Chapter 14. Promoting adaptable labour markets

Sustaining good labour market performance in a context of rapid technological progress, deepening globalisation and demographic change requires policies that make labour markets more adaptable. Such policies include: i) framework conditions that promote the efficient reallocation of workers across jobs, firms, industries and regions; ii) adult learning systems that are responsive to changes in labour market needs, provide strong incentives for learning and link training rights to workers rather than jobs; and iii) effective employment and social policies to help displaced workers regain suitable jobs quickly.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Introduction

Globalisation, technological progress and demographic change are having a profound impact on labour markets. New jobs are being created in expanding businesses, industries and regions and being destroyed in declining ones, with the nature of many jobs rapidly changing as well. Labour markets will need to become more adaptable to ensure that productivity gains are passed on to workers, while mitigating the risks of higher structural unemployment, lower job quality, skills mismatches and rising inequalities.

Adaptability requires policies that promote the efficient redeployment of workers from low-performing to higher-performing businesses and industries and regions – while also helping workers to take full advantage of new opportunities. These include product market policies that do not unduly constrain the entry and orderly exit of firms, as well as labour market and housing policies that promote the mobility of workers across businesses and regions. Such reallocation-friendly policies need to be accompanied by policies that allow workers to acquire the skills to succeed in tomorrow’s labour markets and policies to (re)develop declining regions.

But the efficient redeployment of workers and the provision of labour market-relevant skills cannot, on their own, prevent rapid economic change from causing significant hardship to some workers. Supporting displaced workers will require targeted policies that help them get back to work quickly and limit the extent to which adversely-affected regions fall behind. Early intervention measures related to job-search assistance and re-training are key to avoid that displaced workers become trapped in long-term unemployment and benefit exhaustion. Moreover, specific policies are needed to support workers in declining regions. This requires maintaining high-quality local public services in lagging regions, but it may in some cases additionally require targeted interventions in the areas of activation and skills policies.

The remainder of this chapter is structured as follows. Section 14.1 discusses the role of product, labour and housing market policies in promoting the efficient reallocation of workers across jobs, firms, industries and regions in the face of structural economic change. Section 14.2 highlights the need for responsive, effective and worker-centred adult learning systems that enable workers deal with rapidly changing skill needs. Section 14.3 examines how policies targeted at displaced workers and lagging regions can support the most vulnerable workers to adapt to structural change..

14.1. Promoting the reallocation of workers across jobs, firms and regions

Adapting to rapid economic and technological change triggered by digitalisation, globalisation and demographic change puts a premium on the reallocation of workers and firms to growing sectors and regions.

Keeping entry barriers low to favour the emergence of innovative firms

Business dynamism is a key driver of job creation and productivity growth. Young firms account for an important share of job creation across OECD economies and disproportionately contribute to productivity growth since they tend to be more innovative and productive than existing firms (Foster, Haltiwanger and Syverson, 2008[1]; Criscuolo, Gal and Menon, 2014[2]; Haltiwanger, Jarmin and Miranda, 2013[3]) (Figure 14.1). For example, young firms tend to have a competitive advantage in radical innovation, whereas large incumbent firms tend to focus more on incremental innovation since adopting radical organisational changes and taking large risks is often more difficult for them. In addition, the entry of young firms generally strengthens competition, which can stimulate the productivity growth of existing firms. Overall, multi-factor productivity (MFP) growth over the 2000s was weaker in sectors that recorded larger declines in the share of young firms (Adalet McGowan et al., 2015[4]).

A source of concern is that business dynamism has tended to decline in a number of OECD countries over the past decades (Calvino, Criscuolo and Menon, 2015[5]). The causes of this decline are not fully understood yet. It may relate to global technological and economic trends, such as the rise in information and communication technologies (ICT) and the increasing market power of the largest firms in some industries and countries. It is also likely to reflect policy-induced rigidities that complicate the entry and growth of new firms.1

A range of product market policies can promote the emergence of young innovative firms and the reallocation of resources to high-productivity firms. The evidence suggests that flexible product markets – as measured by the OECD product market regulation indicators – are associated with higher productivity growth and a more efficient reallocation of resources towards high-productivity firms (Arnold, Nicoletti and Scarpetta, 2011[6]). This may reflect lower barriers to the creation and growth of new firms related to lower administrative burdens on start-ups, less burdensome sector-specific regulations (e.g. in retail) or less demanding licensing requirements. Moreover, competition-friendly product market regulation may promote the diffusion of innovation in the economy (Andrews, Criscuolo and Gal, 2016[7]) and the adoption of digital technologies (Andrews, Nicoletti and Timiliotis, 2018[8]).

The evidence further suggests that strict employment protection rules and financial constraints may limit reallocation to the most productive businesses (Chapter 7). In particular, strict employment protection rules have been found to be negatively associated with the propensity of high-productivity firms to be larger than less-productive ones (Andrews and Cingano, 2014[9]; Haltiwanger, Scarpetta and Schweiger, 2014[10]). Since intangible capital is more difficult to collateralise than physical capital, young and innovative firms may have difficulties to access financing (Demmou, Stefanescu and Arquie, 2018[11]; Brassell and Boschmans, 2018[12]). Policies can address such financing constraints by encouraging equity-financing (which in many countries remains less favourable for tax purposes than debt financing), stimulating the development of venture capital markets and standing ready to provide public financing or co-financing to young innovative firms in case of market failures.

Ensuring the smooth exit of inefficient firms

Apart from promoting the entry and post-entry growth of innovative businesses, policies could strengthen reallocation by ensuring the smooth exit of inefficient ones. Otherwise, capital and labour may become trapped in low-productivity businesses, thereby limiting growth of high-productivity ones. For example, low economic growth in Japan in the 1990s was related – among other things – to the high prevalence of so-called “zombie firms”, i.e. low productivity firms that would typically exit in a competitive market (Caballero, Hoshi and Kashyap, 2008[13]).

Recent OECD analysis suggests that in a number of OECD countries the prevalence of zombie firms has risen between 2003 and 2013 (Adalet McGowan, Andrews and Millot, 2017[14]). Subsequent research has shown that, apart from being less productive than other firms, zombie firms reduce the growth opportunities of healthier firms and their access to credit (so-called “zombie congestion”), which hinders their employment and investment (Adalet McGowan, Andrews and Millot, 2017[14]; Andrews and Petroulakis, 2017[15]). This zombie congestion particularly penalises the growth of young firms, which makes it even more damaging for the economy as young firms tend to be more innovative.

Insolvency policies can play a key role in reducing the prevalence of zombie firms and fostering the efficient reallocation of resources in the economy. Recent OECD research shows that insolvency regimes that delay the liquidation or restructuring of weak firms reduce productivity growth (Adalet McGowan, Andrews and Millot, 2017[16]; Adalet McGowan, Andrews and Millot, 2017[17]). The design of insolvency regimes varies significantly across countries, in particular with respect to the treatment of failed entrepreneurs, the availability of preventative and streamlining tools and ease of corporate restructuring (Figure 14.2), suggesting significant room for policy improvement in many countries.

Apart from insolvency policies, the health of the financial sector is an important determinant of zombie firm prevalence (Andrews and Petroulakis, 2017[15]). Indeed, there is empirical evidence that zombie firms are more likely to be connected to weak banks, suggesting that the zombie firm problem may partly stem from bank forbearance. This highlights the importance of sound financial regulations to ensure healthy banking systems and reinforces the case for diversifying corporate financing away from bank lending towards market-based debt and equity financing. This could, for instance, be achieved by reducing the debt bias in corporate tax systems and encouraging the development of venture capital markets (Andrews, Adalet McGowan and Millot, 2017[18]).

The exit of inefficient firms can have adverse effects on employment in the short term and at the local level. Recent OECD research suggests that active labour market policies (ALMPs) and low labour taxes can mitigate such costs, as they tend to boost the re-employment probability of displaced workers (Andrews and Saia, 2017[19]; OECD, 2018[20]). ALMPs appear to be particularly effective in bringing displaced workers back to work when administrative entry barriers in product markets are low (see also Section 14.3 below).

Enhancing geographical mobility to foster efficient reallocation

Rapid economic change can have diverging effects on local labour markets. The evidence suggests, for instance, that increased trade integration of a number of high-income OECD countries with China led to highly localised job losses (Autor, Dorn and Hanson, 2016[22]; Malgouyres, 2016[23]; OECD, 2017[24]), with newly created jobs concentrated in other geographic areas. Similarly, regions with high initial shares of routine jobs have seen declines in low- and middle-skill employment (Autor and Dorn, 2013[25]), whereas the creation of high-skilled jobs in knowledge-intensive services (especially ICT) tends to be concentrated in other regions (Sorbe, Gal and Millot, 2018[26]).

Geographic mobility would allow workers to benefit from the opportunities triggered by globalisation and rapid technological change despite geographic mismatches between job destruction and creation. This could be achieved by a range of policies that promote residential mobility, such as: i) taxing housing property (e.g. by taxing imputed rents) rather than real estate transactions; ii) ensuring a good responsiveness of housing supply to changes in demand and prices (e.g. through appropriate land use and planning regulations) to avoid that housing prices in job-rich areas become unaffordable for workers trying to move in; iii) avoiding unjustified support to homeownership (such as the tax deductibility of mortgage interest) since homeownership can be an obstacle to mobility; iv) avoiding rent controls, which tend to lockin tenants and weaken incentives for construction; and v) carefully designing social housing schemes to make sure that they do not create barriers to mobility (Andrews, Caldera Sánchez and Johansson, 2011[27]; Caldera Sánchez and Johansson, 2011[28]). The empirical evidence suggests that making residential mobility easier can increase the re-employment probabilities for workers displaced by firm exit (Andrews and Saia, 2017[19]). Geographic mobility could also be promoted by better recognition of skills and qualifications across regions and countries.

14.2. Building more responsive, effective and worker-centred adult learning systems

As a result of technological change, globalisation and demographic change, labour markets are experiencing profound structural changes in their occupational and industrial structures, with far-ranging implications for the required types of skills. Automation alone may lead to the destruction of one-in-seven jobs over the next 15-20 years and significantly change the way many of the remaining jobs are carried out (Nedelkoska and Quintini, 2018[29]). Adult learning needs to be scaled up to enable workers to deal with these changes and avoid a further widening of skill imbalances. This requires more responsive, effective and worker-centred adult learning systems.

Adult learning is key to address skill imbalances

Since the majority of people affected by changing skill needs is already in the workforce and adults are expected to work for longer, adult learning is a key issue to ensure that workers and firms can harness the opportunities while addressing the challenges associated with the future of work. This will require a significant upscaling of adult learning systems in all countries in combination with specific measures targeted at those lacking basic skills. On average across OECD countries, almost one quarter of adults lack basic numeracy skills and an even larger share of adults have no or very limited digital skills that are needed to navigate and solve problems in everyday life (Chapter 3). Improving the skills of these adults will be crucial to protect them against the potentially negative effects of automation and globalisation. Yet, despite the importance of life-long learning for adults with low skills, workers with low skills or in jobs at high risk of automation are much less likely to participate in adult learning than workers with high skills or workers whose jobs are safe (Chapter 10). In addition, low-skilled adults are disproportionately employed in non-standard forms of work, which tend to be associated with additional barriers to training (Chapter 12).

In the absence of effective adult learning systems, there is a risk that rapid structural change leads to growing imbalances between skill supply and demand. While some imbalances are unavoidable, especially in periods of rapid transition, persistent imbalances can have significant costs for individuals, companies and society at large. They are associated with negative labour market outcomes for individuals, including lower wages and job satisfaction, and hamper companies’ innovation and technology adoption. According to the OECD Skills for Jobs database (OECD, 2017[30]), countries differ considerably in the extent to which the supply of skills adapts to changing skill needs (see Box 14.1 for details). Large skill imbalances, associated with intense occupational shortages and surpluses, tend to be especially prevalent in countries such as Greece, Iceland and Spain, while they are relatively modest in countries such as France, the Netherlands, Norway and Switzerland (OECD, 2018[31]). Moreover, occupational imbalances have been widening during the last decade, as evidenced by intensified skill shortages in high-level cognitive and soft skills, and by growing surpluses in routine and physical skills (Figure 14.3). The risk of automation is likely to further amplify these trends in the future (Nedelkoska and Quintini, 2018[29]).

Skill imbalances and skills mismatches are closely intertwined. Skill shortages can lead to under-qualification, as employers facing recruitment difficulties may lower hiring requirements to fill their vacancies. Skill surpluses may give rise to over-qualification as job-seekers are more likely to accept job offers below their skill level. On average across the OECD, approximately 36% of workers are mismatched, with approximately equal shares reporting that that they are overqualified (17%) – i.e. that they had higher qualifications than required to perform their jobs – and under-qualified (19%) – i.e. that they had lower qualifications than required to perform their jobs (see Chapter 7 for further details).

Scaling up adult learning

While there are significant benefits from investing in adult learning for firms and individuals, there are various reasons why there is a shortfall of such investments in many countries and particularly among disadvantaged groups and in small and medium-sized enterprises. These include imperfect information on costs and benefits, financial constraints, and various labour market imperfections that break the link between those who invest in adult training and those who benefit from it. For example, workers with a weak bargaining position may not be able to fully capitalise on their investments in adult learning. Employers may face similar problems in a context where workers are increasingly mobile across firms. Governments at the national and the local levels thus need to ensure that adult learning is: i) responsive to changing skill needs; ii) effective in the sense of benefits exceeding costs; and iii) sufficiently worker-centred by linking adult learning to individuals rather than to jobs. Specific measures to encourage adult learning among disadvantaged groups are also needed and are discussed in Chapter 10 on labour market inclusiveness.

Box 14.1. The OECD Skills for Jobs Database

The OECD Skills for Jobs Database is a key instrument for assessing and anticipating skill needs. It documents the evolution of skills imbalances in terms of shortages and surpluses. To this end, the OECD Skills for Jobs Database makes use of detailed performance indicators by occupation and a taxonomy of skill requirements by occupation. The degree of “labour market pressure” for each occupation in each country is assessed by five performance measures which compare an occupation’s long-term path in terms of wages, working time, employment, unemployment and under-qualification with the country average. Above-average performance on each of these outcomes is interpreted as a signal of occupational shortage whereas below-average performance is interpreted as a signal of occupational surplus. After standardising the five relative performance measures, they are aggregated into a single index of occupational imbalance for each occupation. In a second step, the occupational imbalance index is mapped to the underlying skills requirements associated with each occupation based on a widely-used taxonomy developed by O*NET and aggregated to the country level.

Source: OECD (2018[31]), OECD Skills for Jobs Database (2018), www.oecdskillsforjobsdatabase.org (accessed on 26 October 2018).

Promote the responsiveness of adult learning systems to changing labour market needs

Ensuring that skill supply aligns with skill demand requires responsive demand-driven adult education and training systems (OECD, 2016[32]). A precondition to achieve this is to have in place robust systems and tools for assessing and anticipating skill needs, combined with effective mechanisms and procedures which ensure that such information feeds into policy-making, lifelong guidance and the education and training choices of individuals. One promising way that can help achieve this is to couple high-quality information on the skills needs of employers with information on education and training options and their potential benefits for career advancement in terms of job opportunities and pay. Online tools and databases are ideal for disseminating such information as widely as possible among all possible stakeholders, including prospective students, trainers as well as career and skills councillors.

A demand-driven adult learning system also thrives on close links between the world of education and training on the one hand and the world of work on the other. Such links can be strengthened by vocational education and work-based learning programmes. Apprenticeship programmes, where students of all ages combine classroom learning with practical training with an employer for a period of several years, such as in Austria, Germany and Switzerland, are often regarded as best practice. Vocational education and work-based learning programmes tend to be most effective where employer and trade union involvement is strong and co-operation well-developed. More generally, social partners should be closely involved in the development and implementation of the government’s policy agenda at the national level with respect to adult learning by allowing them to take part in permanent advisory bodies, specific working groups or ad hoc consultations in relation to adult learning policy, as well as at the local level, as numerous successful examples illustrate (Box 14.2).

Box 14.2. Examples of local skills development programmes

The development of better local labour market information is critical to help individuals, employers, and policy makers to make well-informed decisions about skills development and training. In the United States, the Workforce Intelligence Network (WIN) in southeast Michigan illustrates how to join-up local actors to build a strong local labour market information system and improve matching between job seekers and employers (OECD, 2014[33]). The mission of the organisation is to cultivate a comprehensive and cohesive talent system to ensure that employers find the workers they need. WIN brings together key partners in workforce development such as community colleges, four-year postsecondary institutions, K-12 schools, economic development organisations, government, community based organisations, and employers. WIN has developed a data dashboard and produces quarterly labour market reports, which publicise job market data related to employer demand, preferred credentials, and labour force fluctuations.

Initiatives as the local level play a critical role in reaching out to employers to promote awareness and participation in apprenticeship training. Local apprenticeship hubs in Manchester and Leeds (the United Kingdom) have been successful in coordinating the range of government actors involved in apprenticeship programmes to provide a “one-stop” offer to local employers (OECD/ILO, 2017[34]). Taking a decentralised approach to apprenticeships can be particularly effective in bringing on board local small and medium enterprises (SME) who often face unique barriers. In Ireland, the state-funded support body Skillnet has been effective in actively supporting and working with businesses to address their current and future skills needs. The programme funds 65 training networks which operate locally, supporting over 14 000 companies and 50 000 trainees. Member companies actively participate in determining their own training needs and how, when and where training will be provided (OECD, 2014[33]).

Strategic local partnerships can also help to adapt employment and skills programmes to the changing nature of work at the local level. Under the Workforce and Innovation Opportunity Act (WIOA) in the United States, for instance, local workforce investment boards – representing private sector employers, labour unions, non-profit organisations, and government agencies - are required to develop a local plan to provide a coordinated response to current and future workforce development challenges. The City of New York has further developed Industry Partnerships which, focusing on a specific sector, are designed to work collaboratively with a diverse set of stakeholders – including employers, community-based organisations, organised labour, philanthropy, government, training providers and educational institutions. The Industry Partnerships identify the most pressing needs that employers have for qualified talent, then revise or design training curricula with employer input or develop other solutions to address those needs (City of New York, 2017[35]).

Financial incentives for participants and providers can be used for steering adult learning investments towards in-demand skills. For instance, the Higher Education Funding Council of England (HEFCE) distributes public funds to higher education institutions to promote specific skill policy objectives, like the development of facilities related to science, technology, engineering and math (STEM) training. Financial incentives can also focus on workers in jobs at high risk of automation or unemployed workers whose skills have become obsolete. Training programmes yield the most successful employment outcomes when they are tied closely to the needs of the labour market (OECD, 2017[36]). This can be done by directing public resources to training activities that address clearly identified labour market needs or take the form of more market-driven forms of targeting by providing subsidies to employers for hiring and training (see also discussion below).

Promote the cost-effectiveness of adult learning

To ensure that firms and workers have strong incentives to invest in adult training it needs to be cost-effective, which depends on the value of adult learning for workers and firms as well as its costs.

The value of adult education and training to firms and workers depends crucially on its quality, but also on the extent to which the skills acquired through training and education are recognised by employers. Yet clear and well-defined quality assurance systems tend to be rare (Broek and Zoetermeer, 2013[37]). In large part, this is related to the diversity and considerable number of actors involved in the provision of adult learning. To assess the effectiveness of adult learning, regular and systematic quality assessments are needed based on the monitoring of learning and labour market outcomes or impact evaluations. To ensure high quality standards and promote an effective demand for adult learning, it is crucial that quality assessments are disseminated widely and effectively. This requires establishing minimum standards through licencing, certification and labelling systems. Ideally, such standard-setting is complemented with the provision of high-quality public information on the effectiveness of individual training and education providers based on the learning and labour market outcomes of past students. Beyond the formal provision of training and education, skills certification programmes also have a role to play by ensuring that less formal forms of adult training are also formally recognised.

The costs of adult learning can be an important barrier, especially among firms and workers with limited financial resources of their own, and hence provides an argument for the use of financial incentives (OECD, 2017[38]). Financial incentives targeted at individuals can be useful to stimulate the acquisition of portable skills and to promote adult learning among vulnerable groups. Those targeted at employers can be useful to promote the acquisition of more directly work-related skills, particularly in SMEs. In general, the effectiveness of financial incentives tends to be enhanced when they contain an element of co-financing since this reduces the risk that training is subsidised that would have been undertaken anyway or has little social value (OECD, 2006[39]). Moreover, direct subsidies typically allow for a better targeting than general tax incentives. However, both direct subsidies and general tax incentives risk becoming very expensive for the public purse if adult learning is supposed to be scaled up radically. Financial incentives that rely on more important contributions from individuals and employers are less likely to hit fiscal constraints, but may require a system based on mandatory contributions to ensure that sufficient resources are mobilised (e.g. individual saving accounts for training, training levies). A collective system may also help to ensure that SMEs and vulnerable workers have the financial resources to invest in adult learning. In a number of countries, the social partners have implemented sectoral initiatives to promote adult learning based on a system of pooled resources (e.g. Finland, the Netherlands).

Make adult training worker-centred by linking it to individuals rather than jobs

The changing organisation of work may further call for a re-think of the rights and duties of workers, firms and government in the management and provision of adult learning. In a world of work organised around long-term employer-employee relationships, workers and firms generally have strong incentives to invest in training. However, the incentives for workers and firms to invest in adult learning may be weakened in a changing world of work, where there is great uncertainty about the skills required by employers in the future, and where work is less stable and more often organised through non-standard work relationships. With workers being increasingly mobile and often combining several jobs at the same time, employer incentives for adult learning may be weak. Moreover, due to the rise of platform and independent contract work, an increasing share of the workforce may no longer have an employer who is responsible for the provision of training and may lack the information, advice and counselling required to pursue training on its own. This calls for training rights and incentives that are available to all individuals regardless of their employment status.

As a result of these developments, there has been a renewed interest from policy makers in individual learning accounts (ILAs). ILAs can take different forms, including: i) individual savings accounts where time credits or financial resources for training are accumulated over time; and ii) voucher schemes which provide entitlements to direct government payments for training, sometimes with a contribution from the participant. ILAs have existed for some time, although rarely universal and country-wide. The original motivation for their use was mainly to create a “market” for adult learning, while empowering individuals to make their own career choices by choosing training courses offered by competing providers. The current interest in ILAs is slightly different and lies in their potential to attach training rights to individuals rather than jobs, and therefore their ability to make training rights portable between jobs and available to all irrespective of employment status. This could help to increase participation in lifelong training for non-standard workers.

A number of countries have individual training accounts systems or conducted experiments to assess their effectiveness (OECD, 2017[40]). In France, for instance, an individual training account (Compte Personnel de Formation, CPF) was introduced at the beginning of 2015. In that scheme, employees – and since January 2018 all working-age adults including own-account workers and unemployed persons– get time credits for training in their individual accounts based on hours worked during the year. Accumulated training credits can only be used at the initiative of the individual and are strictly personal in the sense that they remain valid even when changing employer or becoming unemployed, ensuring potentially strong incentives to individuals to train throughout their lives.2 Studies for the United States further suggest that the effectiveness of individual training accounts is strengthened when coupled with advice and counselling (OECD, 2017[38]). While individual training accounts can be part of a broader strategy to scale up adult learning, they tend to be used only sporadically by individuals with low skills, suggesting that additional measures are needed to enhance their participation in adult learning (see Chapter 10).

14.3. Supporting displaced workers

While promoting reallocation and investing in adult learning is key to make labour markets more adaptable to structural change, it is unavoidable that some workers get displaced from their jobs as their employers are forced to cut back their operations or shut down completely. The cost of job displacement (contract termination of permanent workers with long job tenure due to economic reasons) in terms of foregone income can be large. In some countries, including Germany, Portugal and the United Kingdom, earnings in the year of dismissal fall by 30% on average, with incomes remaining below pre-displacement levels for a long time and even after workers are re-employed. To reduce the costs of job displacement, effective employment and social policies are needed (OECD, 2018[41]). To the extent that job losses are concentrated in specific regions – in many cases compounding the challenges of lagging regions – there may be a need for additional measures at the regional level.

Employment policies for displaced workers

The main focus of policies for displaced workers should be on early intervention measures and effective activation polices.

Early intervention measures have proved particularly effective

A crucial difference between displaced workers and most other groups served by the public employment service is that it is often possible to initiate re-employment services during the notice period prior to displacement. Rapid response services, for example by setting up a temporary public employment service office in factories that will soon close, facilitate the timely delivery of re-employment services. Such early interventions can speed up the adjustment process and achieve better outcomes by starting the process before workers become unemployed. Employers typically view job applications from workers who are still employed more favourably and labour market prospects tend to deteriorate the longer a worker is unemployed. Although such early interventions can be effective, they are not used as widely as would be desirable, as they are often limited to workers affected by mass layoffs.

The extent to which employers and unions are actively involved in the planning and provision of re-employment services to displaced workers can be important for the effectiveness of early interventions. In Sweden, the job security councils, which are operated by the social partners, demonstrate the feasibility of offering early intervention measures to all displaced workers, including those affected by individual or small-scale layoffs, when employers and unions are actively engaged (OECD, 2015[42]). Employment protection rules can help establish an appropriate level of employer engagement by requiring employers to respect a minimum period of advance notice for layoffs. Governments can then ensure that notified workers are the focus of outreach activities by the public employment services or that workers are required to register with the public employment service as soon as they are notified. The latter can help ensure that early intervention measures are not limited to workers who are displaced through mass layoffs, but also reach those affected by individual dismissal.

An effective activation strategy is essential

An effective national activation strategy to get people into work provides a solid foundation for promoting the rapid re-employment of displaced workers. But policy also needs to take into account the specific barriers to re-employment confronting displaced workers (e.g. obsolete skills and the lack of recent job-search experience), specific advantages (e.g. a history of stable employment and strong labour force attachment) as well as the specific local circumstances (e.g. displacement frequently concentrated in economically declining regions).

While all displaced workers should benefit from prompt access to basic job-search services, some will require more intensive re-employment services or retraining. One key challenge is to identify this smaller group rapidly and offer them intensive services when these are most effective rather than after a long period of unemployment as is commonly the case. Another important challenge is to ensure that all groups of displaced workers have equal access to re-employment help, including those who do not immediately qualify for unemployment benefits, for example, because severance pay is treated as compensation. This requires decoupling participation in re-employment services from the receipt of public income support. Moreover, a pragmatic mix of general activation policies and programmes specifically targeted at displaced workers usually works best (OECD, 2018[20]).3

Local employment services can play a critical role in strategies to facilitate structural change and support displaced workers, but they require flexibility and capacity to take a stronger leadership role. The OECD Reviews on Local Job Creation have shown that allowing greater room for manoeuvre to local employment services is a difficult challenge for governments. The awarding of greater flexibility must therefore be accompanied by guarantees regarding the accountability of decision-making and the efficiency of service delivery. This crucially requires putting in place a rigorous performance management system and ensuring that local employment services have adequate skills and sufficient resources. It also requires ensuring that front-line staff have good local labour market information and strong contacts with employers so they can become quickly aware of new employment opportunities as they arise.

Income-support policies for displaced workers

Income-support policies play a crucial role in alleviating the costs of job displacement, in the form of lost labour income during unemployment and potentially also lower earnings upon re-employment. To the extent that technological developments are such that significant groups of displaced workers are at risk of very long-term unemployed in the absence of sufficient work opportunities for all people, resulting in elevated “technological unemployment”, a more fundamental rethink of social protection may be required. However, based on the OECD’s current assessment of the speed of automation over the next 15-20 years, such a prospect is neither likely nor inevitable since the risk of technological unemployment depends crucially on the extent to which new opportunities can be created and workers can adapt their skills to the changing world of work.

Income-support policies alleviate the costs of displacement

Compared with other groups of unemployed people, displaced workers tend to have relatively high benefit entitlements in most countries, because their employment histories are generally more stable than those of many other unemployed people. Nonetheless, benefits only provide compensation for a proportion of earnings losses, with large differences across countries. During the first year of unemployment, the average net replacement rate is 19% in the United States and 75% in Denmark. Earnings losses are especially large for workers experiencing a long spell of unemployment or becoming re-employed at a significantly lower wage or part-time. To avoid that displaced workers experiencing long spells of unemployment are left without income-support it is crucial that social-assistance benefits are available for those who have exhausted their unemployment benefit entitlements. Apart from addressing financial hardship, high coverage social and unemployment benefits also provide a contact point for public employment and social services through which appropriate support measures can be taken to overcome barriers to work (see Chapter 9 for a more in-depth discussion).

An important question in the context of displaced workers is whether wages of re-employed workers should be topped up to compensate for part of the earnings losses due to displacement through the use of wage insurance schemes. Evaluations of two small wage insurance schemes in Canada and the United States suggest that wage insurance mitigates the income declines of displaced workers, but does not speed up re-employment (Bloom et al., 2001[43]; Wandner, 2016[44]). Other pilot studies of wage insurance schemes would be of considerable value, in light of the effect that job displacement has on worker well-being.

Income support policies to deal with elevated structural unemployment

In the unlikely event that automation and digitalisation significantly raise structural unemployment due to the absence of sufficient job opportunities, more far-ranging measures may be needed to provide adequate income support.

To ensure that all workers receive at least some income support a number of countries are experimenting with various forms of basic income schemes. A universal, unconditional “no-questions-asked” public transfer would be simple and have the advantage that no one is left without support. But an unconditional payment to everyone at a meaningful level would most likely require tax rises as well as reductions in existing benefits and would not be an effective tool to reduce poverty (OECD, 2017[45]; Hanna and Olken, 2018[46]). At constant social spending, the implied basic income would in most countries be well below the current level of social assistance. In addition, some disadvantaged groups would lose out when existing benefits are replaced by a basic income, illustrating the downsides of social protection without any form of targeting at all.

Another option to deal with high levels of structural unemployment may be to make use of job guarantees – i.e. the promise of a job to anyone willing and able to work at some minimum wage rate. Compared to basic income schemes, job guarantees fit better with the philosophy of “mutual obligations”, whereby society’s responsibility to support those in need is matched by the individual’s duty to contribute something in return. Job guarantees also have the advantage over basic income schemes that they go beyond the provision of income and, by providing a job, help individuals to stay connected with society, build self-esteem, as well as develop skills and competencies. However, past experience with public sector employment programmes has shown that they have negligible effects on the post-programme outcomes of participants, and therefore are best considered as a form of income-support rather than a policy to promote self-sufficiency and need to be tightly targeted to those with limited resources of their own.

Policies to support lagging regions

To the extent that job displacement is concentrated in specific regions, additional measures are needed to support lagging regions.4 At a minimum, limiting regional inequalities requires that high-quality public services, including public education, public health, public transport and public employment services, are maintained in lagging regions. In some cases, additional public investments in education, transport and infrastructure are needed to strengthen a region's competitiveness and facilitate the diffusion of innovation and good practices across regions, industries and firms (Moretti, 2012[47]; OECD, 2018[48]). Such policies require the cooperation of the national, regional and local governments to enhance the capacity of regional and local governments to effectively administer and implement large-scale investment projects, education and employment programmes. It also requires well-established and transparent procedures for the selection of such projects and the way they are awarded to private contractors.

But preventing displaced workers in lagging regions from further falling behind also requires place-based employment and social policies. These should tackle the social problems associated with the local concentration of unemployment, social exclusion and poverty, through: i) the provision of easily accessible anti-poverty programmes; ii) the establishment of community centres and the use of urban regeneration projects; and iii) retraining, work experience or entrepreneurship programmes that help displaced workers move into new activities or towards other regions with suitable job opportunities. Some regions may need to raise specific support for linguistic minorities and promote the acquisition of new skills and trades for indigenous people whose traditional ways for maintaining their livelihoods are being eroded in an increasingly modern and interconnected world.

Conclusion

Sustaining good labour market performance and inclusive growth in a context of rapid technological progress, deepening globalisation and demographic change require that labour markets are adaptable, i.e. that worker and firms can absorb, adapt to and make the most of the opportunities while being able to deal with the challenges associated with a changing world of work. Many of the policies and institutions that have been discussed in this Volume implicitly reflect the need for adaptable labour markets since adaptability is crucial for achieving good labour market performance in a rapidly changing economic context. This chapter explicitly discusses key policies to strengthen adaptability.

Promote the efficient reallocation of workers across jobs, firms, industries and regions. Adapting to digitalisation, globalisation and demographic change requires that innovative businesses are not held back by overly burdensome product market regulations, especially administrative barriers to firm entry, and lack of financing. At the same time, effective insolvency regimes and more balanced financial systems that do not favour debt over equity financing could promote the exit or re-structuring of the least productive ones. Removing excessively restrictive employment protection rules and reforming housing policies that reduce geographic mobility would prevent workers from becoming trapped in low-productivity businesses and regions and allow them to move where the best jobs are.
Building more responsive, effective and worker-centred adult learning systems. Rapidly changing skill needs require giving greater priority to adult learning. Yet few countries have fully effective learning systems and existing systems tend to widen rather than reducing skill gaps: in all OECD countries workers most at risk of automation are least likely to participate in adult learning. Without appropriate action, there is a significant risk that workers without basic skills become unemployed, are pushed into dead-end jobs or leave the labour force altogether. To meet this challenge countries urgently need to invest in effective adult learning systems. Such systems should be responsive to changes in labour market needs, meet high quality and transparency requirements, incentivise workers and firms to invest in adult learning and be sufficiently worker-centred by linking training rights to workers rather than jobs.
Support displaced workers through the use of effective employment and social policies. While technological change creates new opportunities, it also implies considerable turbulence in labour markets, associated with firm closures, mass layoffs and dismissals. Job displacement tends to be painful for those involved, in terms of lost income during unemployment, but often also leaves long-lasting scars to worker careers. To alleviate the cost of job displacement – both in the short-term but also in the long-term as a result of scarring effects – it is crucial that displaced workers return to work as quickly as possible. This requires effective activation strategies as discussed in Chapter 9, but also early intervention measures during the notice period. Income-support policies are key to alleviate the costs of job displacement during unemployment but potentially also during re-employment through the use of wage insurance schemes.

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Notes

← 1. Ideally, young firms should grow rapidly or exit (so-called “up-or-out” dynamics) to avoid creating a large mass of small low-productivity firms (Calvino, Criscuolo and Menon, 2015[5]).

← 2. The CPF is currently being reformed, amongst other by expressing training accounts in euros instead of hours.

← 3. Many targeted programmes focus on workers who are adversely affected by higher import competition; the two most prominent examples are the Trade Adjustment Assistance in the United States and the European Globalisation Adjustment Fund in the European Union.

← 4. For example, OECD (2018[48]) finds that the risk of automation differs considerably across regions within countries.

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