current theories in economics and their application to the development of a roadmap for employment

Current Theories In Economics and Their Application to the

Development of A Roadmap for Employment

Prepared by

Brian Lewis

December 2010

BACKGROUND

• SAUDI ARABIA – Poised to make its mark beyond oil and gas on

the world rostrum – Its wealth requires careful placement in the

development of human resources to serve its growth and future

– Can benefit from the lessons obtained from the 2010 Nobel Prize in Economic Sciences Laureates

• TO PROVIDE– Simplified Analysis • 2010 Economic Laureates Works

– Framework • Analytic collection analysis

– Foundation Development• Transparency indices

–Offer Recommendations • For policy and regulatory consideration

REPORT OBJECTIVES

THE WORD “RISK” DERIVES FROM THE ARABIC رزق TO SEEK PROSPERITY.

Reducing the “Risks” Implied in English While Multiplying The رزق in Arabic

Is A Worthy Goal For Achievement

THE NOBEL PRIZE IN ECONOMIC SCIENCE

The following pages provide:

An overview analysis of the writings and theories developed by the 2010 Nobel Award Laureates in Economic Sciences is presented in a simplified from. A detailed summary, including bibliography of

the writings reviewed to prepare these documents is submitted separately.

An analysis of OSHA (Occupational Safety and Health Administration)

presenting relevant questionsfor policy consideration and decision.

2010 Nobel PrizeEconomic Science

Awarded for“analysis of markets with search

frictions”

Search Frictions in Labor Markets

Key requirement*:

“How to explain:” HiringFiringQuitsVacancies Job Search

Key breakthrough: Achieved understanding of unemployment as the result of underlying microeconomic behavior

*All of these considerations need to be addressed to develop cohesive planning.

Nobel Prize Medal

Nobel LaureatesEconomic Sciences 2010

Diamond, Mortensen & Pissarides

How can economic policy affect unemployment?

Why are so many people unemployed at the same time that there are a large number of job openings?

The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy.

On the following page a diagram is presented to visually show the complexity of the issues requiring analytical consideration to fulfill the theories advanced by the 2010 Nobel laureates. The subsequent pages outline the considerations for each of the analytical topics.

ECONOMICS IN LABOR MARKETS

• Analytic– Identification • Achieved

– Structures • Established

– Analysis • Requires dense data availability

– Present / Future • Comparisons establish achievement• Forecast problems

2010 NOBEL ECONOMIC SCIENCES

• The Nobel Prize Economic Sciences Laureates – Complex systems applied to labor markets – Analytical, Policy, Regulatory• Variables

– Demonstrated on the following page – Further analysis subsequently

Survivor Benefits

Capital Movement

Government Employment

Experience/Wages

Population Density

Wage Dispersion

Age

Population Demographics

Minor Children

Gender

Years WorkedHuman Capital

Work Hours

Private Employment

Education

Widows

Unemployment

ProductivityTotal Population

2010 Nobel Prize for Economic Science “search” theory requires consideration and inclusion of these variables and analytics for government policy development.

Government Policy

Job Destruction

Employment Credits

Unemployment Insurance

Social Welfare

Minimum Wage

Training Programs

Health Insurance

Friction

Job Creation

Retirement Benefits

TaxationEconomic Growth

Funding for Retirement

Government Regulations

THE SEARCH FOR EMPLOYMENTFRICTION

JOB CREATIONJOB DESTRUCTION

LABOR MARKET ANALYTICS

LABOR MARKET ANALYTICS Key Factors

SEARCH

– Predicts • Arrival rate-employment offers • Labor market tightness

– Search • Greatest amongst low paid

LABOR MARKET ANALYTICS Key Factors

• SEARCH

– New employment • Most often found while employed

– Firms seek new workers • When profitability uptick forecast

LABOR MARKET ANALYTICS Key Factors

• FRICTION

–Workers• Live in changing environment

– Continuing • Re-evaluation job opportunities

LABOR MARKET ANALYTICS Key Factors

• FRICTION

–Wage • Opportunity critical

– Present vs. Future • Uncertainties

LABOR MARKET ANALYTICS Key Factors

• JOB CREATION

– Jobs created • Even in recessions

– Create jobs • To maximize profitability

– Hiring subsidies • Increase employment

LABOR MARKET ANALYTICS Key Factors

• JOB DESTRUCTION

– Reduced profitability • Primary cause

– Improved productivity • Reduces jobs

– Technological improvement • Job loss

– Positive ratio • High UI and job destruction

GOVERNMENT REGULATIONSTAXATION

TRAINING PROGRAMSEMPLOYMENT CREDITS

MINIMUM WAGESHOURS WORKED

CAPITAL MOVEMENTHUMAN CAPITAL

GOVERNMENT POLICY ANALYCTICS: BEST PRACTICES

DEVELOP MEASUREMENT CAPABILITIES

GOVERNMENT POLICY ANALYTICS

• GOVERNMENT REGULATIONS

–Wage subsidies • Increase employment

– Employment subsidies • Increase wages

– Hiring subsidies • Reduce unemployment

GOVERNMENT POLICY ANALYTICS

• GOVERNMENT REGULATIONS

– High start-up costs • Reduce employment

– Unemployment insurance • Extends duration/incidence unemployment

GOVERNMENT POLICY ANALYTICS

• TAXATION

– Analysis • Determine benefit/non-benefit results

– Non-distortionary consumption tax• Employment subsidies benefit low income earners

GOVERNMENT POLICY ANALYTICS

• TAXATION

– Job protection • Reduces profitability

– Unemployment insurance • Reduces profitability

GOVERNMENT POLICY ANALYTICS

• TAXATION

– Social welfare programs • Analysis critical

– Tax credit to employers • New hires

GOVERNMENT POLICY ANALYTICS

• TRAINING PROGRAMS

– Government financed training offers significant benefits

– Job opportunity provides for worker willingness to pay for training

GOVERNMENT POLICY ANALYTICS

• TRAINING PROGRAMS

– Continuing education programs – Job specific training– Virtual training programs available

GOVERNMENT POLICY ANALYTICS

• EMPLOYMENT CREDITS

– Benefits most• Low skilled workers

– Increased wages– Reduces unemployment duration

GOVERNMENT POLICY ANALYTICS

• EMPLOYMENT CREDITS

– Takes multiple forms • Assistance job/worker matching• Tax credits• Government financed training• Others

GOVERNMENT REGULATION ANALYTICS

• MINIMUM WAGES

–Work force • Stability

– Entry level positions– Economic • Stability

–Must balance • Competitive markets

GOVERNMENT REGULATION ANALYTICS

• MINIMUM WAGES

• Hours worked • Wage setting mechanisms• Job security provisions• Combating poverty and social exclusion• Real earnings extend life expectancy

GOVERNMENT REGULATION ANALYTICS

• CAPITAL MOVEMENT

– Rapid capital movement across borders• Increases risk

– Labor income

• Reduces risk– Capital income

• Domestic unemployment– Amplifies negative impact

GOVERNMENT REGULATION ANALYTICS

• CAPITAL MOVEMENT

– Rapid capital movement across borders

• Variance of unemployment with perfect mobility – Can be 3x variance without perfect mobility

GOVERNMENT REGULATION ANALYTICS

• HUMAN CAPITAL

– Labor market structure critical • Creation human capital• Quality human capital created

– Economic growth and development• Critical understand development human capital

TOTAL POPULATIONPOPULATION DENSITY

YEARS WORKEDGENDER

AGEEXPERIENCE/WAGES

EDUCATIONJOBLESS/JOBS

IMPORTANCE POPULATION DEMOGRAPHICS

POPULATION DEMOGRAPHICS

• TOTAL POPULATION

– Positive effect mean wage– Skilled workforce attracts investments– Life expectancy critical issue– Fertility rate important

POPULATION DEMOGRAPHICS

• POPULATION DENSITY

– High labor heterogeneity • Attracts jobs

– Labor pooling metropolitan areas • Important

– Labor growth • Increases with concentration highly skilled

POPULATION DEMOGRAPHICS

• POPULATION DENSITY

– Greater growth • Concentrated trained/experienced work force

– Critical mass skilled workers• Attracts investment and job creation

POPULATION DEMOGRAPHICS

• YEARS WORKED

– Higher wages • Increase life expectancy

– Increased life expectancy • Increased work life

– Early retirement • No greater job creation

– Higher earnings • Prompts early retirement

POPULATION DEMOGRAPHICS

• GENDER

–Women • Tend to live longer than men

– High earners • Both genders tend to live longer

– Demographic analysis for redistributive programs and policies important

POPULATION DEMOGRAPHICS

• AGE

– Fertility/death rates– Age demographics– Job entry – Early/delayed retirement

POPULATION DEMOGRAPHICS

• EXPERIENCE/WAGES

• Experience and increased wages• Job separation decreases work experience• Employee productivity reduces job loss

POPULATION DEMOGRAPHICS

• EDUCATION

– Critical• Development skills • Job training

– Skilled workforce • Attracts investment• Increases job formation

POPULATION DEMOGRAPHICS

• EDUCATION

– Increase job availability and income • Concentration trained/experienced workforce

– Skilled labor pool • More important for company relocation than large

market

POPULATION DEMOGRAPHICS

• JOBLESS/JOBS

– Technology• Creates/destroys jobs

– Improved productivity • Creates/destroys jobs

– Labor pooling • Critical to new job formation

POPULATION DEMOGRAPHICS

• JOBLESS/JOBS

– High UI benefits • Reduces job creation• Prolongs unemployment duration

– Employment/training subsidies • Greater job creation • Greater earned income

UNEMPLOYMENTPRIVATE EMPLOYMENT

GOVERNMENT EMPLOYMENTPRODUCTIVITY/WAGE DISPERSION

IMPORTANCE EMPLOYMENT/UNEMPLOYMENT

ANALYCTICS

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• Unemployment

– Search model • “Time” required to find a job

– Nobel Prize model:• Reallocating labor

– From less – To more productive

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• UNEMPLOYMENT

– Differentials in unemployment correspond:• Unemployment Insurance • Wage determination mechanisms• Active labor market policies

– Unemployment and jobs subsidy policies:• Account for 91% variation unemployment averages

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• UNEMPLOYMENT • Cross-country unemployment rates;– Correspond with unemployment insurance

benefits– Collective bargaining coverage

• Increased termination costs:– Increase unemployment – Reduce job formation

• Job formation:– Increases with appropriate government regulations

and policies

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• PRIVATE EMPLOYMENT

–Metropolitan labor pool• Important for agglomeration

– Critical mass skilled labor• Increases job creation

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• PRIVATE EMPLOYMENT

– Critical mass skilled workforce • Robust results for technological diverse jobs

– Creating a new job • Requires contemplation future job destruction

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• PRIVATE EMPLOYMENT

– New companies/jobs impacted by:• Legal rules and regulations• Finance availability • Bankruptcy provisions • Taxation

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• PRIVATE EMPLOYMENT

– New companies/jobs impacted by:• Unemployment insurance requirements• Labor contracts• Health and safety• Retirement plans and requirements

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• GOVERNMENT EMPLOYMENT (Utilizing MENA Analytics)

–Most important: • Lack analytics and data

– Government and public sector• Largest employers

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• GOVERNMENT EMPLOYMENT (Utilizing MENA Analytics)

– Low productivity exacerbated:• Resulting from over-staffing

– Under-utilized labor:• Greatest in oil exporting countries

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• GOVERNMENT EMPLOYMENT (Utilizing MENA Analytics)

– Low productivity exacerbated:• Due to increased overstaffing

– Under-utilized labor:• Greatest in oil exporting countries

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• GOVERNMENT EMPLOYMENT (Utilizing MENA Analytics)

– Entrepreneurs find:• Lack of skilled labor for jobs available• Despite high unemployment

– High public wages • Discourage private sector growth

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• GOVERNMENT EMPLOYMENT (Utilizing MENA Analytics)

– Legal regulations for labor codify• Standards at work• Minimum wages • Limit employer powers

– Government and public sector employment• Contributes little to economic expansion

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• PRODUCTIVITY/WAGE DISPERSION

– New jobs • More productive

– Efficiency gains• Implicitly reduce employment

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• PRODUCTIVITY/WAGE DISPERSION

– Less advanced economies workforce• Based on less productive work skills

– Firm productivity differentials • Generate wage differentials

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• PRODUCTIVITY/WAGE DISPERSION

– Productivity differentials across firms• Large and persistent

–Wage dispersion • Increases hire yield• Reduces quit rate for employed workers

EMPLOYMENT/UNEMPLOYMENT ANALYCTICS

• PRODUCTIVITY/WAGE DISPERSION

–Workers • Seek higher paying positions

– Reallocation • From less to more productive employers• Generate efficiency gains

POLICY CONSIDERATIONSUNEMPLOYMENT INSURANCE

HEALTH INSURANCERETIREMENT BENEFITS

SURVIVOR BENEFITSWIDOWS

MINOR CHILDREN

IMPORTANCE SOCIAL WELFARE ANALYTICS

SOCIAL WELFARE ANALYTICS

• POLICY CONSIDERATIONS

– Increase social cohesion and equality– Relevant benefits:• Poverty reduction• Income distribution• Functioning labor market• Achieve more equitable distribution• Regulation of economic relations

SOCIAL WELFARE ANALYTICS

• POLICY CONSIDERATIONS

– Social policy instrument classifications• Combating

– Social exclusion

• Reducing – Overall inequality

• Increase rewards– Labor market participation

SOCIAL WELFARE ANALYTICS

• POLICY CONSIDERATIONS

• Unemployment benefits– Important component social benefits

• Sickness and health care coverage– Important component social benefits

SOCIAL WELFARE ANALYTICS

• POLICY CONSIDERATIONS

– Subsistence guarantees• Regardless of current or past employment

– Retirement and old age programs• Establish• Regulate• Maintain • Supervise

SOCIAL WELFARE ANALYTICS

• UNEMPLOYMENT INSURANCE

– Unskilled labor • Large impact

– Unemployment variations• 91%

– Job creation • Important disincentive

SOCIAL WELFARE ANALYTICS

• UNEMPLOYMENT INSURANCE

– Contributes• TO duration • Incidence of unemployment

– Increased unemployment benefits • Increases value of unemployment insurance option to

unemployed

SOCIAL WELFARE ANALYTICS

• HEALTH INSURANCE

– Primary goal: • Insure population against “social risks”

– Analysis should be framed in:• “Second best” context for planning

SOCIAL WELFARE ANALYTICS

• RETIREMENT BENEFITS

– Pension plans• Mandatory vs. voluntary

–Modern economies• Workers required to pay into benefit programs

• Require strong government – Regulation– Supervision– Oversight

SOCIAL WELFARE ANALYTICS

• RETIREMENT BENEFITS

– Variety of policy and planning choices• Provides for customization for local requirements

– Analyze pension system• As a whole

– Analysis should • BE framed in “second best” context

SOCIAL WELFARE ANALYTICS

• RETIREMENT BENEFITS PLANNING

• Life expectancy – Increased

• Pension systems • Multiple objectives

SOCIAL WELFARE ANALYTICS

• SUVIVOR BENEFITS

– Economic stability • Requires such programs

– Social policies • Vary by country

– Economic development • Breaks apart traditional support mechanisms

SOCIAL WELFARE ANALYTICS

• WIDOWS

– Policy and regulatory dynamics • Critical concern

– Provide for • Enjoyment of life

– Reduce• Inequality

SOCIAL WELFARE ANALYTICS

• WIDOWS

– Combating • Social exclusion

– Increase• Labor market participation rewards

SOCIAL WELFARE ANALYTICS

• MINOR CHILDREN

– Policy and regulatory dynamics• Critical concern

– Provide for• Enjoyment of life

– Reduce• Inequality

SOCIAL WELFARE ANALYTICS

• MINOR CHILDREN

– Combat • Social exclusion

– Increase • Labor market participation rewards

– Provide and protect• Future workforce participants

THE FOLLOWING PAGES REVIEWEMPLOYEE/EMPLOYER

HEALTH AND SAFETYANALYTICS FOR CONSIDERATION

LABOR HEALTH AND SAFETY ANALYTICS

OSHA Provides useful model

forPolicy and Planning

SAFETY AND HEALTH IN THE WORK PLACE

• Job opportunities in a “safe” workplace– Poses challenges• Legal• Economic• Moral

SAFETY AND HEALTH AT THE WORK PLACE

• Some approaches improve job creation; – Legislation – Regulation – Enforcement of safety and health in the work place

• STRATEGICALLY IMPORTANT

POLICY CONSIDERATIONS

• SHOULD SAUDI ARABI ADDRESS

–Work place • Insure employee safety• Insure free of hazards

– Employee protection • When complaints filed • Unsafe work place • And/or hazards

POLICY CONSIDERATIONS

• SHOULD SAUDI ARABI ADDRESS

• Workplace inspections by MOL• Establish inspector qualifications • “Hot line” for complaints

POLICY CONSIDERATIONS

• SHOULD SAUDI ARABI IMPLEMENT

– Strict penalties • Safety/hazard violations • How to structure penalties

POLICY CONSIDERATIONS

• SHOULD SAUDI ARABIA MOL

– Maintain public records • Inspections • Violations

• Define job safety/hazards

POLICY CONSIDERATIONS

• HOW SHOULD SAUDI ARABI MOL

– Propagate definitions– Select laboratories to conduct analysis

• Safety/hazardous compounds • Chemicals• Others

POLICY CONSIDERATIONS

• SHOULD SAUDI ARABI ADDRESS

– Health and safety injuries • How to be reported• Should reported injuries be made public

– Natural disasters/pandemics• Policies to protect employees

– Health – Safety

POLICY CONSIDERATIONS

• SHOULD SAUDI ARABIA

– Develop/implement • Environmental standards • Working condition standards

–MOL take employee surveys

POLICY CONSIDERATIONS

• SHOULD MOL DEVELOP REGULATIONS – Cover injured workers– Cover handicapped/disabled workers–What should be role of MOL towards: • Handicapped/disabled workers• Fair employment practices• Employee safety training programs

SUMMARY

• UNEMPLOYMENT

– Increases • From technological improvements• From productivity improvements• From social benefit program requirements• With unemployment insurance coverage• With union/organized labor• With regulatory complexity

SUMMARY

• NEW JOB CREATION POLICIES

– Employer hiring subsidies– Employer/employee training • Subsidies • Programs

– Concentration trained/skilled workforce– Favorable government regulations– Stable social/political systems

SUMMARY

• SOCIAL PROGRAMS

– Job creation/destruction consequences• Unemployment insurance• Retirement programs• Health benefit programs• Job security programs• Minimum wage• Minimum/maximum work hours• Taxation benefits/consequences

SUMMARY

• GOVERNMENT/PUBLIC SECTOR

–Oil exporting countries• Highest in world

– Little/no contribution to growth– Under-employed– Low productivity– Low job satisfaction

SUMMARY

• ANALYTIC DEVELOPMENT

– Transparency of analysis– Critical • Policy formation • Regulatory planning• Economic growth• Economic diversification

SUMARY• RISK

– Risk management of complex economic and social challenges requires careful collection and study of the wide variety and scope of policy and regulatory analytics described and outlined in this presentation.

– The information in this presentation has been drawn from the writings of the 2010 Economic Sciences Nobel Laureates.

CONCLUSIONSAND

RECOMMENDATIONS

• The economic theories examined for this presentation provide foundation for policy formation for sustainable economic growth.

• The creation of analytics and collection of data is critical to provide analytical capabilities to evaluate the strength of the economy.

• The development of such programs will provide for enhanced transparency and understanding.

CONCLUSIONSAND

RECOMMENDATIONS

• TRAINING –Workplace skills of great import– Provides benefit to economy and job creation – Provide rapid return to employment market

CONCLUSIONSAND

RECOMMENDATIONS • DEVELOPMENT

– Critically important all Saudi ministries • Create, Establish, and Utilize Integrated

– Policies– Regulations – Implementation schedules

• Secure stronger and more diversified economy