OECD Employment Outlook 2022

Editorial: Bold action is vital to support living standards of the most vulnerable

The labour market has recovered more than two years after the outbreak of the COVID‑19 pandemic but the outlook is highly uncertain amid the clouds of war

The OECD economies and labour markets have bounced back strongly from the COVID‑19 pandemic, but Russia’s unprovoked, unjustified, and illegal war of aggression against Ukraine is clouding the horizon. The war is first and foremost a human tragedy, causing the loss of innocent lives and the largest humanitarian refugee crisis since World War II. Several million Ukrainians – mostly women and children – have fled their country in search of refuge in other European countries and beyond. The conflict also risks sparking an economic and social crisis, adding significant uncertainty to the global outlook. The OECD has revised its GDP projections in June to 3.0% for 2022 (down from 4.5% in the December 2021 projections). Besides, sustained inflation is projected to erode real household incomes.

So far, labour markets remain tight in most OECD countries. The latest statistics suggest that the OECD unemployment rate is 0.4 percentage points below the level of February 2020 on average, a level that was already the lowest since the global financial crisis. And since the crisis trough of April 2020, OECD countries have created about 66 million jobs, 9 million more than those destroyed in a few months at the onset of the pandemic in 2020.

These aggregate figures hide significant differences across countries and groups, however. In a number of countries, labour force participation and employment rates are still below pre‑crisis levels. Moreover, employment is growing more strongly in high-pay service industries, while it remains below pre‑pandemic levels in many low-pay, contact-intensive industries.

Across the OECD, companies are confronted with unprecedented labour shortages. For example, in the European Union, almost three in ten firms in both manufacturing and services reported production constraints in the second quarter of 2022 because of lack of labour: an unprecedented level since the start of this type of data collection. Even more impressive, in the United States, in July 2022, employers posted more than 11 million job vacancies for a pool of less than 6 million unemployed. And in almost all countries for which vacancy data are available, this ratio is on the rise.

Tight labour market conditions are creating wage pressures in some countries. In the United States and the United Kingdom annual growth of nominal wages was almost 5% in the first quarter of 2022, and around 3% in Canada. Wage growth is also picking up in the Euro area: the wage agreements that have been concluded by social partners in the first quarter of 2022 increased by 3% compared to the same quarter of 2021.

Nominal wages are nonetheless growing less than inflation and are projected to continue to do so. Inflation increased substantially at the end of 2021 as a result of supply chain disruptions. Russia’s invasion of Ukraine is adding strong inflationary pressures. Despite sustained employment growth and widespread labour shortages, real household disposable income was already declining in the last quarter of 2021 and in many countries that decline is continuing in 2022, due to wage growth not keeping pace with inflation.

Dark clouds on the horizon are likely to disproportionally overshadow prospects of those struggling to recover from the pandemic

Even before the onset of the war in Ukraine, the recovery in low-pay industries was significantly lagging behind other sectors. For example, in the first quarter of 2022, employment in accommodation and food services was, on average, 9% below its level before the onset of the crisis. Many of these industries were also among those most severely hit by COVID‑19 and repeated lockdowns of 2020.

The disparities in industry trends explain why the labour market consequences of the COVID‑19 crisis have been deeper and more persistent for vulnerable labour market groups, such as young people, low-educated workers, migrants, and racial/ethnic minorities, which are overrepresented in low-pay industries. On average, in the first quarter of 2022, two years after the onset of the crisis, the employment rate had recovered for workers with tertiary education, while that of low-educated workers was still about 0.5% lower than in the same quarter of 2019. The initial ravages of the crisis also significantly affected young people: their employment rate was still lower than its pre-crisis level in more than half of the OECD countries. And in most of the countries, which collect data on racial/ethnic minorities, the crisis affected these groups disproportionally and their recovery has often been slower.

Young people, low-educated and racial/ethnic minorities were also overrepresented among frontline workers – those who continued to work in their physical workplace and in proximity to other people during the pandemic. Since the outbreak of the crisis, these workers reported more job insecurity, and lower overall health and mental well-being, while often remaining stuck with low wages and bad working conditions. Evidence also shows that they were much more likely than other workers to become infected with COVID‑19, and casualties among this group of workers were larger.

The economic consequences of the war in Ukraine have accentuated inequalities and raised risks for the most vulnerable. Ukraine and Russia are among the largest global agricultural exporters, and the production and export downfall in these countries is triggering hikes in food prices. At the same time, the crisis has sent shockwaves through energy prices, adding to pre‑existing inflationary pressure. The impact on energy and food prices is particularly affecting households at the bottom of the income distribution: they devote a large fraction of their income to consumption of energy and food (one fourth on average among the OECD countries for which data are available). In the six largest European countries, for example, it is estimated that, in the 12 months leading to April 2022, the impact of the hike in energy and food prices alone was about 50% higher for the households in the bottom quintile of the distribution than for those in the top quintile. Similar figures are found for Japan and the United States. And in rural areas, where transport costs are larger, the impact on low-income households is much larger. If not cushioned, the inflation shock could be particularly severe for the most disadvantaged who were already most badly hit by the COVID‑19 crisis.

Wages are on the rise but not keeping pace with inflation

The current commodity price crisis is reminiscent of the global oil price shock of 1973, which led to a period of global stagflation, with unemployment rising together with double‑digit inflation in most OECD countries. There are some similarities with the current situation, but labour shortages are much greater now than in the early 1970s and structural changes have reduced the link between commodity prices and wage growth. In the 1970s, in fact, wages were automatically index-linked to inflation in many countries and collective bargaining was much stronger. Since then, in most countries, wage indexation mechanisms have been removed, which is now likely to prevent a price‑wage spiral.

Collective bargaining has also declined significantly: the proportion of workers who are covered by collective agreements in the OECD has steadily declined over the last three decades (from 1985 to 2019), weakening the bargaining power of workers. At the same time, about one in six employees across the OECD work in local labour markets that are concentrated, which gives them limited outside options. The evidence (contained in this edition of the Employment Outlook) suggests that in such situations, in the absence of countervailing power by organised labour, employers typically retain significant power to unilaterally determine wages and working conditions. Bargaining power is typically lower for vulnerable groups: while this is a source of concern even in low-inflation conditions, it becomes more serious in the current relatively high-inflation situation, as these workers are not in a position to negotiate wage increases to keep up with price increases.

Supporting the living standards of the most vulnerable should be a policy priority to ensure they do not suffer a disproportionate double blow from COVID‑19 and the cost-of-living crisis

The sharp rise in energy and food prices is a cost that risks falling disproportionally on the most vulnerable, low-income households. Comprehensive negotiations between governments, workers and firms will be key to fairly share this cost: none of them can absorb it alone. The recent negotiation and collective agreement of the German chemical sector offers one possible approach: social partners agreed on a “bridge” solution – a short-term compromise that balances the costs and challenges companies face with employees’ concerns about maintaining their purchasing power. In particular, employers and worker representatives agreed on a one‑time payment of EUR 1 400 (about USD 1 400) per employee to help counter rising prices, but they also postponed talks on a formal wage increase until October, hoping the economic outlook will be clearer by then. The fact that all workers received the same lump-sum amount also implies that it was far more generous for low-paid workers. This innovative model has also been replicated in firm-level negotiations in other countries (e.g. in motor vehicle parts manufacturing in Italy).

Beyond their potential role in negotiations with social partners, governments also have other tools to protect the revenues of vulnerable groups. Adjust the minimum wage to maintain effective purchasing power for low-paid workers is among the policy options that could be considered by governments. In many countries, statutory minimum wage adjustments are discretionary policy decisions taken regularly (often once a year). In an environment of rapid price increases, a slow adjustment of the minimum wage inevitably entails significant deterioration of living standards of the low-paid. By contrast, a few OECD countries such as Belgium and France have automatic indexation mechanisms for the minimum wage, which is an effective way to preserve the purchasing power of the low-paid. Whether automatic or not, it is important to adjust statutory minimum wages regularly in the current context of relatively high inflation.

Another way to compensate households and businesses for the increase in energy costs is through temporary energy bonuses. Most OECD countries have taken energy support measures between the end of 2021 and 2022, through price regulations, income support or tax reductions. However, only a small fraction of the additional spending implied by these interventions has been directed to measures targeted to the most affected households and businesses. While urgency and timeliness may justify lack of targeting, governments could consider refocussing spending towards targeted, cost-effective interventions. This would not only provide help to those most in need but also avoid that income support and price relief end up jeopardising carbon-emission goals and the transition towards a greener economy.

Along the same lines of targeted, environment-friendly relief, the tax and benefits system could be used to cushion the shock to the most vulnerable through in-work benefits and other social transfers. However, they can be effective only if the means tests they rely on are made swiftly responsive to people’s changing needs; this requires reducing the reference periods for the needs assessment and putting appropriate weight on the characteristic of the consumption basket of each household type. In certain cases, this may imply bold reforms of means-assessment systems.

Reconnecting low-skilled and other vulnerable groups with jobs is also one of the most effective way to preserve their living standard. This involves supporting job creation but also expanding active labour market policies. About two‑thirds of OECD countries have increased their budget for public employment services since the onset of the COVID‑19 crisis. However, increasing spending may not suffice. How that money is spent is just as important. Employment and training services need to be integrated, comprehensive and reach out to firms that create jobs and to the most vulnerable.

Protecting living standards also requires rebalancing bargaining power between employers and workers, so that workers can effectively bargain for their wage on a level playing field. This implies a greater attention by antitrust authorities to competition in the labour market. In particular, the consequences of horizontal mergers for the competitiveness of the labour market should be carefully evaluated in merger reviews, even when merging firms belong to different product markets. In addition, a comprehensive strategy to fight labour market collusion should be developed. For example, governments could consider whether no-poach agreements within franchising, usually legal in most OECD countries, are desirable from a policy viewpoint in the current context.

Rebalancing bargaining power, however, also means giving a new impetus to collective bargaining and, therefore, accompanying the efforts of unions and employer organisations to expand their membership and enlarge the coverage of collective agreements. Actions should also be taken to ensure that workers in the grey area between dependent and self-employment have access to collective bargaining, as recently proposed by the European Commission. Recent collective agreements involving platform workers in Denmark, Germany, Italy, Spain, and Sweden are interesting and could be replicated elsewhere. In all these countries, as well as others in which agreements have not been concluded yet (e.g. France, Norway, etc.), platform workers’ unions negotiate working conditions for their members even if they are classified as self-employed. And this occurs without triggering interventions from national antitrust authorities, sometimes thanks to explicit derogations to the cartel prohibition enshrined in the law. More generally, the long series of examples of successful collective agreements in the temporary work agency sector and the cultural and creative industries shows that, even in countries where unions are weak, collective bargaining, if sufficiently flexible, can adjust to different and new types of employment relationships.

Tackling labour shortages is critical to supporting living standards in the medium term

The combination of high vacancy rates and less than a full recovery in labour utilisation, in terms of both employment and hours worked in a number of OECD countries, highlights once again a structural problem of effective allocation of labour, which is key to foster growth and, therefore, living standards. Current labour shortages are not just due to lack of high skilled personnel in high-tech industries, but are also widespread in other sectors of the economy, including typically low-pay industries.

Part of this is due to tough working conditions and/or low pay in certain industries or areas within them, which prompt workers to quit their jobs or not to apply for job vacancies in these industries. During the COVID‑19 crisis and recovery, governments have taken a variety of measures to make certain low-pay jobs, and in particular frontline jobs, more attractive. But these measures often do not go far enough to improve job quality in a durable way and, therefore, address labour shortages in these industries. For example, in the long-term care sector, more than half of OECD countries have set up some form of one‑time rewards to compensate workers for extra work during the health crisis. Yet, new initiatives to increase pay have been taken only in less than 30% of them. Reducing labour shortage in these industries would require focussing on solving structural issues rather than acting through temporary ad-hoc fixes.

Part of the labour shortage, however, is simply due to the unprecedented speed of the recovery. As economies reopened, the strong uptake in economic activity has fuelled a record surge in labour demand. While this may stimulate job-to-job moves, and therefore career progress for individual workers towards jobs with better pay and working conditions, available national talents and labour force are often insufficient to fill all existing demands. On average across OECD countries, net migration has remained depressed over the course of the crisis and the first stage of the recovery, and while picking up in recent quarters, its growth is still below the levels reached in the second half of the 2010s in many countries. Policies to encourage immigration, talent attractiveness and the integration of migrants could therefore be part of the menu to be considered in order to ease the labour supply crunch.

Recovery plans create opportunities to better match demand and supply

Governments in most OECD countries and beyond are implementing recovery plans that are unprecedented in size and scope. These recovery plans may present an opportunity to put in place policies to address the structural problems affecting the labour market. Yet, the upheaval of the global economy in the aftermath of the Russia’s war of aggression against Ukraine is bringing about new priorities concerning national policy, such as greater investment in alternative sources of energy, overcoming bottlenecks in supply chains, transfers to most affected groups and increases in defence spending. All these different priorities may imply that fewer resources than initially planned will be available for sustaining the labour market. Within these greater than anticipated budget constraints, targeting will be of paramount importance. On the one hand, policy should enhance workers’ skills and pave the way for a transition to more green jobs. On the other hand, policy should prioritise the most vulnerable. This will ensure that they do not suffer a disproportionate double blow from COVID‑19 and the cost-of-living crisis.

Stefano Scarpetta,

Director for Employment, Labour and Social Affairs,

OECD