Executive summary
The Russian invasion of Ukraine has generated a major humanitarian crisis and sent economic shockwaves across the globe. Several million Ukrainian people – mostly women and children – have fled their country in search of refuge in other European countries and beyond. The increase in commodity prices spurred by the conflict has added to the inflationary pressures generated by supply chain disruptions that have hit real incomes in recent times. The economic shock is undermining the strength of the recovery from the COVID-19 crisis, although progress in labour markets continued in the first months of 2022. However, despite sustained employment growth, real household disposable incomes were already declining on a year-on-year basis in the last quarter of 2021, and in many countries that decline is estimated to have continued in the first months of 2022, due to wage growth not keeping pace with inflation.
The rebound in economic activity from the COVID-19 crisis was faster than expected, but the labour market recovery has been uneven across countries and sectors and is still incomplete, while its sustainability is made uncertain by the war in Ukraine. The pandemic is not over and it is still shaping the employment dynamics of different industries. In particular, low-pay industries such as accommodation and food services are lagging behind, which has a significant impact on the groups of workers who most often work in them. While some of the initial unequal impact of the crisis across workers has been reabsorbed, young people, the low skilled and low-paid workers still trail behind in the recovery in many countries. The same holds for racial/ethnic minorities in many of the few countries for which data are available. These groups have also been severely hit by the increase in commodity prices: low-income households not only devote a larger fraction of their income to consumption, but energy and food represent a particularly large share of their consumption basket.
OECD countries responded with unparalleled resolve to the COVID-19 crisis, complementing pre-existing employment and social protection measures with rapid and large-scale emergency measures in various areas. These interventions effectively supported workers’ jobs and incomes and laid the foundations for a strong labour market recovery. By the end of 2021, the crisis measures had been rolled back in most policy areas following the strong rebound in economic activity. The great urgency with which support had to be provided led to insufficient targeting in some areas, higher-than-needed expenditures and possibly weak incentives to exit support programmes. While the widespread support measures prevented a further rise in income inequality in many OECD countries, some groups of heavily affected workers outside the reach of the standard system were not sufficiently protected. The war in Ukraine is bringing new challenges for labour market and social policies in OECD countries. In this context, many governments have swiftly taken measures to assist large inflows of refugees from the war in Ukraine and to offset the large increases in energy prices, while other measures are under discussion.
Labour market concentration, where only few employers compete for workers, is a key cause of monopsony power – the ability of employers to set wages unilaterally, which can lead to inefficiently low employment and wages. The largest cross-country analysis of labour market concentration to date, based on online job vacancies in 16 advanced countries, reveals that at least one in six workers in the business sector are employed in concentrated labour markets, with larger shares in rural areas and among certain groups such as frontline workers. Empirical evidence tends to confirm that concentration negatively affects employment and harmonised data for a subsample of countries show that concentration decreases wages and worsens job security. These findings call for greater policy efforts to curb monopsony power in labour markets by regulating anticompetitive practices such as wage-setting collusion and non-compete agreements, and to rethink other labour market policies, including minimum wages and collective bargaining.
Around one-third of overall wage inequality can be explained by differences in wage-setting practices between firms rather than differences in the level and returns to workers’ qualifications. Gaps in pay between firms, in turn, reflect differences in productivity, but also disparities in wage-setting power. To tackle high and in some cases rising wage inequality, worker-centred policies (e.g. education, adult learning) need to be complemented with firm-oriented policies. This involves, notably: policies that help lagging firms catch up with the productivity levels of leading firms; promote job mobility between firms; and limit employers’ monopsony power in labour markets. All these policies would raise wages and reduce wage inequality without adverse effects on employment and output.
Provided they are carefully designed and implemented, evidence suggests that reductions in normal working hours could enhance workers’ well-being without damaging employment and productivity. Analysis of a number of national legislative reforms and firm-level contractual reductions in hours indicate that reducing normal hours (while keeping monthly wages constant) might preserve employment and enhance well-being if the impact on unit labour cost remains limited (either due to induced productivity gains or to public subsidies), or if the reduction takes place in situations where employers enjoy significant monopsony power. These beneficial effects are more likely to occur if social partners have leeway to negotiate working hours, wages and work organisation altogether. Moreover, fostering the use of flexible hours could lead to small positive effects on health, workers’ satisfaction, and work-life balance. Teleworking could also improve workers’ satisfaction – but its effects on work-life balance and health vary.