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Structural change strategies

The second dimension of a welfare-increasing policy mix consists of structural policies that enhance an economy’s ability to exploit comparative advantage. These policies, along with trade liberalisation, may create new opportunities for profit and generate additional demand and investment, and hence jobs (in the context of less-than- full employment economy). Broadly, they fall into two categories: (a) policies that facilitate shifting resources from old to new areas of comparative advantage, and (b) policies that raise productivity or improve factors of production in areas favoured by comparative advantage. The first group might include policies to improve labour market flexibility, while the second group could, for example, include creating a strong regulatory or research infrastructure to support bio-technology industries. Factor market reforms often facilitate both policy categories.

Improving labour markets

A critical group of structural policies affects the functioning of labour markets themselves because they generate benefits independently of other policies, and because they help to maximize the impact of all trade liberalisation strategies. People have to know about the jobs created by reform, suggesting the need for efficient and easy-to- access information channels; they have to be in the right place at the right time; and they must have the skills and incentives to fill newly opened positions.

The labour market reforms that achieve these objectives will differ widely across countries, given their diverse labour market structures, but international and regional cooperation can highlight their importance and ensure that international institutions stand ready to support national initiatives. The likely modalities of support will include analysis, capacity-building and, in the case of developing countries, development lending.

Smoothly functioning, well-developed labour markets involve at least three challenges. The first regards market flexibility. In mature economies, the relevant reforms would embrace policies that are pro-job creation by reducing the cost of labour to firms by, for example, reducing payroll taxes, easing bureaucratic impediments to employment creation, and creating unemployment benefits that allow labour markets to respond to wage signals. In developing economies, the appropriate reforms would involve safeguarding the bargaining positions of individual workers and improving working conditions (OECD, 2010b).

A second challenge is to assure smooth labour mobility across sectors and regions. Some advanced economies need to ease regulatory and financial constraints on mobility (OECD, 2010b) and improve the portability of job-related benefit such as pensions or health insurance. Some developing countries, in turn, need to eliminate or simplify legal regulations on regional and international migration. In both cases, there may be a need for long-term efforts to reduce language and cultural barriers among geographical regions.

A third challenge is to match the supply of skills with demand. This is true even in countries with generally high educational standards. Periods of reform, rapid technological change, and large transformations of the global economy can dramatically change the distribution of jobs and their skill requirements, and it is challenging for any economy to keep pace with the changing profile of human capital need. Thus, steady efforts to offer retraining and technological upgrading are needed even for people with considerable formal education.

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