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Professor Geraint Johnes
Professor of Economics at Lancaster University
T 020 7976 3516
Professor Geraint Johnes

OECD Employment Outlook 2015 and the UK Labour Market

Authors: Professor Geraint Johnes

09 July 2015

Today, the OECD is launching its latest Employment Outlook here at the Work Foundation. This publication is always eagerly awaited, both for the wealth of statistical information it contains and for the more in-depth thematic analyses.

Let’s begin with the headline figures. The OECD expects this year’s real GDP growth in the UK to be 2.4%, falling to 2.3% next year. This represents faster growth than in the Euro area and faster this year also than the OECD average – though the latter is expected to rise above the UK projection next year, in part owing to continued recovery in the USA. Significantly and somewhat surprisingly, the OECD is forecasting growth in Greece to remain positive this year, at 0.8%, and to recover to 2.2% next year. Recent developments may of course affect that. The OECD forecast suggests that the unemployment rate in the UK will continue to fall gradually, reaching 5.1% next year.

Indeed, many indicators show that the UK’s labour market has recovered well compared with that of many other countries. The employment rate, for instance, has recently passed the pre-crisis peak in the UK, but it remains far below pre-crisis levels in many other economies, including in particular Spain, Ireland and, of course, Greece. It is noteworthy that employment has also failed fully to recover in the USA. Unemployment, unsurprisingly, is almost a mirror image – though in the US the unemployment statistics portray a somewhat more favourable picture than the employment data, presumably because of changes in economic activity rates. Long term unemployment (defined as those unemployed for over a year) is close to the OECD average in the UK, but that should not be cause for complacency since the average itself has risen; in the UK the long term unemployed now represent around 35% of all unemployment – a sharp increase from the pre-crisis period. Amongst western European countries, it is only Germany that has succeeded in reducing the incidence of long term unemployment in recent years, and this is from a high starting point.

Having peaked well above pre-crisis levels, youth unemployment in the UK has fallen to a point that is now just slightly above the OECD average – though the most recent figures suggest that the fall has slowed to a crawl. The incidence of part-time employment in the UK is well above the OECD average, though this is mainly observed amongst those who work part-time voluntarily. This may reflect the relatively high employment rate, and particularly the high incidence of female activity.

Next we come to a feature of the UK’s labour market that stands out like a sore thumb. Real hourly wage growth has been lower in almost all OECD countries over the period since the crisis – exceptions being Japan, Luxembourg, Poland and (interestingly) Germany. But few countries have seen pay stagnate as it has in the UK. Indeed, since 2007 annual real wage growth in the UK has been the slowest in the OECD with the single exception of Greece.

The government is, of course, concerned about pay – not least because low pay adds to the welfare bill. This has led to calls from politicians who one would not normally consider to be naïve for firms to raise pay – and, more realistically, for the minimum wage to be raised. This being so, the first of the OECD report’s thematic chapters, on the minimum wage, is particularly timely, and provides plentiful evidence of how the UK’s minimum wage compares with that of other countries. Relative to mean and to median wages, the minimum in the UK is close to the OECD average. This, in turn, is similar to several other European countries, but notably lower than in France. It is noteworthy that the number of hours that workers in the UK must work at the minimum wage to move above a ‘poverty line’ defined by 50% of median household income is markedly lower in the UK than in most other countries, owing to the coverage and relative complexity of the benefits system.

A second focus of the report is inequality, and in particular how this is affected by the distribution of skills. In analysing this, the report makes extensive use of the recently collected Programme for the International Assessment of Adult Competencies (PIAAC) data set. On a simple measure of earnings inequality, the UK is near the median amongst the OECD countries, with workers at the 90th centile earning around 3.5 times as much as those at the 10th centile. The corresponding figure for Sweden is around 2.1, while in the USA it is about 4.8 and in Korea well above 5. Differences across countries both in individuals’ skill sets, in the pecuniary returns to those skills, and in the extent to which the skills are actually used in the workplace, all turn out to be important factors in understanding this inequality.

Returns to numeracy are highest in the USA and the UK – in both countries wages increase by over 20% in response to a one standard deviation increase in individuals’ numeracy scores. For the US, in particular, this reflects the relatively unequal distribution of incomes overall – the three countries with the lowest returns to numeracy (Sweden, Finland and Denmark) have relatively equal income distributions, so the returns to anything are fairly modest.

Meanwhile, the skill sets with which individuals are endowed in the US and UK are not as favourable as in some other countries. In both of these countries, the higher return to skills more than offsets the lower incidence of these skills, tending toward a relatively unequal wage distribution. In contrast to the US, however, workers’ skills are underutilised at work in the UK – matching between workers and employers is not so efficient. Consequently the UK income distribution has a lower variance than might be expected by the returns to skills and skill endowments alone. Indeed, an important conclusion of the OECD’s report is that, since the use of skills at work is more unequal than the distribution of skill endowments, one route toward greater equality would be for employers better to use the skills that their workers already have.

The analysis of inequality also extends to inequalities between men and women (little of which can be explained by reference to differences in skills), and between native and foreign born workers (where, in most countries – some southern and eastern European countries being an exception) the skills of migrants are richer than those of natives. With only one exception (migrants in Australia), the raw wage differential places the minority group in an adverse position. For women, this is particularly acute in Korea, Japan and Estonia. For non-native born workers, it is particularly severe in Korea, Spain and Italy. Discrimination of various kinds remains a feature of labour markets worldwide, albeit more severe in some places than others.

The third area on which the report focuses concerns labour market risk. This extends the analysis of inequality to examine a richer array of measures of the quality of working lives. A particularly interesting measure – on which the UK does quite well – is the link between long term labour market outcomes and employees’ employment in low quality firms. These are defined as those firms in the bottom third of the distribution of wages (specific to the sector and size band of the firm).  Countries that perform relatively poorly on this measure include Turkey, Spain and Italy; more surprisingly, perhaps, a majority of firms fall into this category also in Finland, Austria and Germany. The relatively strong performance of the UK on this measure may be due to the flexibility of the labour market – workers employed by low quality firms may enjoy sufficient mobility to escape. More generally, the treatment of job quality in the report is extended in a further chapter that focuses on how to improve the quality of work in emerging economies.

A final area of focus for the report concerns active labour market policies. These have been aggressively pursued in the Scandinavian countries, while the UK and USA, alongside some other major economies such as Australia and Japan, remain comparatively inactive in this sphere. During a recovery, this means that the market has the flexibility to improve quickly. But this comes at a cost in terms of equality and some other more qualitative indicators. And therein, for the UK at least, lies the  nub. As the economy recovers, we find ourselves at a good time to consider how we might use the fruits of renewed growth in a way that improves the experience of work for all. This report provides more than a few clues about how that might be achieved.