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Tackling The Jobs Crisis: What's To Be Done?

Faced with a jobs crisis, policymakers the world over are digging deep into their policy toolkits to generate more employment. A recent study by the IMF’s Fiscal Affairs Department argues that reforms of tax and expenditure policies offer great promise in helping countries confront the jobs crisis, including in the short term.

The study argues that improving employment outcomes, over and above what could be achieved through policies aimed at supporting the demand for goods and services by consumers and investors, requires actively supporting labor demand, strengthening incentives (or reducing disincentives) to work, and expanding training and job assistance, while preserving equity objectives.

The labor market challenge

The economic and social consequences of job losses since the onset of the global crisis have been enormous. However, as bad as the crisis has been for jobs, unemployment was already elevated before the crisis in many advanced and emerging economies. This would suggest that labor market challenges will not go away as the global economy recovers, and that policy measures are needed both to address structural employment issues and to improve the employment outlook in the short term.

Three labor market challenges are particularly important: high rates of long-term unemployment—that is, unemployment lasting more than one year—which is often much higher than short-term unemployment, particularly when compared to Northern European countries that have effectively managed to contain long-term unemployment (Chart 1); high rates of youth unemployment—that is, unemployment among those aged 15–24—which stand at over 50 percent in Greece and Spain and close to three times the overall unemployment rate in a number of economies (Chart 2); and high unemployment rates for unskilled labor, which are much higher than those for skilled labor.



In addition to having a large number of people without a job but searching for one, many countries also have a large share of the working-age population that is no longer looking for employment and thus not participating in the labor market.

Non-participation may reflect cultural preferences or being discouraged from seeking work by weak job prospects or a lack of financial incentives. Raising labor force participation over the medium term can help spur economic growth and contribute to fiscal consolidation by expanding the tax base.

Policy design matters

Fiscal policy matters for employment—both in the short term and the medium term.
There are several options to improve the design of taxes and benefits that can help boost employment without hurting equity. We see four areas of potential reform:

Some may argue that the policies we recommend to increase labor force participation would be harmful, rather than helpful—don’t the high levels of unemployment we see now mean that there are already too few jobs?

The answer is timing—first of all, measures to foster higher labor-force participation will take more time to yield fruit than measures aimed at boosting demand or at improving matching. Further, over the longer-term, higher labor force participation rates, including for older workers, have been shown not to increase unemployment, but rather to be correlated with higher total employment through economic growth.

No time for delay

The appropriate reform mix differs across countries. It will need to be adapted to, and appropriately sequenced for, each country’s employment challenges, labor market institutions, and fiscal constraints. An immediate priority for countries where unemployment has risen sharply is to restore labor demand and to implement active labor market programs that help match labor supply and demand.

Beginning reforms to increase labor force participation, likewise, should not be delayed, given their longer gestation period. Now is the right time to implement structural reforms to tackle the employment crisis and to stimulate the demand for labor—and the design of policies matters very much for labor market outcomes.