Chapter 4. Policies and institutions to enhance labour market performance

Better and well-matched skills are key for both job quantity and job quality

Policies should ensure that workers are equipped with the right skills to thrive in the labour market. Individuals with the right skills are more likely to be employed and, when in employment, tend to have better jobs. A skilled workforce also makes it easier to innovate and adopt new technologies and work organisation practices, thereby boosting productivity and growth. To ensure that the skills acquired through the education and training system correspond to labour market needs, and hence avoid major issues with poor school-to-work transitions and skill mismatch (including shortages), it is important to develop stronger links between the world of education and training on the one hand and the world of work on the other. This can be achieved inter alia by promoting work based learning, the involvement of social partners in the development and delivery of curricula that match market needs, and by cost-sharing in skills funding. The relevance of skills formation can also be improved by having in place robust systems and tools for assessing and anticipating skills needs, combined with effective mechanisms and procedures that ensure that such information feeds into policy-making as well as into lifelong guidance and the design of education and training programmes. Skills policies should also account for regional variations in the supply and demand for skills. This requires close collaboration between employers and the education sector at the regional and local levels.

Promote worker productivity within firms and through the effective reallocation of resources across firms

Productivity growth is the main driving force of higher wages and incomes, and hence rising living standards. Good wages and working conditions, in turn, can promote productivity growth as they enhance motivation, worker effort, skills use and incentives for learning and innovation. A positive dynamic between the performance of labour markets and that of the economy as a whole requires policies that provide sufficient flexibility to allow for the efficient reallocation of workers across firms and sectors along with policies that promote the conditions for learning and innovation in the workplace. In emerging economies, a major challenge is also to design policies and institutions that address the problem of widespread labour informality, as this is associated with both low productivity and poor job quality outcomes (see Box 4.1).

Providing good working conditions and opportunities for career development can foster learning and innovation in the workplace. Good working conditions and opportunities for career development are not only important for employee well-being directly, but can also contribute to productivity by strengthening the commitment of workers to their firm, reduce excessive worker turnover, promote the use of skills in the workplace and strengthen the incentives of firms and workers to invest in training and skill acquisition. Firms therefore often have a strong interest in providing good working conditions since this provides long-term gains in terms of higher productivity and profitability. In practice, the combination of good working conditions with high performance is often associated with the presence of high-quality management and so-called High-Performance Work Practices (HPWP), which tend to emphasise the importance of team work, autonomy, task discretion, mentoring, job rotation and the use of new tools and technologies. The adoption of HPWP depends to an important extent on the production technology of firms, and particularly the importance of skills, but also their size since this determines in large part the resources that firms have at their disposal to implement such practices.

A sound regulatory framework combined with effective social dialogue and targeted information services can help support the conditions for learning and innovation in the workplace. A sound regulatory framework includes adequate standards for working conditions based on occupational health and safety regulations to reduce physical and mental health risks. It also includes working time regulations that limit excessive working hours and the use of night shifts, while establishing the right to rest breaks and paid leave. There also needs to be balanced employment protection provisions that protect workers against possible abuses but which do not prevent required job reallocation. It may also include a minimum wage set at a level that avoids pricing low-wage workers out of jobs. Well-functioning collective bargaining institutions, particularly when associated with high coverage, can also be useful. They allow for more differentiation in terms of wages and working conditions than statutory rules, can foster skills development and skills use in the workplace, and allow for the effective dissemination of good working practices. Finally, governments can indirectly promote high-performance management and working practices through information dissemination and advice on best-practice, as well as facilitating access to management training.

The efficient reallocation of resources depends on the flexibility of firms and the mobility of workers. This includes the ease with which entrepreneurs can start or liquidate a business, firms adjust their workforce in response to changing business conditions and workers move across firms and places in search of better matches for their skills and ambitions to enhance their career opportunities. The efficiency of reallocation is to an important extent determined by the functioning and regulation of financial, housing and product markets, including through policies that affect entry and exit of firms. Labour market policies and institutions also play an important role by determining the flexibility with which firms can adjust their workforces (e.g. employment protection) and the ease with which workers can move across firms. The latter depends to an important extent on the transferability of skills and the portability of benefits, availability of effective employment services and active labour market programmes to facilitate job transitions. Worker mobility also depends on wage incentives for workers to move from low to high-productivity firms, highlighting the importance of allowing sufficient scope to adjust wages to business conditions at the firm level, especially in countries where collective bargaining predominantly takes places at the sector or national level.

Employment protection legislation plays a key role in preventing abuses and avoiding inefficient dismissals but excessive and/or uncertain termination costs hinder efficient labour reallocation. Regulations concerning dismissal and termination of contracts are designed to protect workers against unfair hiring and firing practices and can reduce excessive turnover by preserving worker-firm matches that are viable in the longer term by making firms take account of the social cost in their dismissal decisions (i.e. the social and budgetary consequences of greater joblessness). Regulations that limit the gap in protection between workers on open-ended and fixed-term contracts can further reduce excessive turnover by preventing an undue reliance on temporary contracts. This is likely to spur learning and innovation in the workplace by strengthening incentives for investment in firm-specific human capital. However, excessively high and uncertain termination costs discourage hiring on open-ended contracts and hinder efficient resource reallocation and skill matching, thereby affecting productivity growth and efficiency. In addition, large statutory disparities in termination costs by type of contract trigger differences in job security and generate persistent divides between non-regular and regular workers, in particular because restrictive definitions of fair termination cannot be effectively applied to non-regular workers. This suggests that a narrow definition of unfair dismissal that focuses on false reasons, reasons unrelated to work, discrimination and prohibited grounds should be used. Predictable advance notice, ordinary severance pay and layoff taxes - whose level might depend on the reason for dismissal – can be used to avoid inefficient dismissals and compensate workers for involuntary separations that are not related to their performance.

Ensure that productivity gains are shared with workers, particularly those with low skills

Real wages are the most direct mechanism for transmitting the benefits of productivity growth to workers and their families. Over the past two decades, however, real median wage growth in most OECD countries has decoupled from aggregate labour productivity growth. This reflects both declines in labour shares (decoupling of average wages from productivity) and increases in wage inequality (decoupling of median wages from average wages). Productivity gains no longer appear to translate into broadly shared wage gains for all workers.

The decoupling of real median wages from productivity partly reflects global megatrends, but large cross-country heterogeneity in decoupling suggests that national policies and institutions also matter. The evidence suggests that capital-enhancing technological change and the rise of global value chains have contributed to this decoupling by reducing labour shares (decoupling or real average wages from productivity) and raising wage inequality (decoupling of median wages from average wages). However, the evidence also suggests that national policies in the areas of skills, product markets and labour markets are not only key to raising productivity but can also ensure that the dividend from higher productivity is broadly shared. Skills policies can support the broader sharing of productivity gains by limiting capital-labour substitution in response to global megatrends while pro-competitive product market policies limit the size of product market rents appropriated by capital. Labour market policies and institutions can support a fairer sharing of productivity gains both by affecting the relative cost of labour – and thereby the degree to which capital is substituted for some types of labour – and by influencing the distribution of product market rents.

A statutory minimum wage can help ensure that workers at the bottom of the wage ladder also benefit from growing economic prosperity, particularly in the absence of encompassing collectively agreed wage floors. The latter can be considered a functional equivalent of a minimum wage set by law insofar as most, if not all, workers, especially the weakest ones, are covered by them. Nevertheless, several OECD countries complement collective wage agreements with a statutory minimum wage. When minimum wages are moderate and well designed, adverse employment effects can be avoided. The following principles can help to enhance the design of minimum wage systems. First, make minimum wages pay while avoiding that they price low-skilled workers out of jobs by carefully considering their interactions with the tax-benefit system. For example, by reducing social security contributions around the minimum wage, it is possible to enhance the effectiveness of the minimum wage as a tool to reduce low pay and fight poverty while limiting the rise in labour costs for employers. Second, ensure that minimum wages are revised regularly, based on accurate, up-to-date and impartial information and advice that carefully considers current labour market conditions and the views of social partners and experts (e.g. independent commissions). Third, allow minimum wages to vary by group (if differences in productivity or employment barriers between groups are large) and/or by region (if differences in economic conditions are large). Fourth, improve coverage of, and compliance with, minimum wage legislation.

Collective bargaining institutions and social dialogue can help promote a broad sharing of productivity gains, including with those at the bottom of the job ladder, provide voice to workers and endow employers and employees with a tool for addressing common challenges. To promote good quality jobs for all in a changing world of work, collective bargaining systems have to have wide coverage, while providing sufficient flexibility to firms.

The best way of ensuring the inclusiveness of collective bargaining is by having well-organised social partners based on broad memberships. This allows social dialogue to be widespread at the firm-level among worker organisations and employers and to be based on representative social partners at higher levels (e.g. sector, country). To extend social dialogue to all segments of the economy, including small firms and non-standard forms of employment, governments should put in place a legal framework that promotes social dialogue in large and small firms alike and allows labour relations to adapt to emerging challenges. In the absence of broad-based social partners, another way of promoting the inclusiveness of collective bargaining is through the use of administrative extensions that extend the coverage of collective agreements beyond the members of the signatory unions and employer organisations to all workers and firms in a sector. To avoid that extensions harm the economic prospects of start-ups, small firms or vulnerable workers, it is important that the parties negotiating the agreements represent the collective interest of all groups of firms and workers. This can be achieved by subjecting extension requests to reasonable representativeness criteria, a meaningful test of public interest and providing well-defined procedures for exemptions and opt-outs of firms in case of economic hardship.

Collective bargaining systems characterised by predominantly sector-level bargaining need to allow for sufficient economic flexibility at the firm and country levels. The introduction of flexibility in predominantly sector-level systems has often been considered as requiring a shift from sector to firm-level bargaining. While such a shift would indeed provide more flexibility to firms, it is also likely to induce a decline in bargaining coverage, undermining the inclusiveness of the system. Experience in a number of OECD countries has shown that less radical options are also available, based on the use of controlled opt-outs or sectoral framework agreements that explicitly leave space for further adaptation at the firm or individual level. In principle, these instruments preserve the integrity of sector-level bargaining, while at the same time enabling a closer link between productivity and working conditions at the firm-level. However, their effectiveness in providing additional flexibility for firms largely depends to an important extent on having high levels of collective worker representation across firms. Flexibility with respect to macroeconomic conditions can be fostered through the effective coordination of bargaining outcomes across bargaining units (e.g. industries or firms). Recent OECD analysis suggests that coordination can promote better labour market outcomes by providing more flexibility with respect to macroeconomic conditions (see Chapters 8 and 13 of this Volume). Effective coordination can be achieved through peak-level bargaining based on the presence of national confederations of unions and employers that provide guidance to bargaining parties at lower levels. Another possibility is pattern bargaining where a leading sector sets the targets - usually the manufacturing sector exposed to international trade - and others follow.

Collective bargaining systems differ widely across countries in terms of their coverage, the flexibility that they provide to firms and their specific institutional set-up and these differences tend to be deeply rooted in the sociocultural fabric of countries. National traditions in collective bargaining are important. Yet, this does not imply that collective bargaining systems cannot and should not adapt to a changing economic context. Indeed, one of the most salient features of successful collective bargaining systems may be their ability to adapt gradually to changing economic conditions within their national industrial-relations tradition. This depends crucially on the quality of industrial relations, but also on a government that provides space for collective bargaining and social dialogue, while setting the boundaries.

Promote job quantity and job quality by keeping non-wage labour costs down

Labour taxes in the form of personal income taxes and social security contributions represent a key source of revenue to governments, but can have an adverse impact on employment, earnings and inclusiveness if excessively high. On average across the OECD, labour taxation accounts for about one third of labour costs.

Changes in the composition of labour taxation that broaden the tax base and increase tax progressivity can contribute to better labour market performance. This could for example take the form of a partial shift away from social security contributions towards personal income taxes, when there is already a weak link between individual contributions and entitlements (e.g. health insurance, family allowances). A partial shift to personal income taxes would reduce the burden of taxation on labour by broadening the tax base since the application of personal income taxes is not limited to labour earnings from dependent employees. It would further reduce differences in fiscal treatment based on labour market status and income source, thereby weakening possible unintended tax incentives for self-employment or employment in the informal sector. If personal incomes taxes are more progressive than social security contributions, as is typically the case, this is likely to increase the overall progressivity of labour taxation, with beneficial implications for inclusiveness. Moreover, in contrast to social security contributions, personal income tax systems in many countries have credits or deductions that make effective rates close to zero or even negative at low income levels, which could benefit employment as well. Such a move also has the potential to strengthen the effectiveness of other policy instruments. For example, a partial shift to personal income taxes could help make the statutory minimum wage more effective in supporting pay for low-productivity workers (job quality), while mitigating any potential adverse effects on employment (job quantity). A similar argument applies to collectively agreed wage floors.1

Reducing the overall burden of labour taxation by switching to taxes that weigh less directly on labour can promote employment and take-home pay. One example could be real estate taxes. This would not only be efficient, given the immobile nature of real estate, but also promote inclusiveness since low income households tend to own less property than higher income and more wealthy households. There are also arguments for strengthening the taxation of capital income at the individual level and increasing the reliance on consumption and environmental taxes.

Effective safety nets against labour market shocks improve job quality

Effective social safety nets alleviate concerns about job security among the employed, with important consequences for worker well-being. Moreover, adequate unemployment insurance and other social benefits – including sickness, disability, lone parent and social assistance benefits – enhance job quality by effectively insuring workers against individual labour market shocks (such as job loss) and smoothing consumption between joblessness and employment spells. While moderate employment protection also has a role to play unemployment insurance coupled with effective re-employment support is generally more effective in providing security to workers. Moderate layoff taxes or some degree of experience rating of employer contributions to finance active and passive labour market policies can then be used to provide employers’ with incentives to reduce the use of layoffs and take greater responsibility for the social cost of unemployment, sickness and disability (in terms of greater public spending, lower tax revenues, loss of human capital, health consequences, etc.). However, care should be taken not to unduly penalise certain types of firms and workers and to minimise any unintended consequences on the hiring and firing behaviour of firms, for example by introducing exemptions for employers hiring sick, disabled or long-term unemployed workers.

Adequate safety nets should be accompanied by complementary policies to minimise work disincentives and promote effective job search. In most advanced economies, adequate safety nets consist of multiple layers, including: i) unemployment insurance benefits for those who meet certain minimum contribution requirements; and ii) universal but modest unemployment and social assistance benefits that are available to all non-employed persons subject to a means test. Yet, benefits should be accompanied by strong incentives for effective job search to avoid the risk of benefit dependence and thus increased joblessness and higher costs for the public purse. Mutual obligation principles supported by effective employment services, including job-search assistance and skill development opportunities, active programmes and strictly-enforced job-search requirements are key.

In emerging economies, the provision of effective social safety nets is particularly challenging due to the presence of widespread informal employment (see Box 4.1). In the case of unemployment insurance, for example, the requirement of not being in formal employment for receiving benefits provides potentially strong incentives for working informally while receiving benefits. Moreover, workers who do not perceive the potential benefits of social insurance may “opt out” by taking up informal employment. This can be detrimental to workers’ well-being in the longer term and undermines economic growth and the financial sustainability of social protection systems. To address both issues a number of emerging economies have introduced mandatory self-insurance schemes based on individual savings accounts for unemployment, while ensuring that some form of income support is available to those with insufficient savings. In principle, such a system could also be used to provide unemployment insurance to self-employed workers.

In order to strengthen incentives to work, employability and opportunities, a comprehensive activation strategy is needed…

An effective activation strategy must deal with all barriers to employment through the coordination of a range of policies and services. Jobless persons and individuals marginally attached to the labour market often face multiple barriers to labour force participation and quality employment. Some of these may result from the effect of ill-designed benefit schemes on recipients’ incentives to engage in active job search. However, jobless persons and individuals marginally attached to the labour market typically face other barriers that can cause them to refrain from actively seeking work and/or prevent them from finding suitable jobs. These barriers are particularly important for a number of groups – including older workers, mothers with young children, discouraged workers and people with disabilities. Therefore, raising labour force participation and improving employment performance – in terms of both job quantity and job quality – require a comprehensive activation strategy that makes work more accessible. This means addressing the different barriers to employment through the coordination, at both national and regional levels, of employment, health and social services, the administration of active labour market programmes and the design of tax and benefits policies. An effective activation strategy must combine measures to ensure that jobless people have the motivation to search actively and accept suitable jobs (e.g. through appropriate tax and benefit incentives) with actions to expand opportunities (e.g. job-search assistance, direct referrals, subsidised employment) and interventions to increase the employability of the least employable (e.g. training and work-experience programmes).

Efficient employment services and active labour market programmes are crucial for the success of such an activation strategy. For harder-to-place workers, the provision of these services may require intensive counselling and skilled case managers, the effectiveness of which is typically enhanced by a low client-to-staff caseload ratio. In order to cope with scarce resources, effective profiling tools must therefore be used sufficiently early in the jobless spell as a way to efficiently allocate jobseekers to less or more intensive service streams. It is also important to ensure that local employment offices have sufficient local labour market expertise to effectively place people into jobs. Private providers could play a useful supporting role to improve the delivery and targeting of employment services or alleviate capacity constraints, conditional on adequate performance management. Moreover, active programmes must be rigorously evaluated and ineffective ones must be swiftly terminated.

… which combines active policies with appropriate taxes and transfers by enforcing a system of “mutual obligations”

Employment services and active labour market programmes must be combined with tax and transfer policies. Effective activation needs to be accompanied by moderately generous and high coverage unemployment and social-assistance benefit systems. There are two reasons for this. First, where effective monitoring and sanction systems are in place within a “mutual-obligations” framework – in which governments have the duty to provide jobseekers with benefits and effective services to enable them to find work and, in turn, beneficiaries have to take active steps to find work or improve their employability – the threat of potential sanctions in terms of benefit withdrawal significantly increases the financial incentive for seeking and taking up gainful employment as well as seriously participating in active programmes.2 Second, unemployment and social-assistance benefits provide the principal instrument for linking jobless people to employment services and active labour market programmes. Within a “mutual obligations” framework, benefit recipients are referred to employment services, which provide job-search assistance or, depending on the unemployed person’s profile, direct them towards more intensive programmes, while monitoring their job-search effort or rehabilitation progress. By contrast, in the absence of unemployment and social assistance benefits, it is often difficult to reach out to those facing multiple barriers to employment, who risk being left behind. While moderately generous and comprehensive social benefits strengthen the effectiveness of activation policies, in the absence of effective active labour market policies, there is a risk that such benefits reduce work incentives and deepen labour market exclusion. Passive and active policies should therefore be conceived together rather than in isolation.

Well-targeted, permanent in-work benefits can be effective to make work pay. Combined with active policies and social safety nets, well-targeted, permanent in-work benefits can be effective to set up the right incentives for low-pay workers to both work and climb the earnings ladder, while supporting the living standards of low-income families. Yet, incentives must be properly understood by potential recipients, implying that simple and transparent in-work benefit systems are typically more effective. Since these schemes tend to exert downward pressure on wages, their effectiveness can be enhanced by combining them with binding wage floors that are set at an appropriate, not-too-high level. Finally, in-work benefit schemes are more effective if combined with individual-based taxation, since family-based tax systems often create an important work disincentive for second earners. Since second earners are often women, this has a tendency to further reinforce existing gender inequalities in the labour market.

Enhance the sustainability of work by providing good-quality, productive and healthy work environments

A comprehensive activation approach also implies making work sustainable over the life-cycle through policies that enhance the quality of the work environment. A healthy working environment can be promoted through policies preventing and addressing work-related health and safety risks. While work-related physical hazards are often well-addressed by existing policies in most advanced economies, they remain a source of concern in many emerging economies. Moreover, health and safety legislation and incentives have been slow in most OECD countries in recognising that physical health risks are on the decline and mental health risks are rising fast: psychosocial expertise is limited in labour inspectorates and equally so in occupational health services, where such services exist. As emphasised in the OECD Recommendation of the Council on Integrated Mental Health, Skills and Work Policy (OECD, 2015[1]), mental health risks can be minimised over the life-cycle through a comprehensive approach. This involves: the implementation and enforcement of rigorous legislation for psycho-social risk assessment and risk prevention; the introduction of appropriate financial incentives to promote high-performance work organisation and management practices that reduce the risk that work impairs one’s health; and more effective leverage of market incentives by making the business case for models of work organisation and management practices that result in better working conditions.3 The involvement of the social partners is crucial to ensure the effective implementation of incentives, regulation and guidelines. Initiatives to improve the quality of the work environment will also help people to prolong their working lives, which is particularly important in the context of rapid population ageing.

Foster social mobility between generations

The importance of socio-economic background for future labour market performance derives largely from the difficulty that individuals from poor socio-economic backgrounds and/or poor neighbourhoods have in acquiring solid labour market skills. This is also a key channel through which high income inequality can lower economic growth. By opening new opportunities, social mobility can also strengthen incentives for innovation and entrepreneurship, reinforcing its potential impact on economic growth.

Public investments to improve the educational outcomes of those from lower socio-economic backgrounds are key for promoting social mobility. The evidence suggests that early interventions are the most cost-effective, such as improving the access to high quality pre-school programs for children from disadvantaged backgrounds. But measures targeting older students are also needed, such as reducing early school leaving. This requires effective mechanisms for the early detection of youth at risk of dropping out, combined with remedial education interventions. Governments can reduce school failure and dropout by eliminating system-level practices that undermine equity, such as grade repetition and early tracking, by ensuring that school choice does not exacerbate economic or spatial inequities, and by designing alternative upper secondary education pathways to ensure that students complete their education. For individuals who leave education with very low levels of skills, second-chance options for education can provide a way out of a low-skills/poor-economic-outcome trap. Countries should also ensure equal access to post-secondary education. Funding mechanisms can be instrumental in mitigating inequities, particularly after compulsory education, by ensuring that financial considerations are not a barrier to skills development.

Reforms in the tax and benefits system can also help reduce the role of socio-economic background on the educational and health outcomes of children. Cash transfers or tax rebates targeted at poor households or households with children (such as family or child benefits/allowances) can improve the future labour market outcomes of their children. To increase their effectiveness, receipt of these benefits can be made conditional on the behaviour of beneficiaries with respect to education (e.g. school attendance) and health (e.g. medical check-ups), as in the conditional cash transfer (CCTs) programmes developed in many emerging economies as well as some advanced economies. To make conditional cash transfers work, it is important that they are combined with investments in the quality of education and health.

Enhance upward mobility and career development over the life-course

More must be done to help youth make a good start in the labour market, avoiding poor careers characterised by intermittent spells of low-paid work and unemployment. The OECD Action Plan for Youth recommends a set of measures to tackle high youth unemployment, including: strengthening the education system and preparing all young people for the world of work; encouraging employers to expand work-based and work integrated learning programmes (including quality apprenticeships or internship programmes); expanding active labour market strategies to enhance employability and job opportunities; and removing barriers to stable and rewarding work. Governments should also ensure that the cost of hiring youth reflects their productivity through the use of wage-subsidies, the design of non-wage labour costs or a sub-minimum wage. There should also be strong incentives for employers to convert temporary contracts into open ended ones so that they provide a useful stepping stone into more stable employment rather than become a dead end to career progression.

Workers should also be provided with opportunities to develop, maintain and upgrade their skills at all ages to reduce the risk of becoming trapped in low-quality jobs and joblessness, as well as to be able to respond to the rapidly changing demand for skills in existing and new jobs. While there are significant benefits from investing in adult learning for firms and individuals, there are various reasons why such investments tend to be sub-optimal in practice in many countries – particularly among the low-skilled and the disadvantaged, as well as in small and medium-sized enterprises. The lowest skilled are only a third as likely as the highest skilled to participate in adult education and training in most OECD countries. Governments at the national and the local levels, therefore, play a critical role in helping individuals and firms overcome these barriers. Specifically, policies should focus on: i) increasing and promoting the benefits of adult learning (e.g. by strengthening the recognition of acquired skills during the working life and not just those during the training programme); ii) helping individuals and firms overcome any financial constraints they might face (e.g. by offering co-financing arrangements) as well as non-financial constraints (e.g. through flexible provision); iii) helping individuals make good vocational education and training choices by providing high-quality information, advice and guidance; and iv) fostering stronger business-education partnerships which ensure that training programmes are well aligned with the needs of employers. Such efforts should focus in particular on the least-skilled as well as SME’s. The social partners also have an important role to play in fostering greater participation in training of under-represented groups.

Good working conditions are essential for long, productive and healthy working lives. Working conditions must not impinge negatively on workers’ health, and work organisation should adapt to workers’ strengths and needs, making the most of a diverse workforce, including age and gender diversity (see Box 4.2). For example, this means taking into account how specific obligations in terms of family commitments vary across working lives and individual situations, and individual differences across workers in terms of maturity, experience and aptitude to carry out more physically and mentally demanding work. A working environment that is conducive to career development, work-life balance and good physical and mental health will help avoid that difficulties cumulate over the working life. Indeed, health problems and the difficulty of combining work and family life are among the main reasons for withdrawing from the labour force, especially for older workers and women. While working conditions and work organisation are primarily determined by employers, often together with trade unions or other forms of worker representation, policies and institutions can provide employers with incentives and tools to improve them.

Appropriately designed wage-setting institutions can be part of a broader strategy to reduce poverty and labour market exclusion

Wage-setting policies in the form of statutory minimum wages or collective wage bargaining reduce wage inequality, but their effectiveness in reducing poverty is likely to be modest. While in-work poverty is associated with low wage levels, a substantial number of minimum-wage workers live in households with incomes above the poverty line and a number of poor people have earnings above the minimum wage but live in relatively large households without other earners. However, a moderate minimum wage can help to enhance the effectiveness of in-work benefits, designed to tackle low in-work incomes. Collective wage bargaining potentially affects a greater number of low-wage workers at risk of poverty, but also tends to have a greater impact on workers in households with incomes above the poverty line, especially in the context of a statutory minimum wage. Moreover, if not well designed, there is a risk that the benefits of reducing in-work poverty as a result of statutory or collectively agreed minimum wages are offset by greater poverty among jobless households when they reduce the employment prospects of low-productivity workers. The main features of well-designed minimum wage policies and collective bargaining systems are discussed in the context of creating high-quality jobs above.

Redistribution through the tax-benefit system is crucial for limiting financial hardship

Redistribution through the tax-benefit system can play a crucial role in making labour markets more inclusive by ensuring that the gains from economic growth are broadly shared in the population, including among families with low incomes. Most of its redistributive effect reflects the role of cash transfers – accounting for around two thirds on average across OECD countries – with progressive taxation accounting for the remaining part. Redistribution also takes place through the provision of public services, notably in the form of education and health. Efforts to strengthen the scope and effectiveness of redistribution should bear in mind possible adverse effects on work incentives, particularly among low-income families. The design of such policies is key for their effectiveness in reducing inequality and overcoming trade-offs with employment and economic growth.

At the lower end of the income spectrum, government transfers have an important role to play in lifting low-income households from financial hardship, but they need to be paired with measures to promote self-sufficiency and prevent long-term benefit dependency. Even in the context of constant budgets, policies to address growing inequality could be made more efficient, for example by making greater use of in-work relative to out-of-work benefits to encourage people to take up paid work and give additional income support to low-income households. Unemployment insurance can also contribute significantly to redistribution since the risk of unemployment tends to be highly concentrated at the bottom of the wage distribution. Increasing the coverage of unemployment insurance is a promising avenue for promoting labour market security and inclusiveness, provided it is carried out together with the rigorous enforcement of a “mutual-obligations” framework to preserve work incentives. This is especially important for non-standard workers who may not be eligible for unemployment benefits and the long-term unemployed who have exhausted the maximum duration of their benefit entitlements.

There is also scope to strengthen the role of taxation for redistribution to ensure that everyone contributes a fair share, especially those at the top end of the income distribution. Over the past decades, incomes of top earners have risen much faster than those of other earners in most OECD countries while effective marginal tax rates on high incomes have remained stable or declined. Governments therefore should ensure that wealthier individuals contribute their fair share of the tax revenue, including by improving tax compliance, scaling back tax deductions and reassessing the role of property and inheritance taxes, while taking account of the impact of possible reform options on incentives for work, effort and skills development. A particular effort should be made to ensure that profits of companies, in particular multinationals, are taxed where revenues are generated (OECD, 2017[4]).

Reduce spatial inequalities and support lagging regions

Large regional labour market and income divides in many OECD countries and emerging economies can partly be addressed by promoting growth and competitiveness in lagging regions. At a minimum, this requires that high-quality public services, including public education, public health, public transport and public employment services, are maintained in lagging regions. However, unlocking these regions’ growth potential may in some cases require additional public investments in education, transport and infrastructure that could – if well designed – strengthen a region’s competitiveness and facilitate the diffusion of innovation and good practices across regions, industries and firms. Policies may also be needed to provide special support to firm and job creation in regions hit by technology or trade shocks, including by adequate innovation support, improving access to finance and supporting well-designed business incubators.

But preventing lagging regions from falling behind further also requires specific policies to help displaced workers and disadvantaged groups. While trade liberalisation and technological progress bring important benefits to countries, some regions can be hard hit because of their industrial structure. Place-based employment and social policies should tackle the social problems associated with the local concentration of unemployment, social exclusion and poverty through: the provision of easily accessible anti-poverty programmes; the establishment of community centres and the use of urban regeneration projects; and 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.

Addressing the needs of lagging regions requires a good coordination between national, regional and local policies. Sub-national governments play an important role in the selection of public investment projects, the development of local infrastructure and the design of regional education, employment and social policies. But all levels of government, including the central government, should work together in a coordinated way to effectively promote regional development. Given the limited capacity of lagging regions to collect taxes to finance basic public services and the need for additional measures to support workers in lagging regions, some degree of inter-regional fiscal redistribution is required. A coordinated approach should also involve efforts to enhance the capacity of regional and local governments to effectively administer and implement large-scale investment projects, education and employment programmes.

Specific policies are needed to ensure that underrepresented and disadvantaged groups are not left behind

Policy should also ensure that groups at greater risk of labour market disadvantage are not excluded. A number of groups are fully integrated in the labour market and do not equally share the benefits of economic growth. For example, in OECD countries, the employment rate of people with disabilities is on average 44% lower than that of prime-age men. Also, the low-income rate in households with a migrant head is 21% higher than in the average household. And mothers in couples with young children are often not in work or working as secondary earners, bringing home less than 30% of household earnings in many countries.

Supporting disadvantaged groups requires, in some cases, adapting policy interventions to their specific needs and employment barriers, which often are quite heterogeneous not only between groups but also within groups. For example, increasing the integration of women with caring responsibilities requires encouraging men to take care leave, increasing access to affordable child-care, and enhancing the availability of flexible working arrangements (see Box 4.2), as well as removing fiscal disincentives to work for second earners. However, in the case of sole parents, a comprehensive activation strategy should be put in place by promoting a mutual-obligations framework in which employment and childcare support (including out-of-school support) are combined with work and effective job-search effort. Childcare support should be designed to ensure that work pays once taxes, transfers and childcare costs are taken into account, without heightening the risk of poverty. Similarly, a more inclusive labour market policy for migrants implies tackling discrimination, ensuring equal access to active labour market policies, assessing and recognising qualifications and skills acquired abroad as well as providing migrants with specific training opportunities corresponding to their needs, including language courses. In the case of migrant mothers with children, however, equal access to childcare and social services (which includes effective provision of information on these services) plays a paramount role. And fostering the inclusion of people with disabilities requires organising disability policy around removing each person’s specific barrier(s) to his/her employability and making the incentives of all actors involved – sickness and disability benefit recipients, employers, authorities, service providers and medical professionals – consistent with this strategy.

Entrepreneurship policies can also play a role in opening up opportunities for disadvantaged groups. Entrepreneurship policies should therefore be designed so as to be inclusive and ensure that everyone, including disadvantaged groups, have opportunities to start up and operate a business or be self-employed. This requires policy measures that are tailored to the specific challenges faced by the different disadvantaged groups, possibly bundled into packages to allow addressing all barriers simultaneously, and that rely on specialist agencies to ensure policy effectiveness. Key policies to promote and support inclusive entrepreneurship include entrepreneurship training, coaching and mentoring, facilitating access to finance, and building entrepreneurial networks.