Tuesday, July 29, 2014
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The Next Social Contract

PARIS – Around the world nowadays, persistent unemployment, skill mismatches, and retirement frameworks have become central to fiscal policy – and to the often-fierce political debates that surround it. The advanced countries are facing an immediate “aging” problem, but most of the emerging economies are also in the midst of a demographic transition that will result in an age structure similar to that of the advanced economies – that is, an inverted pyramid – in just two or three decades. Indeed, China will get there much sooner.

Multiple problems affect employment. Weak demand in the aftermath of the global financial crisis that began in 2008 remains a key factor in Europe, the United States, and Japan. But longer-term structural issues are weighing down labor markets as well.

Most important, globalization results in a continuous shift of comparative advantage, creating serious adjustment problems as employment created in new activities does not necessarily compensate for the loss of jobs in old ones. In any case, most new jobs require different skills, implying that workers losing their jobs in dying industries have little hope of finding another one.

Moreover, technological progress is becoming ever more “labor-saving,” with computers and robots replacing human workers in settings ranging from supermarkets to automobile assembly lines. Given the volatile macroeconomic outlook, many firms are reluctant to hire new workers, leading to high youth unemployment throughout the world.

At the same time, aging – and the associated cost of health care for the elderly – constitutes the main fiscal challenge in maturing societies. By the middle of this century, life expectancy at age 60 will have risen by about ten years relative to the post-World War II period, when current retirement ages were fixed.

Marginal changes to existing arrangements are unlikely to be sufficient to respond to technological forces, reduce social tensions and young people’s fears, or address growing fiscal burdens. A radical reassessment of work, skill formation, retirement, and leisure is needed, with several principles forming the core of any comprehensive reform.

For starters, skill formation and development must become a life-long process, starting with formal schooling, but continuing through on-the-job training and intervals of full-time education at different points in life. Special youth insertion programs should become a normal part of public support for employment and career formation, with exemption from social-security contributions for the first one or two years of employment.

A second principle is that retirement should be a gradual process. People could work an average of 1,800-2,000 hours per year until they reach their 50’s, taper off to 1,300-1,500 hours in their early 60’s, and move toward the 500-1,000 range as they approach 70. A hospital nurse, an airplane crew member, or a secondary-school teacher, for example, could work five days a week until her late fifties, four days a week until age 62, three days until age 65, and perhaps two days until age 70.

Employers and workers should negotiate such flexibility, but they should do so with incentives and financial support from government – for example, variable social-security and income taxes. Paid holidays can be 3-4 weeks until age 45, gradually increasing to 7-8 weeks in one’s late 60’s. Maternity and paternity leave should be increased where it is low, such as in the United States.

Public policies should also encourage greater scope for individual choice. For example, every ten years, a worker should be able to engage in a year of formal learning, with one-third of the cost paid by the employer, one-third by public funds, and one-third by personal savings (these proportions could vary by income bracket).

The overall objective should be a society in which, health permitting, citizens work and pay taxes until close to the age of 70, but less intensively with advancing age and in a flexible manner that reflects individual circumstances. In fact, gradual and flexible retirement would in many cases benefit not only employers and governments, but also workers themselves, because continued occupational engagement is often a source of personal satisfaction and emotionally enriching social interaction.

Using the Gallup World Poll, my colleagues at the Brookings Institution in Washington, DC, Carol Graham and Milena Nikolova, have found that the happiest cohorts are those who work part-time voluntarily. In exchange for longer work lives, citizens would have more time for both leisure and skill formation throughout their lives, with positive effects on productivity and life satisfaction.

The new social contract for the first half of the twenty-first century must be one that combines fiscal realism, significant room for individual preferences, and strong social solidarity and protection against shocks stemming from personal circumstances or a volatile economy. Many countries are taking steps in this direction. They are too timid. We need a comprehensive and revolutionary reframing of education, work, retirement, and leisure time.

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  1. CommentedZsolt Hermann

    The purpose of life is achieving happiness, contentment.
    Contentment is fulfilling empty desires, yearnings, more precisely satisfying necessities.
    Unhappiness is when people are unable to satisfy their necessities, desires.
    The greatest problem humanity is facing, and the reason why we are unable to satisfy our necessities and remain unhappy is that we are unable to define what our true necessities are.
    If I knew what I truly need and I could effortlessly satisfy that need, I would have the chance of sustainable happiness.
    But today humanity is living in a completely unnatural, artificial bubble.
    Newer and newer desires, temptations, attraction are popping up everywhere, through the mass media we are constantly bombarded with "must haves", "you deserve this, you deserve that", there is an unbearable social pressure to keep up with the others, people work more, earn more, spend more than ever before, but they are feeling more empty, more unsatisfied, and are more depressed and indebted than ever before.
    As we proudly disconnected from the natural system, claiming we were above it, we created this "endless, consumerism Matrix" and became slaves to it.
    And on top of it now it seems the whole system is self-destructing.
    But this self-destruction could actually become our freedom from slavery.
    The only question is what we do with this freedom, what kind of a new society we build on the ruins of the present one.
    In today's global, integral human society we need a system that is mutually responsible and complementing.
    We need a system where each and every human being know its own worth, role, normal, natural necessities and can find the way of effortlessly fulfilling them.
    We need a global, integral education program that can teach people how this integral system works, what its laws and principles are and how human beings can adapt to it in a free, positively motivated way.
    The new social contract has to be a global, mutual, systematic one, equally and willingly signed by all participants.

  2. CommentedA El

    The given example is hard to envision as job duration, especially in the States, tends to be quite short. According to the BLS: "of the jobs that workers began when they were 18 to 24 years of age, 69 percent ended in less than a year and 93 percent ended in less than 5 years." Given this dynamism in the labor market, what is another policy measure that can "encourage greater scope for individual choise"?

  3. CommentedAngela Lusigi

    I think Kemal has raised critical issues for the new Social Contract. I'm reading this with the understanding that skewed towards instances where the majority of the population is ageing. However, there is much to learn and plan for in countries with younger populations. In their situation however, the elements of the social contract that emphasise lifelong education are critical. In addition, the mechanisms for delivering this continuos retooling through closer public-private partnership with a focus on quality and equity in opportunity and outcome is critical.

  4. CommentedFrank O'Callaghan

    Kemal Derviş makes an important point about the relationship between work, leisure and life expectancy. There is another issue that must also be considered; inequality. The great inequality of power in the "advanced" countries between the wealthy and the rest is the single most important issue in the economic world.

    These apparently separate issues are in fact tightly coupled. Some working class are time poor but not in severe material poverty while others of the same class are in severe material deprivation but have free time due to unemployment. These are both inefficiencies. The only reason for this is to maintain unnecessary poverty.

    The great question is how we will solve this unsustainable situation.

  5. CommentedRené Costa

    Social contracts is the solution. Yet, quid of countries where social pressure succeeds in having full pension at age 62? Likewise, vocational training is s must in all countries. Yet, integration of marginal population in largest urban areas in Europe, e.g., through Schools of the Second Chance, has proven to be quite expensive and has not been pursued on a large scale.

  6. CommentedAndré Fonteyne

    This is one of the best articles I have read recently.
    We absolutely need to apply arrangements of this kind.
    But not only to make it easier to work until your 70s but also to make it easier to start working earlier. If skills become obsolete so quickly, why stay in college until you are 25 without any work experience? The German system of apprenticeship clearly had advantages.

  7. CommentedJ St. Clair

    seems to me you are primarily talking about the government sector of the economy.....

      CommentedMoritz G€d1g

      You are right. Dervis is right in his analysis and the consequence but I see no way how to realize any of it.
      Companies want employees that work at least 40 h per week. Who are always available and so on. They don't want senile, weak, fat people who work 30 h per week. Let us be honest about aging: yes we become older but that mostly means that we are longer old and sick, not that we are longer young and healthy.
      The problem of an unemployed youth is transient. There will be plenty of work in 10 years, but many of the then elderly will not be able to pay for their needs.