1 Challenges to OECD employment from greater integration in the world economy Simon Commander European Bank for Reconstruction and Development & London Business School Santiago, Chile: 16 March, 2007

2 Context: 1 Widespread perception in Europe and North America that workers are under siege –Unemployment remains high and persistent in some of the major European countries – e.g., France & Germany –Rising K/L ratios –Some evidence of downward pressure on wages –Clear changes in relative wages & in income distributions –Possible increase in unemployment risk &/or greater job insecurity Some have attributed these changes to trade – principally the growth of Asia

3 Context: 2 Yet, evidence on movements in wages and employment is more nuanced Further, trade has not been a major part of the story, although the growth in tradability is important More important in explaining evolution of employment has been labour market policies that lower aggregate employment European institutions – possibly in combination with shocks – have been key in explaining high unemployment rates and persistence

4 Context: 3 And – critically - there has been technical change driving: –changes in relative wages and relative employment for different skill categories Evidence shows that technical change has been skill-biased –losers are mostly those with few skills/low educational attainments –these changes are not new: closely associated with ICT and its diffusion over past two decades Other factors perceived to be raising pressure on workers in OECD include: –Rapid growth in services outsourcing/offshoring facilitated by technical change and hence in job migration across borders –Greater mobility of labour across borders due to changes in policy (e.g., points based migration programmes) and/or accession to trade blocs (EU15→EU25) –And, most recently, private equity

5 Facts: migration of jobs Concern about job displacement has grown as services offshoring affects a much broader skill range than manufacturing outsourcing –Some consultancy studies estimate that the number of jobs offshored in the US will rise from 400,000 to 3.3 million in 2015 – which would translate into 2% of all American job losses every year Is this a zero sum game? –McKinsey estimates that $1 of offshoring creates $1.14 of economic benefits for the US and $0.33 for the Indian economy. –Yet, gains are not equally distributed and there may be transition costs for displaced workers. –In contrast Germany and France are estimated to be losing between €0.25 and €0.15 for every €1 of offshoring even on the aggregate level –European losses due to low re-employment probabilities resulting from inflexible labour market institutions.

6 Facts: mobility of labour Labour market effects of immigration –little evidence of negative employment effects on domestic workforce in either Europe or USA –Evidence on wages is more ambiguous in Europe small negative effects have been found for USA, Borjas (2003) found 10%↑in migrants→↓4% of earnings of comparable native workers UK – indications that unskilled wages kept down at/around minimum wage Clear that outcomes depend very much on nature of immigration - demand or supply driven; complements or substitutes In Europe – open borders likely to be linked to supply driven mobility & this could put downward pressure on native wages USA has been generally better at integrating immigrants into employment –jobless rate of non-nationals in EU15 in 2002 twice rate of natives while in USA jobless rates roughly similar

7 Facts: mobility of labour Fiscal burden of migration often raised Yet, evidence is mixed; –UK evidence is that foreign born have higher average fiscal contributions compared to native British on average – likely to be driven by education –Austria, Belgium, France & Holland – dependence of immigrants on welfare generally higher than locals –And from sending end, brain drain arguments need qualifying…..

8 Current policy toolbox Job migration : –Offshoring: No particular policies (yet) in Europe –In USA some argue for expanding wage insurance schemes for trade displaced workers to displaced workers in the USA from offshoring (Trade Adjustment Assistance) Yet evidence from Canada on wage insurance provides little evidence of success and fiscal implications are still unclear In Europe main emphasis is still on making labour markets more flexible (e.g. UK labour market programmes/Lisbon agenda) and strong emphasis on education and R&D Migration of workers and job migration treated very differently in policy terms Former mostly pro-active (avoidance (Germany) or managed migration (UK)) Latter mostly reactive – viz; through flexible labour markets

9 Looking ahead: 1 Cost differences between OECD and developing countries likely to remain large making space for job migration Costs of job displacement in Europe likely to be higher than in USA due to labour market institutions But: many functions within firms ill suited for offshoring for organisational or technical reasons & suitable workforce in countries such as China and India is finite Indian firms already find it hard to fill posts; there is large turnover in off-shoring firms and growing wage pressure Chinese effective supply of skills also more limited than aggregate data would suggest

10 Looking ahead: 2 Key challenge: coping with losers – low skilled; minorities; disabled; elderly Challenge possibly analogous to post-1945 openness/fallbacks compact (Rodrik) Through what instruments? –Wage insurance –Augmented job displacement schemes –Training and up-skilling (urgent for the UK) –Greater role for private & voluntary providers to increase innovation and efficiency

11 Looking ahead: 3 What fiscal & other implications? –Wage insurance likely to be costly –Significant incentive issues –Job displacement schemes hard to condition on particular labour market experiences (viz; trade-related displacements) –Unskilled and disabled are also costly And don’t forget the longer run challenge of demographics – OECD is ageing fast……