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Chapter 2 Knowledge/Skills Enhancement and the Labor Market

[Contents]

<Summary of Chapter 2>

(Flexible Labor Market that Enhances Human Capacity)

   The U.S. labor market has increased its flexibility as shown in employment adjustment through restructuring. Supported by active labor mobility, the IT revolution has made progress and brought about changes, such as employment substitution by IT and an increase in the demand for IT workers. These individuals, companies and the government working actively for the enhancement of labor's knowledge and skill is contributing to the good performance of U.S. economy.

(Solution of Unemployment through Higher Quality of Employment)

   The European labor market, which is often noted for its rigidity, has begun to change. The enhancement of employability is drawing attention as a way to solve the problem of structural unemployment in EU countries. Companies are intensifying vocational training. EU countries have begun to attach importance to policies designed to enhance the quality of employment.

(Economic Crisis and Flexibility of Labor Market)

   The Asian currency and financial crisis raised unemployment rates in Asian countries to a varying degree and pushed to change the way the labor market should be. In Korea, the mobility of labor seems to have been enhanced after the crisis. In Singapore, it has become important not only to dissolve the mismatch in the labor market but also to enhance the employability of individual workers and to secure qualified people for future economic development. In Australia, where reform of the labor market has been promoted, the structural unemployment rate has declined in recent years.


Section 1: Flexible Labor Market that Enhances Human Capacity (the U.S.)

1. Formation of highly flexible labor market

(Restructuring by firms)

   Amid intensifying competition brought about by the progress in globalization, technological innovation, and deregulation, firms implemented downsizing and outsourcing and, as a result, office workers, whose long-term employment had so far been guaranteed, have been exposed to employment adjustment. Firms secured the core of their human resources on one hand and laid off office workers with relatively low skills on the other.

(Formation of wage structure in line with knowledge and skills)

   Wage differentials have been widened as wages have come to be increasingly formed by market forces. As a result of the reshuffle of manpower brought about by the flexible formation of wages reflecting the levels of workers' knowledge and skills, there has appeared a bipolarization of the occupational structure in the light of income levels. (See Figure 2-1-6)

(High fluidity of employment)

   With spreading innovative business management practices, employee tenure has become shortened. Full-time regular workers have increasingly been replaced by non-regular workers in various forms of engagement. The help supply business and the pension and medical insurance systems that guarantee portability have also contributed to the higher mobility of labor. In the circumstances, an increasing number of workers are changing jobs to make the best use of their knowledge and skills.

(Employment conditions that contributed to new growth)

   Although the number of people who lost their jobs due to restructuring or business closings is by no means small, many more jobs were created mainly by small businesses. Looking upon this from the business side, the increased flexibility of the labor market may have made it possible to promptly and easily cope with a rise in labor demand created by the opening of new businesses or business expansion, and thus supported the growth of new industries, such as the IT industry. (See Figure 2-1-14)

2. Change in qualification of workers due to the usage of IT

(Employment creation and substitution by IT)

   In the progress of IT revolution, firms have drastically increased IT investment and have changed the quality of knowledge and skills that they require workers to possess in order to introduce IT into their business activities. As IT has reorganized business processes drastically, the workers engaged in occupations that require less knowledge and skills, such as clerical jobs, have been substituted to IT and, at the same time, knowledge workers, such as IT engineers, have increased. (See Figure 2-1-16)

   Among the characteristics of IT workers are high wages and education levels. The ratio of women to total IT workers is relatively small. With demand for IT workers increasing amid the IT investment boom, the shortage of IT workers is and will be a cause of concern.

(Changes in company organization and work style by the usage of IT)

   Introduction of IT into business administration and operation has widened the range of tasks that a personnel can handle and made exchange and sharing of information easier; company organizations have tended to become flat in structure. The usage of IT also increases teleworking and other new types of engagement such as independent contractors, who conclude work contracts on a specific task or on a temporary basis. This has prompted workers' identity to shift from "group identification " to "individuality."

(Improvement of matching efficiency in the labor market)

   IT innovations have drastically changed the way one seeks jobs in the labor market. The Internet provides a platform for exchange of information on vacancies and job seekers and has made recruitment and job-seeking activities effective. This has given the labor market an enhanced matching function.

3. Enhancement of knowledge and skills by individuals, firms and the government

   In the United States, individuals, firms and the government are actively promoting the enhancement of knowledge and skills of workers to cope with the change in the environment surrounding employment. Higher education offered by universities and community colleges is playing an important role in enhancing individual's knowledge and skills. Companies are also positive in providing re-education and vocational training to enhance the evaluation of workers in the labor market. They provide not only on-the-job training but also formal training by utilizing outside institutions to conduct education and vocational training. The government has placed greater importance on employment policies designed to enhance human capacity, such as the improvement of education and training both in terms of quantity and quality. These efforts by individuals, firms and the government are contributing to fostering IT workers, who are indispensable for the IT revolution.

Figure 2-1-6 Bipolarization of occupational structure

Figure 2-1-14 Job creation/destruction by Firm Employment Size(1992-96)   Figure 2-1-16 Changes in computer use and occupational structure


Section 2: Solution of Unemployment through Higher Quality of Employment (Europe)

(Rigidity of the European labor market)

   It is often mentioned that the European labor market is rigid. Indeed, despite of the fact that the economy as a whole has been expanding since 1993, unemployment rates remain high in many European countries and the European labor market is chronically plagued with unemployment regardless of phase shifts in business cycles (See Figure 2-2-1). One of the factors that produces this structural unemployment is a mismatch between supply and demand in the labor market.

   In EU member countries, while traditional industries, such as agriculture and manufacturing, have increasingly excessive workers, the IT industry is short of workers. This interindustrial mismatch can be attributed to the fact that, in many European countries, there are strict requirements that companies must follow if they want to discharge workers; that inefficient industries, mainly those in the manufacturing sector, are kept afloat thanks to ample government subsidies; and that most Europeans are not enterprising in establishing new businesses.

   Although free labor mobility within the EU region is guaranteed, cross-border labor movement among EU countries is not, as a whole, in place (See Figure 2-2-4). In Germany, the ratio of foreign workers with EU nationality to the total workforce in 1999 was smaller than in 1995. In the EU as a whole, the rise in the comparable ratio is negligible. Since there is a great gulf in language and culture among EU countries, the ratio is not likely to increase sharply in the near future.

   High unemployment rates of youth are one of the causes for the mismatch in the labor markets of EU countries. Unable to discharge excessive workers due to strict employment protection legislation, European companies are refraining from the new recruitment of youth. This has resulted in narrowing employment opportunities for young people, leading to their high unemployment rates.

   The progress of the IT diffusion in the economy has rapidly changed the kind of skills required in the labor market. The labor market today is in dire need of IT-related skills. However, Europe falls far behind the U.S. in terms of penetration of IT. There also appears to be a mismatch with regard to IT skills.

(Emphasis on enhancement of employability)

   Amid changing environment surrounding employment, many countries in continental Europe failed to improve employment situations even when the economy was in an expansionary phase in the second half of the 1990s. However, having become aware of the importance of enhancing skills and abilities of their employees to cope with the change in environment, companies in EU countries have begun to intensify vocational training.

   For the governments of EU countries, as well, increasing employment has become the most important issue when the European Monetary Union (EMU) shifted to "Stage Three" where increased pressures put on them to reduce governments' expenditures and their flexibility in economic management reduced due to a single monetary policy and strict fiscal disciplines.

   In the U.K. and the Netherlands, unemployment rates fell as a result of the introduction of the market mechanism into the labor markets and the wider use of part-time work. However, even in these two countries, youth unemployment and long-term unemployment remain difficult problems. Consequently, growing attention has been given to enhancing the employability of people entering the labor market.

   "Employability" is sometimes interpreted just as employment possibility, but what it implies is that workers expand their possibility and opportunity for employment, change jobs, or advance their careers by acquiring by themselves the skills and ability required at work. Enhancement of employability is required of all groups of workers now in the labor market, regardless of their current levels of skills, types of job, or educational background, and it should lead to the enhancement of companies' competitiveness.

   Plagued by the common problem of structural unemployment, the EU in 1997 adopted a four-point employment strategy, including "improving employability," and began to tackle the problem in earnest. The EU calls on member countries to focus more on positive employment measures designed to enhance the quality of employment, such as vocational training and public employment services, rather than on passive employment measures centering on unemployment benefits.

   A breakdown of EU countries' public expenditures on labor market programs in accordance with the classification adopted by the OECD shows that their expenditures for positive employment measures have been increasing in recent years. The ratios of employment-related public expenditures to GDP in EU countries are higher than the respective ratios in the U.S. and Japan. And the percentages of expenditures for positive employment measures are also higher than in the U.S. and Japan. Moreover, the percentage of expenditures for the enhancement of employability, such as employment training and measures for youth, is higher than for other positive employment measures (See Figure 2-2-19).

(European labor market begins to change)

   Although the problem of structural unemployment remains, European labor markets have begun to show slight changes, as can be observed from an increase in part-time work and flexibility in working hours in some countries. Although unemployment rates in EU countries still remain at high levels, they have begun to decline in some countries, suggesting that the shift in policy at EU level has become effective.

Figure 2-2-1 Unemploment rates in EU countries (after 1990)

Figure 2-2-4 Ratios of foreign workers with EU nationality to tatal workforce (Aged 25~49)

Figure 2-2-19 Employment-related expenditures in EU countries


Section 3: Economic Crisis and Flexibility of Labor Market (Korea, Singapore and Australia)

(Qualitative change in labor market in response to currency and financial crisis: Korea)

   When the outbreak of the currency and financial crisis in Korea made the adverse effect of excessive employment tangible, many people were laid off and the unemployment rate soared. To cope with the situation, the Korean government declared reform of the labor market as one of the four structural reform programs and tackled unemployment and many other problems. As a result, the unemployment rate turned lower after hitting a peak in early 1999 and fell to 4.0% as of September 2000. And thanks to active renewal in the corporate sector, labor mobility may have become smoother than it was before the crisis. The number of employees has increased considerably in the rapidly growing automobile and IT-related equipment industries. The government attaches importance not only to passive employment policies but also to the expansion of the vocational training system to prevent unemployment.

(Mismatch in the labor market, and shift to a knowledge-based economy: Singapore)

   In Singapore, the outbreak of the Asian currency and financial crisis touched off a wave of layoffs, mainly in the manufacturing sector, and the unemployment rate soared above 4%, a level not seen before. After that, the employment situation improved in line with an economic recovery, though the unemployment rate does not have come down to a pre-crisis level, and the mismatch between supply and demand in the labor market became evident. In the circumstances, the Singaporean government adopted "Manpower 21," a national strategy to develop human capacity, and shifted its policy toward the creation of "a knowledge-based economy" through the enhancement of employability of individual workers and by securing qualified people in a bid to ensure its international competitiveness in the future.

(Flexibility of the labor market brought about by reform: Australia)

   The unemployment rate in Australia has been declining in recent years. This can be attributed to the increased flexibility of the labor market as well as the continued economic expansion. The reform of the labor market has been implemented in a way to make it more flexible and efficient by utilizing the market mechanism and introducing elements of competition ; shifting to a decentralised industrial relations system in decision-making on labor conditions, putting Commonwealth Employment Services under private management and reforming the education and training systems. One of the reasons why the Australian economy was little affected by the Asian currency and financial crisis was that the country had been actively promoting structural reform, including reform of its labor market, even before the crisis.

Figure 2-3-1 Employment trends by type of employment in Korea   Figure 2-3-8 Number of retrenched workers by industry in Singapore   Figure 2-3-14 Number of employees and unemployment rate in Australia

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