Learning from Sweden—A Long-Term Unemployment Policy Aimed at Securing a Labor Force

An opinion piece from Professor Yoshihiko Fukushima of Waseda University in Japan.

Professor Yoshihiko Fukushima

According to the final report of the Committee for Japan's Future, an expert examination committee established under the Council on Economic and Fiscal Policy, “there is a need to raise the employment rate of women and the elderly by 5% in order to secure a sufficient labor force ” (Nikkei morning edition, November 13). The same report also claims that there is a need for participation in the labor force by women and the elderly in order to compensate for a falling working age population in the future. However, looking at current conditions in the Japanese labor market as a whole, I believe that before we set about promoting the participation of women and the elderly in the labor force the first thing we need to tackle is the problem of long-term unemployment. In this paper I want to discuss the question of long-term unemployment, which has been increasing since the collapse of Japan's bubble economy.

Trends in long-term unemployment

According to the OECD database OECD Stat., since the mid-1950s Japan has maintained an extremely low rate of unemployment in comparison to other OECD countries. Even when the unemployment rate was at its highest after the collapse of the bubble economy in the early 1990s it remained at around 5%. However, the ratio of long-term unemployment (a period of unemployment of one year or more) among unemployed people as a whole has risen consistently since the collapse of the bubble economy so that by 2012 almost 50% of unemployed people were long-term unemployed. An even bigger problem is the increase in young long-term unemployed. According to the Ministry of Internal Affairs and Communications' Labour Force Survey, in 2013 the ratio of young workers aged under 35 among the long-term unemployed was approximately 40%.

Being in a state of unemployment for a long time removes the incentive for a worker to work and as a consequence encourages him or her to withdraw from the labor market. In Japan, the working age population between the ages of 15 and 64 as a percentage of total population peaked in the mid-1990s and has continued to fall ever since. As the size of the young workforce continues to shrink as a result of the falling birthrate, the withdrawal of existing workers from the workforce means further reductions in working population and human capital. What's more, workers withdrawing from the labor market causes a reduction in tax receipts and social security contributions. In other words, keeping workers involved in the labor market not only increases the role of the individual worker but also helps to maintain and improve the standard of social welfare for society as a whole.

Mismatch between demand for and supply of labor

The causes of workers falling into long-term unemployment can be found on both the labor demand side and the labor supply side. Causes on the labor demand side imply a shortage in the demand for labor itself. According to the Ministry of Health, Labour and Welfare's “White Paper on the Labour Economy 2014 ” (The Analysis of the Labour Economy), for the period between 1990 and the first quarter of 2014 the amount of time during which the active job opening ratio (= number of openings/ number of jobseekers) excluding new graduates exceeded 1 was only around 20% of the total. In other words, since 1990 for around 80% of the time there has been a labor demand shortage. Between the early 1970s and the late 1980s, despite the fact that the active job opening ratio excluding new graduates exceeded 1 for only around 10% of the time, the ratio of long-term unemployed was stable, and even at its highest the ratio was only around 20%. Since the 1990s, the ratio of long-term unemployment has continued to increase and by 2012 it had reached approximately 50%.

From this perspective, it would appear that supply side causes have had a strong impact on the continued rise in long-term unemployment. In other words, structural causes rooted in a mismatch between the labor demand side and labor supply side have had a strong impact. This development can be shown in a shift towards the outside of a Beveridge curve. In a Beveridge curve, the unemployment rate (U) is represented on the horizontal axis and the vacancy rate (V) is represented on the vertical axis. It plots both measured and estimated values and usually depicts a curve falling from top left to bottom right. A rise (or fall) in the vacancy rate means an increase (or decrease) in the demand for labor, and consequently a fall (rise) in the unemployment rate. A variety of research has shown that since the 1960s Beveridge curves for OECD countries have consistently continued to shift towards the outside. When a Beveridge curve shifts towards the outside it shows that there has been an increase in the number of unemployed workers despite an increase in the number of vacancies in the labor market. In other words, it shows that a mismatch has arisen between the labor demand side and the labor supply side and there has been an increase in so-called “structural unemployment. ”

Sweden's activation policy

Among OECD countries Sweden has maintained the lowest ratio of long-term unemployment for the past 30 years, despite having a higher level of structural unemployment than Japan. The diagrams show the Beveridge curves for Japan and Sweden between 2001 and 2011, based on quarterly data. It is clear from the diagrams that Sweden's Beveridge curve is located to the outside of Japan's and that since 2001 there has been a bigger shift in Sweden than in Japan. In other words, Sweden has more structural unemployment than Japan and Sweden's structural unemployment is growing. However, for the past 30 years Sweden has maintained the lowest ratio of long-term unemployment among OECD countries. Not only are there more robust and comprehensive guarantees of workers' rights in Sweden than in Japan, but the unemployment benefit system is considerably more generous. This situation tends to have a strong risk of encouraging people to continue receiving unemployment benefits until the benefits period expires without seriously searching for work, or so-called “moral hazard. ” However, Sweden has continued to maintain a low long-term unemployment rate.

So what has controlled the increase in long-term unemployment in Sweden? In other words, how has Sweden succeeded in reducing the “moral hazard ” for the unemployed and increasing their job-finding success rate? Since the 1990s, Sweden has consistently placed emphasis on active labor market policies in respect to the unemployed. Although there have been ongoing changes in the specific operational methods and content of these policies, they have all shared the approach of requiring workers to aggressively carry out job-seeking activities at an early stage and to take part in educational and training programs, thereby encouraging a lesser moral hazard and the resolution of labor supply-demand mismatch. A policy that encourages the worker himself or herself to find work is called an “activation policy. ” It is commonly accepted among economists that Sweden's aggressive pursuit of an activation policy has led to a major reduction in moral hazard, a reduction in the unemployment rate, and a particularly notable reduction in the long-term unemployment rate. The effectiveness of this policy in Sweden suggests that Japan should also consider actively promoting an activation policy to tackle long-term unemployment as a way of securing a labor force.

Yoshihiko Fukushima
Professor, Faculty of Political Science and Economics, Waseda University

Professor at Faculty of Political Science and Economics, Waseda University. The author graduated from the Faculty of Economics at Keio University in 1988. In 1990, he completed the Master's program (Master of Arts in Economics) at the Graduate School of Economics there and then joined Salomon Brothers Asia, Limited. After work in Tokyo, New York, and London, he completed the Ph.D program at Department of Economics, Stockholm University, Sweden, in 2003. After the post as a professor at Nagoya University of Commerce & Business, he took the present post in 2007.

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Source: Excerpts from OECD Employment Outlook 2012

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Source: Excerpts from OECD Employment Outlook 2012

Published: 10 Dec 2014


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