most countries are exiting recession and slowly entering a phase of economic recovery, attention is shifting to concerns about exit strategies and the increasing urgency of tackling the crisis-induced fiscal deficit and government debt. At the same time, a premature withdrawal of monetary and fiscal stimulus would endanger the recovery and have further negative implications for the labour market. In any case, the challenge is to ensure that the recovery is accompanied by employment growth.
Figure 1 National labour market policy responses to the current global financial crisis
Notes: HIC = high-income countries; MIC = middle-income countries; LIC = low-income countries, which are grouped according to the World Bank’s classification of countries, see http://go.worldbank.org/D7SN0B8YU0. UB = unemployment benefits schemes.
Source: Cazes et al. (2009).
Hence labour market policies should continue playing a complementary role in responding to the crisis, along with macroeconomic and other policies, in order to maintain and promote labour demand through both job retention (in high income countries, typically work-sharing schemes) and job creation. Hiring subsidies, especially, have a role to play in ensuring countries experience a jobs-led recovery rather than a jobless one. Governments should consider both job/wage subsidies along with tax credits to encourage employers to start taking on new staff during the coming years. These measures are particularly relevant for individuals who are vulnerable to becoming longterm unemployed or losing their attachment to the labour force, such as youth and the low skilled. Moreover, governments should continue with training and related measures that improve the employability of the unemployed, which are needed to reduce the risk of long-term unemployment and to facilitate any structural changes in the labour market. Since financial budget constraints will become increasingly binding, Government will need to reallocate resources to ensure that labour market policies move in line with developments in the overall economy and the labour market.
Over the longer term, governments should aim to develop a comprehensive and integrated policy and institutional framework that will enable them to better respond to future crises. This involves the development of labour market institutions and a broad-based social security system, which acts as an automatic stabiliser during a crisis. More efforts also need to be made to monitor and evaluate the impact of specific labour market policies. Finally, mechanisms should be developed to facilitate constructive dialogue between the social partners, the government, employers and workers.
Cazes, S., Verick, S. and C. Heuer (2009) “Labour market policies in times of crisis”, Employment Working Paper, No.35.
International Labour Organization (ILO) (2009) Protecting People, Promoting Jobs: a Survey of Country Employment and Social Protection Policy Responses to the Global Economic Crisis, An ILO report to the G20 Leaders’ Summit, Pittsburgh, 24-25 September 2009. ILO, Geneva.