Commentary: Active Labor Market Policies to Expand Employment and Opportunity

Labor markets in all Organization for Economic Cooperation and Development (OECD) economies are under stress. Two main factors generate the pressure, although the precise contributions of these factors to unemployment and wage growth remain to be determined. The first factor is an apparent shift in the bias of technology toward skilled-labor-intensive methods of production. The second factor is the industrialization of Third World and former Third World countries and the expansion of world production of goods made by unskilled labor. The effective supply of unskilled labor has increased and demand has shifted against it leading to forces that would drive down the wages of unskilled workers if wages were permitted to adjust. Where they have not been permitted to adjust either because of institutional or governmental interventions, unemployment has increased. In the United States, where interventions are minimal, wages for the unskilled have fallen in real terms relative to the wages of the skilled. In many European countries, wages of the unskilled have been maintained but at the cost of high rates of unemployment and labor force withdrawal. The combination of high levels of social welfare benefits for the unemployed, coupled with reduced demand for unskilled labor at prevailing European wages, produces high levels of European unemployment.