1997 - TUAC NOTE




Economic Development Review Committee (EDRC) Report
to Ministers on "Lessons from the Review Process"


  1. The Jobs Strategy recommendations and the OECD Economic Country Surveys are a central and very visible part of the OECD's overall Programme of Work. They should be assessed against the background of the OECD Secretary-General's October 1996 paper on "The OECD: Challenges and Strategic Objectives". TUAC agreed with the Secretary-General's central theme that the OECD's mission must be to achieve a balance between economic development, social progress and political stability against the background of the growing pressures of globalisation. We also agreed that OECD countries face a breakdown in this balance and the risk of a popular backlash, because too little emphasis has been placed on social factors. We supported the view that "all economic policies designed to foster economic growth must have social policy objectives". Current developments in many OECD countries are reinforcing these messages. However, TUAC's concern is that the current interpretation of the Jobs Strategy will worsen not improve the social climate.
  2. In April 1996 TUAC expressed its concerns(1) at the direction of the follow-up to the OECD Jobs Study. These were that :
  3. although the original Jobs Study was conceived as a "broad programme of action" involving a "balanced mix of policies" the country specific recommendations focused excessively on recommendations to deregulate the labour market and weaken trade unions ;
    the social cost of this deregulation in terms of widening income inequality and growing poverty was devastating whilst the gains in terms of better employment performance were questionable ;
    many of the labour market recommendations involved trade-offs between long and short term effects, static and dynamic efficiency, resource allocation and innovation goals as well as economic and social goals. These were recognised in the Jobs Study, but had become largely absent from the follow-up. Moreover the exact nature of these trade-offs were likely to vary according to national circumstances and differing institutional structures, yet rather than using national experiences to enrich the strategy the country specific recommendations appeared to present a "one size fits all" solution ;
    in endorsing the Jobs Study the 1994 Ministerial Council called for "the implementation of the employment strategy, in cooperation with the Social Partners" yet the country specific recommendations had at that point failed to promote consensus building at a national level and at OECD level there was little opportunity to get a trade union voice heard in the "closed" EDRC process.
  4. These concerns were based, in part, on the written reactions of TUAC affiliates to the Country Reviews which had then been published as part of the Jobs Study follow-up. A fuller set of written comments is attached as an annex to present TUAC Note. In general these concerns have been repeated in the comments on the subsequent reviews. They therefore remain the essence of what TUAC would draw as the lesson from the Country Level experience of the OECD Jobs Strategy.
  5. It is significant that the EDRC paper "Implementing the OECD Jobs Strategy: Member Countries Experience" does raise some of TUAC's concerns in its treatment of the "overarching themes" arising from experience with the Country Reviews:- the relationship between equity and efficiency; social cohesion; consensus and the reform process; interaction between structural policy; and the role of macroeconomic policy. The social concerns are raised as reasons for the strategy not being implemented more extensively. However, these social concerns are subsequently dismissed as inconsequential. The EDRC paper's message is to push ahead with a strategic approach to deregulate labour markets.
  6. TUAC's view is that the OECD Ministerial Council should reassess the implementation of the OECD Jobs Strategy. It should not be a policy "set in stone" nor a blue-print for labour market deregulation against which countries' progress is measured. Rather it should be an evolving, broad-based strategy where the contrasting approaches of different countries can be used to test and evaluate the relevance of the strategy and to change and qualify it. The Social Partners should also be brought fully into the review process. The closed and secretive nature of the EDRC process looks increasingly out of place in an OECD which needs urgently to be seen as more relevant to all elements of civil society.
  7. This note briefly comments on the "overarching themes" raised in the EDRC paper, before making some procedural suggestions.

"Overarching Themes" from the Jobs Study follow-up :

The Role of Macroeconomic Stabilisation Policy

  1. The basic lesson that should be drawn from Europe's unsatisfactory employment creation record is that given the rise in European productivity over the last fifteen years European countries have collectively failed to implement growth-orientated policies. The annexed chart shows that employment creation in Europe has been strongly related to growth performance over time. European authorities have not lived up to the Jobs Study recommendation that "macroeconomic policy should focus on assisting recovery through faster non-inflationary growth of domestic demand where there is still substantial economic slack"(2). They have repeatedly, frequently with OECD encouragement, erred on the side of monetary and fiscal restriction. This risk is now present in Europe through the inflation fixation of central banks and financial markets, and through the risks of concerted pro-cyclical deflation as a result of public expenditure cuts associated with the EMU convergence criteria.
  2. This situation must be contrasted with the policy stance of the United States authorities of "keeping growth going" and "testing the water" for inflationary bottlenecks to appear. Such an approach is more reliable than a dependence on statistically abstract notions of NAIRU's and NAWRU's constructed on data from periods of prevalent inflationary as opposed to disinflationary expectations. It is significant that the Chairman of the U.S. Federal Reserve Bank(3) has said that NAIRU's "are so unstable when tried to apply to the real world that I am dubious about their practical applicability".
  3. The lesson that Ministers must draw from the recent experience of economic growth in the OECD, is the need for European Central Banks to lower real interest rates in the current climate: as the EDRC paper points out "monetary policy is given the double task of bearing down on cyclical unemployment while maintaining effective price stability" (§ 195).

Interaction between Structural Policies

  1. The thrust of the EDRC paper's argument is that the main problem with the implementation of the Jobs Study lies in Continental Europe where the main focus is for "measures to increase labour and product market flexibility" (§ 21). Later (§ 181) a synergy is developed between:- measures to widen wage inequality; the weakening of collective bargaining institutions and recommendations on the minimum wage; reducing the generosity of unemployment and other social transfers; a significant weakening of employment protection legislation (EPL); and increasing competition in product markets to put pressure on wage bargaining.
  2. The strategy in the Country Surveys remains excessively focused on these sets of recommendations. This is despite the fact that there is strikingly little empirical evidence of the effectiveness of these approaches. The EDRC paper itself points out that there is little reflection of changes in eligibility requirements yet in unemployment rates (§ 56). Even where these approaches get people off unemployment registers, it may push a significant number of them out of the labour force (as in the UK). The 1996 OECD Employment Outlook presented an extensive analysis of earnings inequality and low-paid employment but found no evidence that a higher incidence of low-paid employment yielded a better employment or unemployment performance, and concluded that "factors other than relative wages, such as the overall level of aggregate demand or the amount of training received, may be more important for determining labour-market outcomes of these groups."(4). The EDRC paper recognises that "it is still controversial if, and to what extent, EPL has contributed to the increase in unemployment in Member countries" (§ 75).
  3. The EDRC strategy, therefore, is about more labour market deregulation, even when in reality the effectiveness of what is being proposed is not known. What is known, however, is the social cost of removing some of the employment and income protection for some of the most vulnerable groups in OECD societies.
  4. The confidence with which the EDRC makes recommendations in the above areas can be contrasted with the generally critical treatment of the use of Active Labour Market Programmes. The EDRC concludes that in view of "the disappointing experience with some ALMPs in the past, recommendations in this area have not been for a general expansion of active measures" (§ 113). The treatment of education and training issues looks similarly imbalanced. It is surprising, when the large majority of the original OECD Country Notes on the Jobs Study identified skills as a key issue that the EDRC should note "OECD recommendations to strengthen basic skill acquisition have been confined to a few countries" (§ 131).
  5. A very different view of the policy options emanates from work being carried out in other parts of the OECD with regard to:- technological change; the nature of "flexible organisations"; skill acquisition and education policy; and corporate governance issues. The changing strategies of firms in the global market are seen to be a key factor. One interpretation of this work is that firms in the OECD area are becoming polarised. On the one hand there are those trapped in Taylorist forms of production having to compete in an ever tougher global market with low wage competition from non­OECD countries. Increasingly it is not the firms themselves which have to compete but the workers in different countries bidding for their jobs with the same employers. On the other hand there are firms who have shifted to new forms of work organisation in which a high premium is given to the flow of knowledge and innovation. These "high skill - high trust" organisations compete on the basis of a different and clearly more acceptable strategy than their Taylorist rivals.
  6. The policy implications of this are that governments can move their economies onto higher growth paths by encouraging technological diffusion, innovation, "good practice" management techniques and the development of appropriate infrastructures for the "information society". "Learning societies" and knowledge-based firms are the key to success. In this scenario labour market deregulation is not a central issue. Internal functional flexibility of workers in line with changing work organisation is much more important to firms. Flexibility to "hire and fire" looks at best irrelevant and at worst could encourage the low wage/low skill route to competitiveness. This "dynamic" feature of changing competitive strategies in OECD countries is not reflected in EDRC Reviews.
  7. Overall, therefore, TUAC would question how balanced is the EDRC's treatment of labour market issues, how effective are the measures proposed, and how desirable they are in terms of their social impact. It seems to reflect the Press reports of the Lille G7 Jobs Conference which quoted an OECD economist as saying: "the less regulations there are in the labour market, the more efficiently they will operate, and the more people will have jobs"(5).

The relationship between equity and efficiency

  1. The EDRC paper argues that " A key reason for the slow and sporadic implementation of the OECD Jobs Strategy is the perception that undertaking reform involves trade-offs with policy objectives concerning equity and social cohesion". This is not just a perception. The deregulation of labour markets has a major cost in terms of growing poverty, inequality and social dislocation. Weakening the collective bargaining system, reducing minimum wages and reducing unemployment benefits all work to lower relative and in some cases absolute earnings in the bottom half of the income distribution. It is therefore not surprising that the 1995 OECD Study on income distribution showed that the United States (with deregulated labour markets) had the highest degree of income inequality and the United Kingdom, which has pursued labour market deregulation as a major plank of government policy had the "biggest increase in income gap between the rich and poor"(6). The 1996 Employment Outlook's analysis of earnings inequality reinforced this assessment.
  2. Rising poverty and inequality is destroying social cohesion and does not provide an acceptable route for OECD countries either socially or economically. Yet the treatment of this in the Country Surveys remains dismissive. The EDRC paper says that "lower relative incomes at the bottom of the scale may raise incentives for investment in human capital by groups who would not otherwise have made little such investment, which should reduce income dispersion over the longer run" (§ 9). Again this assertion is not supported by the evidence in the 1996 Employment Outlook, which found that "increase in earnings dispersion may not be offset in the longer run by greater relative upward mobility among those with low earnings"(7).
  3. A year ago TUAC argued that the EDRC reports should include an "equity audit" of each measure which is proposed and that equity and social issues must be treated far more effectively. This recommendation seems even more valid today.

Social Cohesion and consensus

  1. TUAC has criticised the absence from most Surveys, of recommendations on how to reach agreement with the Social Partners on desirable changes. The EDRC paper does begin to address these issues. It notes (§ 175) that a consensus based approach has worked in Austria, the Nordic countries and the Netherlands. To this list could be added Ireland and Italy. Initial attempts by the unions in Germany to propose a "pact for jobs" were rebuffed leading to major social confrontations in Germany. The report notes that in a number of "English-speaking countries" "labour market organisations have often been seen as special interest groups" and instead "governments have emphasised the popular mandate of existing governments and the possibility for voters to express dis-satisfaction at the next election" (§ 175). In several such countries voters seem to be doing this emphatically, and TUAC would argue that it is clearly necessary to now integrate a recommendation in the Country Reviews promoting negotiations with the Social Partners.

The Jobs Strategy Procedure

  1. TUAC recognises the willingness of the current EDRC Chair to engage in a dialogue with trade unions as shown in the informal consultations which have taken place between TUAC and the EDRC Bureau since April 1996. The fact that the "overarching themes" in the EDRC paper coincide to a significant extent with the concerns raised by TUAC a year ago confirms the need to develop an intensive involvement of trade unions in the Jobs Strategy follow-up.
  2. TUAC's concern at the balance of the recommendations which appear in the EDRC paper confirm the need to rethink how the OECD delivers country specific policy advice and surveillance against a background of increased horizontal work. TUAC has made suggestions on this in consultations with the OECD Council(8)). As argued in this Note, rather than structural policy chapters appearing as national recommendations for implementing a "blue-print"(9), they need to be tailor-made to specific country circumstances, and draw upon the knowledge of the specialist OECD Committees. We have suggested the creation of a broad-based OECD Committee, served by a general coordination unit of country desks not attached to any particular department and geared towards multidisciplinary work.
  3. With regard to the Jobs Study follow-up, trade unions should be invited to give comments on recommendations relating to employment before, rather than after, the Country Reviews are published. The social partners should be invited to take part in at least part of the review meetings, initially for a trial group of countries. An opportunity to express comments along these lines could increase the commitment of the social partners to the OECD's recommendations when reviews are undertaken, and moreover raise both the credibility and acceptability of the Jobs Strategy.

(1) TUAC Informal Note on EDRC Follow-up to the OECD Jobs Study, April 1996

(2) The OECD Jobs Study, 1994, page 44.

(3) Alan Greenspan, U.S. Senate Hearings, January 1997.

(4) OECD Employment Outlook, July 1996, page 94.

(5) Associated Press, "G-7 Fight Unemployment", 31 March, 1996.

(6) OECD, Income Distribution in OECD Countries - Press Release, 19 October, 1995.

(7) OECD Employment Outlook 1996 (page vii).

(8) TUAC Discussion Paper to the OECD Liaison Committee with Non-Governmental Organisations, November 1996.

(9) OECD Economic Outlook, December 1996, page xii.

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