Council 19-20 January 2015 Room Document No. 1 THE ECONOMIC, FINANCIAL AND SOCIAL SITUATION:
LATEST DEVELOPMENTS
I. THE GLOBAL OUTLOOK AND POLICY CONSIDERATIONS 1. Recent developments and near-term prospects
Oil prices have fallen by over $60 per barrel since June, to the lowest nominal level since May 2009.
This collapse, already similar in magnitude to earlier episodes in 1986, 1998 and 2008, has brought the promise of a welcome boost to activity in oil-importing countries, which includes the largest economies: the United States, China, the euro area and Japan. Negative effects are already being felt in major oil-exporting countries, notably Russia, and in the oil sector in the United States and elsewhere. The impact on global GDP is expected to be positive, however. If oil remains around USD 50 per barrel, the boost to world GDP, compared to oil prices staying at their average 2014 level of close to USD 100 per barrel, is estimated to be about 0.3 percentage points in 2015, other things equal. Part of this boost was already included in the latest Economic Outlook, however, so that the implied change to OECD projections would be about 0.2 percentage points.
The more-than-50% drop in the oil price in US dollar terms since June has also provided a significant disinflationary impulse in most economies. Unless the oil price rebounds quickly, headline inflation is likely to fall below zero in all major OECD economies, other things equal. Indeed, euro area inflation already turned negative (-0.2%) in December, owing in large part to the sharp drop in energy prices at the end of 2014. And headline inflation is now declining sharply in most economies. Notably, since September the annual rate of headline inflation in the United States has fallen by ½ percentage point and in Japan by ¾ percentage point. The downward impact on inflation is particularly welcome in a number of emerging economies where inflation has been above the central bank’s target. By contrast, where inflation was already well below target, as in the euro area, the negative price shock risks complicating the task of the central bank in getting inflation moving back towards the target. To the extent that very low or negative inflation is taken as a sign of depressed activity, the positive effects on activity of the oil price decline may be more muted than otherwise in these economies.
The oil price decline facilitated a reduction in policy interest rates in India this month, as inflation has fallen sharply since mid-2014. By contrast, Russia was forced in December to raise policy rates sharply to stem a rapid depreciation of the rouble. Another key monetary policy move was the abandonment of the exchange rate floor by the Swiss National Bank on 15 January. This decision was not directly linked to the oil price, but rather underlines how diverging monetary policy stances among the major central banks (with the Federal Reserve moving towards normalising interest rates while the ECB and the Bank of Japan look at stepping up unconventional easing) can give rise to or aggravate strains that result in macroeconomically important changes. It is expected that there will be further manifestations of such tensions as this divergence progresses, with, in particular, a likelihood of exchange rate swings and financial volatility among some emerging economies.
The Greek election campaign was a reminder of another source of financial and macroeconomic turmoil, in this case the euro area crisis. Greek 10-year sovereign bond yields rose by more than 300 basis points from early December to early January, breaking through 10 per cent. They have since eased somewhat, but remain high and volatile. There has been no contagion to other euro area periphery countries, however, and German yields hit record lows this month.
Recent economic indicators generally point to at or above-trend growth in the United States, a modest pick-up in the euro area (but with significant divergence across the zone), and a mixed
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picture in Japan, with strong industrial production growth but nominal wages still lower year-on-year and consumption remaining depressed since the April consumption tax hike. Growth in China has remained on a gradual declining trend, broadly in line with the government’s objective.
2. Policy requirements
There is a broad consensus that the normalisation of policy interest rates in the United States will begin around mid-2015. The disinflationary shock provided by falling oil prices provides scope for the Federal Reserve to exercise more patience, if it wishes, before starting to raise policy rates, given uncertainty about how much slack remains in the economy as well as faltering growth in other major economies. On balance, however, the Fed should “see through” the impact of lower oil prices on headline inflation just as it would not react to one-off upward shocks to the price level. The key to the timing of the first rate increase should remain the pace at which the US output gap is closing.
By contrast, in both the euro area and Japan the negative contribution of energy prices to headline inflation reinforces the need for further unconventional monetary policy action to stabilise inflation expectations around the central bank’s inflation target – in both economies market measures of inflation expectations over the 5-10 year horizon indicate that expectations have been falling rapidly in recent months, and in both cases are well below the official target. With the European Court of Justice decision on 14 January having supported the ECB’s ability to conduct bond purchases, the ECB must move quickly to implement large-scale quantitative easing. And the Bank of Japan should maintain its recently expanded "quantitative and qualitative monetary easing” until the inflation target has been sustainably achieved.
In China, the authorities continue to face the challenge of balancing support for activity with bringing about an orderly slowdown in credit growth. Particularly given the oil price drop, and with inflation already low and falling, the balance of risks favours maintaining an accommodative monetary policy in the near term while proceeding with macroprudential regulation and the progressive liberalisation of the financial sector to bolster financial stability.
It remains important that monetary policy be used as part of a policy package that also includes fiscal and structural policies and that adequately takes into account cyclical conditions. For example, for the euro area it would be helpful to allow for a temporarily more expansionary area-wide fiscal stance. This could be implemented through the decisions of the EU Council and ensure that countries are not sanctioned if they slow or temporarily halt the pace of fiscal consolidation as part of a well-defined initiative at the level of the union as a whole. The recent communication from the European Commission on showing more flexibility in the application of the union’s fiscal rules goes in the right direction, but may not be sufficient in the circumstances.
Despite facing more worrisome long-term public debt dynamics than the euro area, Japan has been more willing to use fiscal policy to support demand, most recently via a stimulus package announced by the newly-reelected government amounting to 0.7% of GDP. This package, together with the delay of the second consumption tax hike to 2017, can be justified by the need to kickstart demand, but it only accentuates the importance of producing a detailed and credible fiscal consolidation plan, complemented by ambitious structural reforms, to turn the public debt dynamics around.
The fiscal policy challenge in the United States is different. The output gap is now closing and the main focus of fiscal policy can switch to supporting long-term growth (via tax reform and shifts in the composition of expenditure) and ensuring debt sustainability in the light of the pressures that an ageing population will put on the public finances. This suggests the need for a gradual but steady improvement in the structural budget balance.
3 II. FINANCIAL MARKETS
The basic problems in world financial markets are many. Interest rates have been too low for too long, dating back to well before the financial crisis (and were one of the causes of it). This leads to an inter-temporal misallocation of resources. This includes excessive investment and too much borrowing in all of its forms. At the same time, when a problem has arisen, central banks have invariably stepped in to remove volatility (and deal with any significant tail risk, such as a bank failure). Most importantly, in this environment market participants become involved in what is referred to as ‘leveraged beta’, and derivatives are one of the ultimate forms of building this leverage.1 At this point the markets are so used to the central banks ‘having their back’, it is natural for them to think that the Greenspan put would be replaced by the Bernanke put (it was) and hence now surely the Yellen put. Markets love low volatility for the leveraged-beta world. The market does not believe that if ‘push comes to shove’ that Yellen won’t follow. I believe there is a very good chance she will prove them wrong and, if she does, the theme of liquidity crises, as everyone tries to unwind their leveraged beta plays, will become a major theme for 2015 at some point later in the year.
A lot is happening right now: the chance of QE in Europe; the Greece issue; the oil price; the Russia issue; the Swiss franc re-float; bond market responses to deflation and monetary policy; the normalisation of monetary policy and the coming liquidity problems. (Oh dear, it is all just building up isn’t it).
QE in Europe
This is highly likely. But as we have stated before, unlike the Fed, Europe does not have a single risk free bond that all of the Euro countries are jointly responsible for. We know they have considered many options, but none can be really satisfactory. Lets’ suppose they bought government bonds in proportion to GDP—a ‘neutral’ base case. Then, you have to buy Greek debt, but if Syriza wins you may lose money. If you buy across the board, you will have to buy on-the-run bonds with a negative yield in many cases. If you buy only high quality corporate and no junk bonds, then you widen the spreads—and so on. The risk in Europe is that the QE, as late as it is, will become some form of compromise that will prevent sufficient bonds being bought, so that it won’t be the equivalent of the US, UK or Japan. The only mechanism of three that I can see working to help Europe will be a fall in the euro and fiscal easing (there is no room to get interest rates lower, and we know where inflation expectations are—not for turning in the USA, so why would a euro version of QE have much impact on inflation expectations unless they can really push the euro down a lot).
The Greece Issue
The chance of a Syriza win seems possible, and the old question of ‘does Greece leave the euro’ is back on. Politically and legally that is difficult—but banks are testing scenarios and strategies and contract terms once more, just in case. Greek banks are exposed to Greek sovereign debt in a big way, and the obvious does not need to be stated. But who is exposed to Greek banks in Europe ( about €15bn). The answer is German banks, to the tune of €5bn but this is small for the country.
None of the other larger countries (France, Belgium, Italy, and Spain) are exposed to any meaningful extent. The worry is the smaller EU countries that have €9bn in direct exposure and €3.5bn in CDS and other guarantees. Needless to say, a major Greek crisis would be a significant risk event in the current environment anyway.
1 Beta is the performance of the overall markets, bonds or equity, as opposed to the skill of stock picking (for alpaha—beating the market). So if a bond gives you $1 for every cash investment of $100, you make 1%. But if you lever the position 100 times you make 100%.
4 The Oil Price Issue (financial points)
The financial side of the oil price fall is a much larger worry—it needs to be considered alongside the positive disposable income story. In the USA 15% of all high yield bonds are issued for the oil-related industries directly exposed to the collapsing oil price. The proceeds of such borrowing have been cumulating at an average of more than $40bn pa in the last few years and this has built up to close to $200bn. Leverage loans are much higher at around $500bn. These have to be serviced and rolled when they become due. A guestimate for the need to roll the high-yield bonds this year (based on average duration of say 6 years) could be over $30bn. High-yield bond prices are collapsing. The surge in US production was driven by these smaller players in shale oil drilling, not the big companies.
Forbes Magazine points out that for these companies the break-even is about $80-85 p/b. Hence many small and medium-sized companies will go bust, and or close rigs (which is exactly what Saudi is trying to engineer).
All around the world oil and gas producers have been hedging their price in the forward markets, and the exposure of banks to this is very high. In mid-2014 there were $1.23tn in forwards and swap notional outstanding for non-gold and other non-precious metal positions, and $328bn in options sold. Oil hedging in various forms is a large part of this. To cover these positions, the financial firms will have to sell crude oil forward. This must be adding substantially to the downward pressure on spot and forward markets. When it is all covered, the prices may stabilise. It is to be hoped that there are no accidents along the way. The derivatives markets will have winners and losers, and of course banks are big players—the moves are generating large cash margin calls.
The Russia Issue
Speaking of oil—in addition to sanctions, Russia is massively exposed to the collapse of oil prices.
The world is exposed to $340bn of Russian obligations, of which only a small amount is Russian sovereign debt ($18bn). The main exposures are to non-banks (Russian high-yield debt companies--
$142bn); in guarantees in the derivatives markets ($130bn) which means Western banks; and to Russian banks ($48bn). Unfortunately, to add to Europe’s woes, $204bn of the total is European exposure. And of this, around half is in countries like Austria that are outside of the main financial centre countries (Germany, France, Belgium, Spain and Italy). The pain must be high in those institutions exposed, and approximate hedges to Russia-risk must also involve selling crude oil forward, adding to the downward pressure.
The Swiss Franc Re-float
The Swiss franc until mid-January had been the most shorted currency in the world. With the prospect of European QE from 22 January, the situation was becoming untenable, and the Swiss would have had to stand ready to absorb an even greater influx of euro flows and derivatives shorting. In a well-kept secret, they let the currency go, and to combat appreciation they then imposed a -0.75% interest rate on site deposits, and moved their target for 3-month Libor to a range of -1.25% to -0.25% (from -0.75% to 0.25%). In my view the prospect of QE from Mr Draghi explains the timing of this.
The Swiss franc appreciated from the minimum floor of 1.2 to the euro to 0.85 (a 36% move from the minimum) and then depreciated a little back to 1.05 (a move on the day of about 13%). These are some of the largest moves in a currency since the Plaza Accord. Leveraged investors, notably those with derivative positions, would have been hurt by this, and there is a lot of blood on the carpet. The key market observations are:
The Swiss stock market had one of its largest one day moves ever (down).
The FX derivatives market is very concentrated. The big banks encourage derivatives (because they are such a huge part of their revenue—spreads are huge) on the wrong side of the trade will be nursing losses (for reference 4 banks control 46% of the FX market--DB, Barclays, UBS and Citi--and 10 banks control 78% of it). Outside of the 10 there is a huge
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retail market that provides liquidity to the big banks—the retail guy reputedly always loses money, and banks don’t always hedge it because of this. But that liquidity can dry up as it did in mid-January.
In mid-2014 the notional of all FOREX derivatives was $27tn, and of this around $4tn was in Swiss francs. The spike in volatility yesterday would have shifted the gross credit exposure up, giving rise to the cash calls. Banks that did not lay off their positions, or couldn’t, will have had to make large cash margin payments. Some of the smaller on-line FOREX brokers are known to have losses taking them below regulatory capital positions.
The problem does not stop there. For reasons unknown to me, the biggest Swiss franc lender to households and businesses in their own currency are Poland, Hungary and Austria.
The devaluation of the zloty on the 15th of January of 13% versus the franc will see instalments rise, and loan loss exposure provisioning rise. Polish lenders had 131bn zloty ($35bn) of Swiss franc mortgages on their books at the end of November, some 46% of total home loans. This is a significant issue in Poland. Hungary also saw a large forint devaluation—but over the last year regulators moved to reduce foreign currency exposure on bank books are they are more forex-covered for the exposure they do have.
Mark-to-market losses at the worst point for the SNB were about CHF70bn, coming back to about CHF28bn at the end of the day.
It cannot be ruled out that we will see more policy action in Switzerland in the direction of even more negative interest rates. In 1972 Swiss negative rates were -2% per quarter on the increase in CHF non-resident deposits. This followed the use of what we would call macro-prudential policies today, which were a total failure (100% reserve requirements on foreign deposits and zero interest for non-residents). Macro-prudential is being pushed again, as though we haven’t seen it before, and it will fail to help again as it always has. The negative rates were pushed to -3% per quarter in November 1973 and then to -10% per quarter in February 1978. And then the Swiss went to exchange rate targeting as none of this worked. This time around the order has been reversed (exchange rate target first) and now back to negative rates to slow appreciation. A cranking up of negative rates can’t be ruled, plus macro-prudential policy and possibly capital controls as a part of the latter. This would become a Codes of Liberalisation issue for Switzerland and the OECD if things went that way.
It is my view that what happened to the Swiss franc yesterday will be something of a pointer to what can happen in the monetary normalisation process in the next year or so—that is huge liquidity
‘pockets’ emerging as liquidity dries up, with the accident-prone derivatives market and its leverage the main, but not only, centre point for a systemic risk event. The authorities did not take OECD advice to separate derivatives businesses from banking, and indeed in the United States Citi was able to push back the ‘push-out’ rule via a bill sponsored by a politician tacked to passing the Budget bill.
This is bad policy making, and regulators need to look hard at this issue of derivatives and liquidity going forward.
Bond Markets Responses
The Sovereign curve for Switzerland was, on the 15th of January, negative across its entire range out to 10 years. This picture of the sovereign curve is really important as an illustration of the deflation pressures and how hard they are to fight. The German curve is also negative across most of its range, and it hasn’t had the currency issue to deal with. This is a deflation concern.
6 The Coming Liquidity Problems
It seems increasing likely that Europe will launch into QE either in January or March, that Japan will continue to do so, and the US growth and monetary policy nexus will see the dollar continue to rally as a consequence. Central bank policies have forced investors into higher-yield illiquid investments, and the unwind in the normalisation process—possibly starting this year—will be prone to extreme liquidity pressures.
Euro selling is likely to build with QE, with unprecedented policy action and international reserve managers moving against the euro—reducing positions in favour of the dollar. The dollar will continue to rise. The dollar would need to move 30% higher to achieve its 2002 peak and why not more given the circumstances now compared to then.
This will put pressure on all the high-yield debt denominated in dollars. The dollar return component compared to the coupon will stimulate moves into US assets for relative return reasons, and this may occur with liquidity issues driving big price moves. Structured products, ETF’s and other leveraged derivatives positions based on these assets will face large margin calls in an environment where the repo market could once more be illiquid.
The falling yen and euro will also put competiveness pressure on (slowing and problematic) emerging markets countries that move with the dollar.
Sharp rises in the dollar are associated with heavy pressure on commodities including oil and hence all of the derivatives positions in dollars.
This is a difficult moment in markets. A hawkish Yellen may really surprise, just as the SNB did, and trigger the liquidity issues. However, this is surely more likely if there is relatively good news out of Europe. One potential here is that the EU has relaxed fiscal rules, which could combine with solid QE in Europe to help the economy and markets. The Fed move would be earlier and stronger. Bad outcomes in Europe and Emerging markets surely would stay the hand of the Fed somewhat. But if this proved not to be the case (hawkish Fed plus bad news in the rest of the world) the liquidity air pockets will be very large indeed. It will be important to watch gold and the dollar—dollar appreciation correlated with gold appreciation (just a little so far) would be a damaging signal, just as it was in 2009.
III. LATEST LABOUR MARKET AND WAGE DEVELOPMENTS
1. The labour market recovery continues to be very uneven across countries, with the OECD unemployment rate still well above its pre-crisis level
After having remained essentially unchanged around 8% for nearly three years, the OECD harmonised unemployment rate has been falling gradually since late 2013, reaching 7.2% in November 2014 (see Table 1). This is down 1.3 percentage points from its post-war high of 8.5% in October 2009, but still significantly higher than its level prior to the crisis. Nearly 44 million persons are currently unemployed in the OECD area, which is 11.3 million more than immediately preceding the crisis.
Even during the extended period when the OECD average remained stuck at around 8%, this reflected the offsetting impacts of gradually declining unemployment in a number of countries, including Japan and the United States, and further increases in a number of Euro area countries (see Figure 1). Unemployment in the Euro area topped at 12% in the middle of 2013 and has since eased moderately to 11.5% in November 2014, but is still far higher than in the United States and, especially, Japan.
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Recent labour market trends in the Euro area reflect different developments in different countries (see Figure 2). Recent reductions in unemployment in Greece, Portugal and Spain, albeit still at a very high levels, help to explain why the Euro area average rate has eased slightly during the past year. By contrast, unemployment recently has been largely stable in France while it has continued to rise slowly in Italy.
o The highest unemployment rates in November were in Greece (25.7%, September 2014), Spain (23.9%), Portugal (13.9%), Italy (13.4%), the Slovak Republic (12.6%), Ireland (10.7%), Turkey (10.4%, August 2014) and France (10.3%). The lowest rates were recorded in Korea (3.4%), Japan (3.5%), Norway (3.8%, October 2014), Iceland (4.6%), Mexico (4.7%), Switzerland (4.8%, Q3 2014), Austria (4.9%), Germany (5%), New Zealand (5.4%, Q3 2014), the United States (5.6%, December 2014), Israel (5.6%), the Czech Republic (5.8%), Luxembourg (5.9%) and the United Kingdom (5.9%).
The unemployment rate in the United States decreased to 5.6% in December, its lowest level since June 2008. Job growth continued strong in December with US payroll employment rising by 252 thousand, very close to the average monthly gain of 246 thousand over the prior 12 months. Despite recent favorable economic developments in the United States, the labour market recovery still has a long way to go. The civilian labour force participation rate was down 0.2 percentage point in December, while the employment rate was unchanged at 59.2%.2 Whereas the unemployment rate has fallen by 1.1 percentage points over the past year, the employment-population ratio rose by only 0.6 percentage point during the same period and the labour force participation rate fell by 0.1 percentage point. The employment and participation rates remain well below their pre-crisis levels and only a part of this decline can be explained by population ageing.
The Canadian unemployment rate was unchanged at 6.6% in December 2014, but down 0.6 percentage point from one year earlier. Employment slightly decreased in December (by 4.3 thousand), driven by losses among women, but was up 186 thousand over the previous 12 months (1%).
2. Long-term unemployment has risen sharply in some countries, bringing with it the risk of a rise in structural unemployment
For the OECD area as a whole, more than one in three unemployed persons had been out of work for 12 months or more in the third quarter of 2014 (see Figure 3). This corresponds to 15.2 million persons who are long-term unemployed. The size of this group has increased by 77.2% since 2007.
The largest increases in long-term unemployment occurred in those countries where the global economic and Euro area crises hit labour markets particularly hard. Between 2007 Q4 and 2014 Q3, the share of long-term unemployed increased from 49.1% to 75.4% in Greece, from 28.9% to 57.7% in Ireland and from 19.2% to 53.4% in Spain. Several countries where long-term employment had been very low historically have also seen large recent increases.
In the United States, the share of all unemployed who have been jobless for a year or more rose from just under 10% in 2007 Q4 to a post-war high of around one-third in 2011 Q3, before easing to 21.5% in 2014 Q3. In Iceland, the incidence on long-term unemployment rose from 5.4% prior to crisis to 12.2% currently. In many of these countries, overall unemployment has fallen significantly from its recessionary peak, but long-term unemployment has been slower to decline in most cases.
2 Following US practice, these participation and employment rates refer to the population ages 16 and over.
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The incidence of long-term unemployment actually fell in 10 of the 33 OECD countries analysed. The decrease was most marked in Germany, where the labour market impact of the recession was relatively mild and long-term unemployment was already declining prior to the crisis. However, the incidence of long-term unemployment in Germany is still 8.3 percentage points above the OECD average (43% versus 34.7%).
The large increases in long-term unemployment are of particular concern because of the elevated risk that such workers become structurally unemployed. A high incidence of long- term unemployment can also result in some of these workers becoming discouraged and dropping out of the labour force, while others are compelled to accept new jobs where they are underemployed.
3. Youth have been among the hardest hit groups and may experience long-term scarring
Youth have been one of the population groups whose employment has fallen most in recent years and this fall has been associated with a large rise in unemployment (see Figure 4). The rise in youth unemployment is of great concern, particularly in those OECD countries where youth unemployment has risen to dramatic levels: 53.9% in Spain, 49.6% in Greece, 42.9% in Italy, 33.5% in Portugal and 29.7% in the Slovak Republic. The persistence of such high unemployment rates among youth risks compromising their long-term career prospects.
Several countries have seen marked decreases in youth unemployment since the crisis peak, most notably Estonia (-24.1 percentage points), Hungary (-8.8 percentage points), Ireland (- 7.8 percentage points) and Greece (-7.5 percentage points). While this is encouraging, youth unemployment is still above the pre-crisis level in the large majority of countries (3 percentage points higher on average across the OECD area).
Another reason that the employment-to-population ratio has fallen sharply for youth since 2007 is that participations rates have fallen for this group. To the extent lower participation reflects higher school enrolments or vocational training, this is not necessarily a problem since lower employment now should translate into better employment opportunities in the future. Unfortunately, this is not always the case and the percentage of persons aged 15-24 who are neither employed nor in education or training – the so-called NEET rate – has increased since 2007 in many OECD countries. Italy and Spain have seen particularly large increases in the NEET rate, but the relative size of this group has also increased in Australia, Canada and the United States. A smaller number of countries have seen declines in the NEET rate, including Germany, Japan and Turkey.
4. The incidence of temporary work has fallen in some countries but increased in others
The overall incidence of temporary work in the European Union has declined slightly since the start the start of the crisis, from 14.5% in the last quarter of 2007 to 14% in the third quarter of 2014. This means that in the European Union more than one in seven employed persons are employed on a fixed-term contract. However, the incidence of temporary contracts exhibits important differences across countries in terms of both its level as well as its trend (see Figure 5).
o As of the third quarter of 2014, the incidence of fixed-term contracts was highest in Poland (29%), Spain (24%), Portugal and the Netherlands (22%). The incidence of fixed- term contracts was also relatively high in Finland, France, Slovenia and Sweden where it exceeded 15%. By contrast, the incidence of fixed-term contracts is relatively low in countries such as Estonia (3%), the United Kingdom (6%), Luxembourg (7%), Denmark (8%), Austria and Ireland (9%).
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o The incidence of fixed-term contracts declined most strongly in Spain where it declined by 8 percentage points over the six years since the start of the crisis, although it has started edge back up in the most recent period. The large overall decline in Spain accounts for a significant part of the decline in the incidence of temporary work at the EU level. Other countries where the incidence of fixed-term contracts is now lower than at the start of the crisis include Norway, Portugal, Slovenia (-1 p.p.) and Germany (-2 p.p.).
o The incidence of fixed-term contracts increased significantly in a number of European countries, including the Netherlands and Slovak Republic (+4 p.p), Hungary (+3 p.p.) and Czech Republic (+2 p.p.). The increases in the three Central European countries are particularly notable as they depart from a relatively small base. They represent a doubling in Slovak Republic and increases between 25% and 50% in Czech Republic, Hungary as well as Estonia.
5. The incidence of part-time work has continued to increase
Across the OECD, about one in five employed persons worked part-time in the third quarter of 2014 and the importance of part-time work is increasing across-the-board. Since the start of the crisis in the last quarter of 2014, the incidence of part-time work has increased by over 2 percentage points on average, or in proportional terms, between 10 and 20% (see Figure 6). As shown in the Figure, the increase is largely involuntary in the majority of countries, with voluntary part-time declining in a number of them.
o The incidence of part-time work is highest in the Netherlands where more than half the working population is employed in part-time jobs (52%). More than one in three employees work part-time in Switzerland (37%) and over a quarter in Austria, Belgium, Denmark, Germany, Japan, Norway, Sweden and the United Kingdom. By contrast, less than one in ten employees work part-time in the Central and Eastern European countries, Greece and Turkey.
o During the seven years since the start of the crisis, the incidence of part-time work has increased substantially in Greece, Ireland, Italy and Spain (more than 5 p.p), Austria, Switzerland, the Netherlands (4 p.p.) and Slovak Republic (3 p.p.). The incidence of part- time work declined in only a few countries and, where it did, the decline tended to be marginal. The main exception is Norway where it declined by 2 percentage points.
6. What do the newly created jobs look like?
Figures 7 to 9 document the dynamics in the composition of the workforce in terms of contracts, working-time arrangements and broad economic sector during the seven-year period since the start of the global financial crisis. This provides interesting insights about the composition of jobs created during the recent labour market recovery and how this compares with the jobs that were destroyed during the downturn.
o In the European Union as a whole, over 60% of the jobs created during the year since the last quarter of 2013 (i.e. the time at which employment growth turned positive) represent jobs with fixed-term contracts (Figure 7). By contrast, during the period from when employment growth first turned negative in the first quarter of 2009 until the last quarter of 2013, temporary contracts accounted for slightly less than 30% of job losses.
In order words, the contribution of temporary jobs to job creation during the most recent years is much stronger than the employment losses during the preceding period.
A similar pattern can be observed in countries such as Greece and Italy. This asymmetry may not necessarily be worrisome since in many countries it is common practice to
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recruit new employees initially on a temporary contract and convert their contracts subsequently, subject to satisfactory performance. It may also reflect the still fragile nature of the economic recovery and the high level of uncertainty over the economic outlook. Nevertheless, it is important to monitor this development closely. If the recent increase in the creation of temporary jobs fails to translate into the creation of permanent contracts, this would raise important questions about the quality of the jobs being created and reinforce existing concerns about labour market segmentation. This appears to be the case in countries such as the Netherlands and Slovak Republic where the incidence of temporary work is now considerably higher than at the onset of the global financial crisis.
o For the European Union as a whole, the incidence of part-time work has tended to increase gradually throughout the period since the start of the global financial crisis (Figure 8). The share of part-time work in overall job creation during the most recovery is very large in a number of countries. These include Austria, Greece, Italy, Slovak Republic and Switzerland. The reasons behind this are likely to differ across countries, but may raise questions about the quality of the jobs being created in the recovery.
o There are important differences in the sectoral composition of the jobs that are being created in the recovery and those that have been destroyed during the downturn (Figure 9). This can be seen most clearly in the case of the United States where the employment recovery has been underway for about four years. The contribution of manufacturing and construction to job losses during the downturn was much larger than to job creation during the economy recovery. A somewhat similar pattern can be observed in Japan and the European Union. This suggests that a significant share of the construction and manufacturing jobs that were lost as a result of the global financial crisis are unlikely to come back, even once the labour market has fully recovered. This highlights the importance of policies that can help unemployed persons, who have lost their jobs in manufacturing or construction, find new jobs elsewhere.
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Figure 1. The labour market impact of the crisis and recovery has been highly uneven across countries
Harmonised unemployment rate, percentage of the labour force
Source: OECDShort-Term Labour Market Statistics Database (Cut-off date: 13 January 2015).
Figure 2. Labour market conditions also vary within the Euro area
Harmonised unemployment rate, percentage of the labour force
Source: OECDShort-Term Labour Market Statistics Database (Cut-off date: 13 January 2015).
3 4 5 6 7 8 9 10 11 12 13
%
United States
Japan Euro area
0 5 10 15 20 25 30%
France Germany
Greece Italy
Portugal Spain
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Figure 3. Long-term unemployment have risen in most countries, but sharp hikes are confined to only a few, Q4 2007 and Q3 2014a,b
Long-term unemployed (more than one year) as a percentage of total unemployed
Note: Countries are shown in ascending order of the incidence of long-term unemployment in Q3 2014.
a) Data are not seasonally adjusted but smoothed using three-quarter moving averages. OECD is the weighted average of 33 OECD countries excluding Chile.
b) 2013 for Israel.
Source: OECD calculations based on quarterly national Labour Force Surveys (Cut-off date: 13 January 2015).
Figure 4. Youth unemployment has reached very high levels in some OECD countries Percentage of youth (aged 15-24) labour force, Q4 2007a- Q3 2014b
Note: Countries shown in ascending order of the youth unemployment rates at their peak.
a) Q2 2007 for Switzerland.
b) Q4 2014 for Canada and the United States.
Source: OECDShort-Term Labour Market Statistics Database (Cut-off date: 13 January 2015).
0 10 20 30 40 50 60 70 80
%
Q4 2007 Q3 2014
0 10 20 30 40 50 60 70
%
Q4 2007 Peak Q3 2014
13
Figure 5. Incidence of temporary employment has declined in some countries, but risen in others Percentage of employees aged 15-64, Q4 2007-Q3 2014, European countries
Source: OECD calculations based on national labour force surveys.
Figure 6. The incidence of part-time employment has continued to increase Percentage of employees aged 15-64,a Q4 2007-Q3 2014
a) 16 and above for the United States.
b) Employee, excluding executive of company or corporation.
c) OECD is the weighted average of the 27 countries shown.
Source: OECD calculations based on national labour force surveys.
0 5 10 15 20 25 30 35
%
Q4 2007 Q3 2014 (↗)
0 10 20 30 40 50 60
%
Q4 2007 Q3 2014 (↗)
14
Figure 7. Temporary jobs account for a significant share of job creation in some countries
Annual percentage change, employees aged 15-64, Q4 2007-Q3 2014, selected European countries
European Union Greece Italy
Netherlands Poland Spain
Source: OECD calculations based on national labour force surveys.
-10010 Permanent contracts Temporary contracts Employees
-3 -2 -1 0 1 2 3
%
-12 -10 -8 -6 -4 -2 0 2 4 6
%
-3 -2 -1 0 1 2 3
%
-5 -4 -3 -2 -1 0 1 2 3
%
-4-3 -2-101234567
%
-8 -6 -4 -2 0 2 4 6
%
15
Figure 7. Part-time work has continued to increase gradually
Annual percentage change, employees aged 15-64,a Q4 2007-Q3 2014, selected OECD countries
European Union Greece Italy
Netherlands Spain United States
a) 16 and above for the United States.
Source: OECD calculations based on national labour force surveys.
Figure 9. Many of the jobs destroyed as a result of the crisis will not come back in the recovery Annual percentage change, employees in the non-agricultural business sector,a Q4 2007-Q4 2014
European Union Japan United States
a) Manufacturing refers to minimin, manufacturing and utilities and business services to trade, transport and communication, accomodation and food services, financial servies, real estate and business services.
Source: OECD calculations based on the European quarterly national accounts, on the labour force survey for Japan and on the Current Employment Statistics survey for the United States.
-10010 Full-time contracts Part-time contracts Employees
-3 -2 -1 0 1 2 3
%
-15 -10 -5 0 5
%
-3 -2 -1 0 1 2
% 3
-5-4 -3-2 -10123
%
-8 -6 -4 -2 0 2 4
%
-6 -4 -2 0 2 4
%
Manufacturing Construction Business services Non-agricultural business sector
-5 -4 -3 -2 -1 0 1 2
% 3
-3 -2 -1 0 1 2
% 3
-10 -8 -6 -4 -2 0 2
% 4
16
Table 1. Changes in harmonised unemployment since December 2007 Seasonally adjusted data
a) August 2014 for Turkey; September 2014 for Greece and the United Kingdom; October 2014 for Chile, Estonia, Hungary and Norway; December 2014 for Canada and the United States; and Q3 2014 for New Zealand and Switzerland.
b) Information on data for Israel: http://dx.doi.org/10.1787/888932315602.In order to ensure a comparison between the results based on the Quarterly Labour Force Survey and the new Monthly Labour Force Survey introduced in January 2012, the series have been chained using the chaining coefficients provided by the national authorities (For further details see http://www1.cbs.gov.il/publications12/saka0412m/pdf/intro_f_e.pdf).
c) Harmonised unemployment data for New Zealand and Switzerland are not available on a monthly basis but for comparison purposes the quarterly averages are reported on a monthly basis.
Source: OECD calculations based on the OECD Short-Term Labour Market Statistics Database (http://dx.doi.org/10.1787/data- 00046-en).
Nov ember 2014a
December 2007
%-points
change % change Nov ember 2014a
December 2007
Absolute
change % change
OECD 7.2 5.6 1.6 28.2 43 791 32 536 11,255 34.6
G7 6.2 5.4 0.8 14.5 23 153 19 845 3,308 16.7
European Union 10.0 6.9 3.1 44.9 24 423 16 419 8,004 48.7
Euro Area 11.5 7.3 4.2 57.5 18 394 11 461 6,933 60.5
Australia 6.3 4.3 2.0 45.4 778 476 301 63.2
Austria 4.9 4.0 0.9 22.5 217 169 48 28.4
Belgium 8.5 7.2 1.3 18.1 421 346 75 21.7
Canada 6.6 6.0 0.6 10.0 1 272 1 081 191 17.7
Chile 6.3 7.8 -1.5 -19.2 534 555 -20 -3.6
Czech Republic 5.8 4.8 1.0 20.8 308 251 57 22.7
Denmark 6.4 3.3 3.1 93.9 188 96 92 95.8
Estonia 6.9 4.1 2.8 68.3 47 28 19 67.9
Finland 8.9 6.5 2.4 36.9 239 175 64 36.6
France 10.3 7.4 2.9 39.2 3 028 2 106 922 43.8
Germany 5.0 8.1 -3.1 -38.3 2 108 3 284 -1,176 -35.8
Greece 25.7 8.1 17.6 217.3 1 241 402 839 208.7
Hungary 7.4 8.0 -0.6 -7.5 328 337 -9 -2.7
Iceland 4.6 2.5 2.1 84.0 9 5 4 80.0
Ireland 10.7 5.0 5.7 114.0 230 112 118 105.4
Israelb 5.6 8.5 -2.8 -33.5 215 269 -54 -20.1
Italy 13.4 6.6 6.8 103.0 3 457 1 652 1,805 109.3
Japan 3.5 3.7 -0.2 -5.4 2 290 2 510 -220 -8.8
Korea 3.4 3.1 0.3 9.7 903 760 143 18.8
Lux embourg 5.9 4.2 1.7 40.5 15 9 6 66.7
Mex ico 4.7 3.8 0.9 24.8 2 461 1 712 749 43.7
Netherlands 6.5 3.3 3.2 97.0 585 283 302 106.7
New Zealandc 5.4 3.5 1.9 54.3 134 78 56 71.8
Norw ay 3.8 2.4 1.4 58.3 103 61 42 68.9
Poland 8.2 8.2 0.0 0.0 1 426 1 351 75 5.6
Portugal 13.9 8.8 5.1 58.0 714 479 235 49.1
Slov ak Republic 12.6 10.5 2.1 20.0 341 277 64 23.1
Slov enia 9.6 4.7 4.9 104.3 96 48 48 100.0
Spain 23.9 8.8 15.1 171.6 5 467 1 995 3,472 174.0
Sw eden 7.8 6.0 1.8 30.0 409 291 118 40.5
Sw itzerlandc 4.8 3.7 1.2 32.3 230 156 74 47.1
Turkey 10.4 9.0 1.4 15.6 3 000 2 044 956 46.8
United Kingdom 5.9 5.0 0.9 18.0 1 920 1 567 353 22.5
United States 5.6 5.0 0.6 12.0 8 688 7 645 1,043 13.6
Number of unemployed Thousands Unemployment rate
Percentage of the labour force
