The Centrality of Labour in Inclusive Growth Strategies
This article is based on the PSU's paper "The Global Economic Crisis: effective responses and policy strategies to address the human impact". A full version of that paper, including reference material, is available here .
"Inclusive growth" is a relatively new concept for economic growth which seeks to draw attention to the supply-side of an economy (the factors of production that contribute to wealth, concentrating on labour) as well as the demand-side, which uses wealth for activities like consumption and investment.
In addition to promoting high levels of economic growth, inclusive growth explicitly acknowledges the need to maximise the opportunities available to an economy's labour force to contribute to economic growth and benefit from it more broadly. Inclusive growth is a medium to long-term growth strategy and is generally seen to focus on productive employment rather than income distribution. It therefore focuses on improving access to economic opportunities, strengthening human capabilities and strengthening productive social safety nets.
This year, APEC's new research and analysis arm - the Policy Support Unit (PSU) -undertook some work to examine policy measures adopted internationally that are consistent with an inclusive growth framework. In doing so, the PSU also examined approaches suitable for shorter term measures to assist in contributing to a recovery from the global economic crisis.
Some aspects of this work and associated challenges are the subject of this article.
Provision of unemployment benefits
Suitably designed unemployment benefits are consistent with an inclusive growth framework. Firstly, they can prevent individuals who have lost their source of income from falling into poverty. Secondly, unemployed individuals with some income can support consumer spending.1 Finally, as with other safety net measures, unemployment benefits can reduce the need for overly precautionary savings. This can potentially lead to greater (and less volatile) domestic demand in the longer term. It may also be able to contribute towards greater balance in the current regional disparities between the propensities to save and consume.
Determining who can access unemployment benefits, for how long and at what level are central design features that need careful thought as they can have a significant effect on an economy's aggregate unemployment and employment levels.
Eligibility
Many economies restrict access to unemployment benefits to citizens and/or permanent residents. Some economies require contributions to have been made to social insurance schemes before access to unemployment benefits is permitted. This means that unemployment benefits are not available to individuals who have never worked in paid employment. While such restrictions can increase aggregate employment, they can also have unintended income distribution issues. For example, young people entering the workforce for the first time at a time of an economic downturn would be ineligible for unemployment assistance despite very low work availability.
Duration
A longer duration of unemployment benefits may reduce the urgency of seeking new employment. If obtaining benefits is subject to a time limit, individuals are more likely to search for jobs before the cut-off time. Studies have shown that around the time benefits are reduced, significant new employment occurs.
Generosity
Unemployment benefits set too close to an individual's previous wage can result in the individual being less inclined to seek new employment. This could lead to adverse outcomes of individuals being out of work longer and total employment being lower.
Active labour market policies
An Active Labour Market Policy (ALMP) adds sophistication to unemployment benefits. An ALMP requires an individual in receipt of unemployment benefits to actively seek work or undertake a form of training in order to improve their chances of finding employment. ALMPs are common in many economies and involve a broad range of measures that are designed to assist individuals to find work and improve their skills, such as:
There is no ideal approach for an ALMP. However, international experience shows that successful policies were focussed on the supply side of the economy rather than the demand side. Some measures showing positive results included:
Interestingly, public job creation was typically found to have disappointing outcomes.
Training
Improving unemployed individuals' skills through training is attractive. Training increases an individual's competencies and enhances the supply of human capital in the economy.
Evaluation of training provided under ALMPs has yielded mixed outcomes. When training is directly job related, outcomes have been acceptable. But outcomes for males and youth have been poor while, in contrast, outcomes for adult women have been positive. Available evidence suggests three important features that need to be included in the design of public training programmes:
Compliance
Ensuring compliance with the requirements of any policy measure (and particularly ALMPs) is vital to their success. Compliance regimes vary significantly across economies. However, if only lip service is paid to these requirements, the results are essentially the same as that of a passive welfare system - where welfare benefits are provided unconditionally and there may be little incentive for individuals to move back into paid employment.
Effective enforcement for specific transfer payments (such as unemployment benefits) to control fiscal risk may also enable unconditional payments (such as retirement and disability payments). Should a comprehensive welfare system encompassing many payments for different circumstances exist, effective mechanisms will be necessary to prevent individuals from migrating from benefits with obligations to those that are unconditional. Otherwise, the whole system's integrity will be undermined, fiscal risks increase and the level of employment can be adversely affected.
Conclusion
Inclusive growth as a policy framework and the particular measures outlined above require significant policy thought and coherence. At times they may require significant fiscal investments which may be a burden, particularly for developing economies.
However, the rationale for inclusive growth has an underpinning of enabling people to increase their capabilities across an economy's labour force. By having individuals and firms as its analytical focus, it takes into account the benefits of market forces and competition as well as the role of government.
Economies may be considering introducing or adjusting policy settings like unemployment benefits and active labour market systems in response to the global economic crisis. Faster employment turnaround times and increasing human capital levels would ease fiscal pressures and lead to an earlier and higher growth path as economies recover. If so, an inclusive growth framework provides a longer term perspective which shorter term responses should not conflict with.
"Inclusive growth" is a relatively new concept for economic growth which seeks to draw attention to the supply-side of an economy (the factors of production that contribute to wealth, concentrating on labour) as well as the demand-side, which uses wealth for activities like consumption and investment.
In addition to promoting high levels of economic growth, inclusive growth explicitly acknowledges the need to maximise the opportunities available to an economy's labour force to contribute to economic growth and benefit from it more broadly. Inclusive growth is a medium to long-term growth strategy and is generally seen to focus on productive employment rather than income distribution. It therefore focuses on improving access to economic opportunities, strengthening human capabilities and strengthening productive social safety nets.
This year, APEC's new research and analysis arm - the Policy Support Unit (PSU) -undertook some work to examine policy measures adopted internationally that are consistent with an inclusive growth framework. In doing so, the PSU also examined approaches suitable for shorter term measures to assist in contributing to a recovery from the global economic crisis.
Some aspects of this work and associated challenges are the subject of this article.
Provision of unemployment benefits
Suitably designed unemployment benefits are consistent with an inclusive growth framework. Firstly, they can prevent individuals who have lost their source of income from falling into poverty. Secondly, unemployed individuals with some income can support consumer spending.1 Finally, as with other safety net measures, unemployment benefits can reduce the need for overly precautionary savings. This can potentially lead to greater (and less volatile) domestic demand in the longer term. It may also be able to contribute towards greater balance in the current regional disparities between the propensities to save and consume.
Determining who can access unemployment benefits, for how long and at what level are central design features that need careful thought as they can have a significant effect on an economy's aggregate unemployment and employment levels.
Eligibility
Many economies restrict access to unemployment benefits to citizens and/or permanent residents. Some economies require contributions to have been made to social insurance schemes before access to unemployment benefits is permitted. This means that unemployment benefits are not available to individuals who have never worked in paid employment. While such restrictions can increase aggregate employment, they can also have unintended income distribution issues. For example, young people entering the workforce for the first time at a time of an economic downturn would be ineligible for unemployment assistance despite very low work availability.
Duration
A longer duration of unemployment benefits may reduce the urgency of seeking new employment. If obtaining benefits is subject to a time limit, individuals are more likely to search for jobs before the cut-off time. Studies have shown that around the time benefits are reduced, significant new employment occurs.
Generosity
Unemployment benefits set too close to an individual's previous wage can result in the individual being less inclined to seek new employment. This could lead to adverse outcomes of individuals being out of work longer and total employment being lower.
Active labour market policies
An Active Labour Market Policy (ALMP) adds sophistication to unemployment benefits. An ALMP requires an individual in receipt of unemployment benefits to actively seek work or undertake a form of training in order to improve their chances of finding employment. ALMPs are common in many economies and involve a broad range of measures that are designed to assist individuals to find work and improve their skills, such as:
- job matching services;
- education and training programmes;
- employment subsidies;
- and job creation schemes.
There is no ideal approach for an ALMP. However, international experience shows that successful policies were focussed on the supply side of the economy rather than the demand side. Some measures showing positive results included:
- job-search assistance (which has the additional advantage of being relatively low-cost);
- intensive employment services;
- individual case management; and
- mixed strategies with selective referrals to long-term training programmes
Interestingly, public job creation was typically found to have disappointing outcomes.
Training
Improving unemployed individuals' skills through training is attractive. Training increases an individual's competencies and enhances the supply of human capital in the economy.
Evaluation of training provided under ALMPs has yielded mixed outcomes. When training is directly job related, outcomes have been acceptable. But outcomes for males and youth have been poor while, in contrast, outcomes for adult women have been positive. Available evidence suggests three important features that need to be included in the design of public training programmes:
- tight targeting on participants;
- relatively small scale programmes; and
- on-the-job components (and hence the need to establish strong links with employers).
Compliance
Ensuring compliance with the requirements of any policy measure (and particularly ALMPs) is vital to their success. Compliance regimes vary significantly across economies. However, if only lip service is paid to these requirements, the results are essentially the same as that of a passive welfare system - where welfare benefits are provided unconditionally and there may be little incentive for individuals to move back into paid employment.
Effective enforcement for specific transfer payments (such as unemployment benefits) to control fiscal risk may also enable unconditional payments (such as retirement and disability payments). Should a comprehensive welfare system encompassing many payments for different circumstances exist, effective mechanisms will be necessary to prevent individuals from migrating from benefits with obligations to those that are unconditional. Otherwise, the whole system's integrity will be undermined, fiscal risks increase and the level of employment can be adversely affected.
Conclusion
Inclusive growth as a policy framework and the particular measures outlined above require significant policy thought and coherence. At times they may require significant fiscal investments which may be a burden, particularly for developing economies.
However, the rationale for inclusive growth has an underpinning of enabling people to increase their capabilities across an economy's labour force. By having individuals and firms as its analytical focus, it takes into account the benefits of market forces and competition as well as the role of government.
Economies may be considering introducing or adjusting policy settings like unemployment benefits and active labour market systems in response to the global economic crisis. Faster employment turnaround times and increasing human capital levels would ease fiscal pressures and lead to an earlier and higher growth path as economies recover. If so, an inclusive growth framework provides a longer term perspective which shorter term responses should not conflict with.
|
About the PSU
The APEC Policy Support Unit is APEC's research and analysis arm which commenced in August 2008. Its mission is to support APEC members and fora in improving the quality of their deliberations and decisions by providing rigorous, tailor-made research, analysis and policy support. The PSU's mandate covers a broad range of APEC's activities. At present it focuses on economic structural reform, trade and investment issues. Some of the PSU's key achievements include:
The PSU is also building relationships with other international organisations to recognise and complement their work, and is pursuing opportunities to undertake joint research and analysis. Providing APEC members with additional data resources and expanding the body of APEC-specific research will provide APEC with an analytical foundation for its agenda. A comprehensive listing of PSU work, completed and in progress, is available here. |