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4. POLICY IMPLICATIONS AND REQUIREMENTS

The demographic scenarios presented in section 3 investigate the magnitude of a potential measure to compensate for population aging and negative labour force growth in the North. While each of the broad policy approaches—higher fertility rate, higher labour force participation, and larger migratory inflows—may partially or even fully help to stabilize the labour force in the North, the actual policy measures with which to achieve such changes may not be available, effective or efficient, or may create problems of their own. This section sketches some of the key policy issues, including the identification of some important questions for future policy research.

4.1. What can governments do to increase the fertility rate of a country?

Two sets of public instruments are typically evoked to foster a fertility decision: offer direct monetary or real transfers and reduce the opportunity costs of female labour force participation. A third set of measures seems to be the pet of only a few academics and politicians: reduce the negative fertility effects of existing social programs, in particular, pension schemes.

Provide transfers in cash or kind. A number of countries provide monetary transfers to families with children for reasons of income support, pro-natal considerations, or both. Such transfers include birth premiums, parental leave, family allowances that are sometimes differentiated by the number of children and housing allowances or preferential access to housing. The empirical evidence of such transfers indicates a low to moderate degree of effectiveness, if any (see Bjoerklund, 2002; Drago, Scutella, and Verner, 2002 and Neyer, 2003). There seems to be broad agreement that such transfers may influence the timing and spacing of children. But the long-run effects on the total fertility rate of mere transfers on their own seem to be very small. Such a result should come as no surprise because the present value of such transfers is dwarfed by the direct costs and by the opportunity costs of raising children.

Reduce the opportunity costs of female labour force participation. The limited effectiveness of traditional pro-natal instruments and the wish of many well-educated women to manage both a professional career and a family have focused attention on appropriate policy actions. The main set of measures concerns the access of families with children to day care centers (crèches, kindergarten, full-day schools) or simply the availability of nannies or live-in maids at reasonable prices and non-intrusive administrative procedures. Here government actions can be very supportive and apparently equally effective if done via budget expenditures (Sweden) or market mechanisms (the United States), as both countries have a total fertility rate of similar magnitude (see Caldwell, Caldwell and McDonald, 2005).

Reduce distortions in the fertility decision. There is a long-standing fear that a pay-as-you-go pension system introduces distortions in the fertility decisions of families. Indeed, there are good reasons to believe the pay-as-you-go system induces a moral hazard effect and reduces individual incentives to invest in human capital (see Sinn 2004 and Meier and Wrede 2005). The old-age benefit is fixed at the individual level, often scarcely linked to one’s own financial contribution and certainly independent of whether one has any children at all. Therefore, individuals have little incentive to take such contributions into account when making fertility decisions and the incentive to form a family is affected by the implicit subsidy that defined benefits provide to single (childless) households. The empirical evidence seems to support the conjecture that public pension schemes have a negative impact on fertility rates. But while the effects seem to be statistically significant, the magnitude is small. For example, reducing the contribution rate in pay-as-you-go schemes by 25 percent would increase the worldwide fertility rate by 0.1 percentage point, say, from 2.2 to 2.3 percent (Ehrlich and Kim 2003).

4.2 How can governments support an increase in the labour force participation rate?

An increase in labour force participation can be affected at three levels: raising the labour force participation of women closer to that of men, raising labour force participation for all workers, and raising the labour force participation of elderly workers.

Increase female labour force participation. Reconciling work and family by increasing female labour force participation is closely linked to the policy measures discussed above. More basically, female labour force participation is closely linked to the education level and the incentives and aspirations of women to use their educational achievements. A successful inclusion in the labour market, however, contributes to a delay in the age of first birth. In many OECD countries, a substantial and increasing share of women (20 percent and more) are having their first child at the age of 40 and older, reducing the total number of children per woman.

Increase the labour force participation rate overall. The overall increase in the labour force participation rate is linked to the performance of the labour market and its capacity to handle the challenges and opportunities of globalization. Worldwide and also in OECD economies, there is a fear that globalization leads to job losses and lower wages. Unemployment remains stubbornly high in many countries in Europe & Russia, job creation is high on the agenda of China (with some 200-300 million internal migrant workers), and essentially all countries are concerned about the level of and increase in youth unemployment (for more on this see OECD, 2004c and Card, 2005, Boeri
and Bruecker 2005).

Increase the labour force participation of the elderly. Increasing the labour force participation of the elderly is high on the agenda of all countries as a means to deal with the issue of how to finance the pension schemes. As a necessary condition, this requires reforms of the pension system to make a postponement of retirement more attractive or simply to increase the minimum retirement age. In addition, however, employers must have an incentive to keep or hire elderly workers, which requires changes in the wage profile and rethinking the contractual arrangements between trade unions and employers (see Drinkwater and others, 2003; Commander, Kangasniemi, and Winters, 2003).

4.3. What can governments do to accommodate immigration flows to mutual advantage?

Filling labour force gaps in rich countries through migration seems to be an easy task in view of the excess supply of willing migrants from the developing world. Yet sentiments against migrants, especially in countries that have not traditionally received a large number of immigrants, and the discussion about the best approaches to integration indicate that the absorption of migrants into society is not easy. Is it possible to call for workers alone, or is it necessary to prepare future citizens? Is a short-term guest-worker concept feasible in view of the gross number of immigrants required? In addition, many other policy areas need to be addressed. The three addressed here often receive insufficient attention.

Adjust the economic environment. Large-scale immigration over a long period of time is like a sequence of supply shocks to which the economy needs to adjust. As with other shocks, it is best absorbed in an economy with sufficient flexibility, including flexibility in the markets for goods, services, and factors of production. Public management and support of migration flows are needed and important, but they cannot substitute for private initiative.

Such an approach seems to be successfully applied in the traditional recipients of immigration, such as the United States, Canada, and Australia. For example Card (2005) suggests that immigrants do not harm the labour market opportunities of native workers. This more positive assessment about the impact of migration is in line with other more recent as well as older research results. Boeri and Bruecker (2005) claim that the resistance of EU countries against migration is the result distorted labour markets. Under such settings their argument goes migration may entail significant direct and indirect costs. If correct, this would call for a fundamental review and adjustment of the economic environment in many nontraditional recipients of immigration (in Europe and elsewhere) before further large-scale immigration is envisaged.

Manage the skill mix. The net benefits of migration and their distributive effects between and within countries depend on the skill composition of migrants as well as of the labour force in the sending and receiving countries (see Drinkwater and others, 2003); Commander, Kangasniemi, and Winters, 2003; Borjas 1999). Selecting migrants with appropriate skills creates benefits for the receiving country but risks hurting the sending country. The experience in migrant-receiving countries suggests that they substantially underutilize the skill level of their migrants due to information problems and uncertainties about the value of skills, including academic training, received abroad (Reitz 2005).

Improve the portability of social benefits. For a variety of reasons, a substantial share of migrants returns to their home country after years of work abroad. And governments of host and source countries may wish to encourage return migration for various reasons. Governments of migrant-receiving countries may support return migration to stress the temporary nature of immigration for political reasons. Currently such decisions by migrants are very much distorted by lacking or incomplete portability of social benefits, in particular pensions and health care (Holzmann, Koettl, and Chernetsky 2005). As a result, many migrants do not return to their home country because they do not want to lose their access to social programs, or they prefer to work in the informal sector in order to avoid contributing to these programs, payments that become, in essence, a mere tax.