Putting people at the centre of the investment decision: Implications for Private Pensions

Pensions Outlook 2014Gökhan Kula (MYRA Capital) and Markus Schuller (Panthera Solutions)

Ladies and gentlemen, let us be clear: as a society we are increasingly attracted to simplistic solutions, be it in the form of religious denominations or through the populist promises of salvation of parties on the right and left margins. Now, we could also utilise this escape route in the financial industry we work in, on the grounds that simplification has been accepted in other areas of society. But not so fast. Our position and status as well-educated, well-paid and (often) with high self-esteem brings responsibilities with it. We must not surrender to the call of simplistic answers. How then does our industry transcend the simplistic?

On what is feasible

The passionate debate on efficient markets and rational investors is no longer needed. It has been decided. Markets are not efficient, nor are investors rational (see On Market Efficiency). On the other hand, markets are not completely inefficient, but adaptive. People are not completely irrational, but oscillate between emotion and reason (see Unethical Asset Allocation Methods).

What remains the biggest obstacle in regards to change management is changing the behavioural patterns of employees along the investment process.

Does the employee have to be at the centre of the process in order to get closer to the knowledge boundary in asset allocation? Are high frequency trading and RoboAdvisors not evidence enough that humans may not have to play a role in the investment process? Slow down. All quantitative methods and algorithms are based on assumptions of market patterns and how these can be made utilisable as best as possible. Who decides on the assumptions? That’s right, the human developers. In order to lead investment methods closer to the knowledge boundary of asset allocation, this only leaves the focus on the investment team and the investment process it experiences.

What is feasible now? In one sentence: “More conscious and therefore rational investment decisions by means of proactive management of cognitive dissonances and an analysis focus on causality instead of correlation in regards to understanding market correlations create a higher probability of anti-cycles in the investment process.” (Schuller).

If you were searching for the Holy Grail, you have now found it.

Innovation & Asset Allocation

The asset management industry is currently being attacked on two fronts. Regulators increasingly see a systemic risk in asset managers and are trying to implement regulatory measures in order ensure a better handling; and Fintechs are questioning inherent business models and are increasing the margin pressure.

Other industries are already demonstrating the two solutions for this increasing limitation of room for manoeuvre. The temporary solution is economies of scale. This is already the case in our industry. There are regulatory and organisational constraints in regards to the oligopolisation of industries. It is only a temporary solution.

The sustainable solution is specialisation. Competitive advantages by means of specialisation can be won through innovation. This is the only sustainable solution.

In our industry, innovations are rare. Innovation means a shifting of the knowledge boundary on asset allocation, a measurable improvement of the service provisions of corporate finance compared to the real economy. The innovative ability and motivation of the investment teams (investment committee, foundation chairpersons, family office managers etc.) therefore comes into focus. The sustainable competitive ability of an investment process stands and falls with the investment team. Let us refer to them as high performance investment teams (HPIT) to uqse Panthera’s terminology.

Reducing behaviour gaps

Creating a concept is one thing, establishing and managing HPIT is another. There are a number of well-tested starting points, including skin in the game–based incentive systems, transparent governance structures, and quantifiable, transparent performance measurements. But here we’d like to concentrate on reducing the behaviour gap.

The “behaviour gap” has been sufficiently researched and quantified from an academic point of view. A result of the pro-cyclic behaviour of market participants, explained by emotional and wrong decisions. It is self-explanatory that this structural underperformance leads to significantly reduced returns for investors over time compared to buy-and-hold.

Bogle

(Source: Vanguard, Bogle Financial Markets Research, Dalbar)

Although Bogle is mainly highlighting the cost penalty, his research shows the even larger potential for improvement when it comes to minimizing the timing and selection penalty. For reductions of selection penalties, we refer to our initial point, namely the necessity of high performance investment teams.

Implications for private pensions (Third pillar of pensions)

Within ongoing demographic change, a significant shift in pension policies can be observed. Private pensions (the “third pillar”) become increasingly important to close the pension gap, opened by the pillars 1 and 2 (state and employer plans). This puts European trustees in the difficult position of becoming long-term investors for their own private pension plan, with all the difficulties like selecting the right asset allocation and investment vehicles – and the right insurance company. Our trustee should keep three concrete facts in mind:

  1. Costs matter. In a secular low yield environment, each basis point in fees is spent unnecessarily. A focus on passive replication is recommended. If active management fees are justified, the investment products used within the private pension plan should be institutional share classes without distribution costs.
  2. By incorporating strategies based on the body of knowledge led by behavioural asset management, a higher emphasis of rule-based investment processes and dynamic asset allocation strategies could be a way to structurally increase equity allocations in private pension plans. Structurally higher equity allocation will transform mid- to long-term to higher expected returns for private pension trustees, which can alleviate the expected drag of the other main pension pillars due to demographic change.
  3. Insurance companies offer to pre-select and perform due diligence on investment products. Trustees then select from this shortlist, trying to assemble a feasible asset allocation for their pension plan. How can our thoughts on HPIT be of relevance for insurance companies? During an insurance company’s due diligence process of selecting investment products for private pension plans, it should only consider those with a stringent rule-based investment process committed to high performance investment teams. Like that, the whole investment industry would be forced to focus more on the most important risk and performance driver, namely the man at the centre of the investment decision.

Useful links

OECD work on insurance and pensions

Breaking down the silo: connecting education to world trends

Now connect to world trends
Now connect to world trends

Tracey Burns, OECD Directorate for Education and Skills

Did you ever wonder if education has a role to play in stemming the obesity epidemic sweeping across all OECD countries? Or what the impact of increasing urbanisation might be on our schools, families, and communities? Or whether new technologies really are fundamentally changing the way our children think and learn? If so, you’re not alone.

The OECD’s work on Trends Shaping Education stimulates reflection on the challenges facing education by providing an overview of key economic, social, demographic and technological trends. It has been used by ministries to guide strategic thinking and in Parliaments as a strategic foresight tool. It’s also part of the curriculum in teacher education colleges, and is a resource for teachers when designing courses and lectures, as well as parents and students themselves.

The fourth edition of the book will be launched in January 2016. Two weeks ago, the Trends team travelled to Brussels to hold an expert workshop with researchers in a number of domains, including demography, governance, urban design, new technologies, climate change, financial literacy, small and medium enterprises, children and families, and banking.

Why take the time to meet face-to-face with these experts? To be honest we weren’t sure that it would yield any results. Researchers have many demands on their time, and it is not often that they are given a chance to look beyond their own particular speciality to think more holistically about global trends. Sometimes, though, it is by bringing people together unexpectedly that the best ideas emerge.

Will robots replace our teaching force in 10 years? In 20 years? Will new fertility technologies allow for designer babies (and, in parallel, “rejects” that did not turn out as expected)? Will online relationships rival or replace our friendship groups? What might this mean for families, and schools? These ideas might seem radical, but the trends behind them are supported by science. And while they are still speculative, there are a number of trends that could have an impact on education, if not today, then tomorrow or the next day. And yet most of our education systems still do not address them.

For example, climate change trends make it clear that across OECD countries we can expect to experience more and more extreme weather events. In most of our countries, the effects will be felt most acutely in cities, where the density of the population and ageing infrastructure (roads and services, such as water, electricity and plumbing) makes us especially vulnerable. If you combine this with worries about the emergence of new epidemics (MERS in Korea is just the latest example) and our ageing populations, a cautious city planner has reason for concern. And not just hypothetical reasons, either. Recent flooding in New York and other major cities has revealed the weakness of many of our emergency-response services.

So what does this have to do with education? Good question. In the short term, communities need to have a plan to educate their populations on what to do (and not do) in the event of a major storm or other extreme weather event such as drought or fires. In the medium and long term, we need to develop school infrastructure and transport that are designed to provide safe access for our students. Hoping it won’t happen is not a sustainable plan – certainly not for the communities that have already experienced an extreme weather event or those that are forecast to do so in the near future.

This is just one example. Important trends to keep an eye on range from the macro level (increasing globalisation and migration) all the way through national and regional labour markets, urban planning, and our changing demography and family structures. How can education support our ageing populations – currently one of the major demographic preoccupations for most OECD governments – to stay active and healthy well past retirement? Will cities keep growing at increasing speeds, or will we continue to see the decline of mid-size cities, such as Detroit (USA) and Busan (Korea)? What about new technologies in the classroom, will they change the way we teach and learn? Perhaps even our concept of what a classroom is?

In September, we plan to hold a second workshop in order to discuss how the trends we have identified might interact with education in the short and medium term. Stay tuned to find out how that goes, and to get a sneak peek between the covers of the next Trends Shaping Education volume, due out in January next year.

Useful links

OECD work on innovation in education

The most successful anti-poverty movement in history?

DCR 2013Peter Gregory, Institute of Public Affairs, Melbourne

It is erroneous for the UN to claim that the Millennium Development Goals (MDGs) has been “the most successful anti-poverty movement in history”. The extraordinary reduction in the number of people living in extreme poverty over the last 25 years has been caused by market-led economic growth. We must re-cast foreign aid and charity to reflect this reality.

Between 1990 and 2015 the number of people living in poverty fell from 1.9 billion to 836 million. This drastic improvement is something we should all be ecstatic about. But the UN is incorrect in judging the MDGs as contributing significantly to this extraordinary achievement in its final report into the 15-year goals released a fortnight ago.

According to The Economist, in the first decade of this century, developing countries increased their GDP by 6% per year on average – 1.5 points more than between 1960 and 1990. Since 2000 annual growth in household consumption in developing countries grew by 4.3% per year on average – it grew by only 0.9% annually in the preceding decade.

These gains largely occurred because of market liberalisation which boosted trade between and within countries. In their Economic Freedom of the World report for 2014 the Cato Institute in the US found that global economic freedom has increased significantly since 1980 based on security of property rights, freedom to trade internationally, the rule of law, regulation and other factors. They also found almost without exception, that countries that were more economically free were more prosperous.

An obvious example is China. Throughout the late 70s and early 80s China instituted free market reforms such as opening itself up to trade with the outside world, removing the barriers to private enterprise and allowing agricultural markets to emerge.

These reforms meant that 680 million people have been lifted out of poverty since 1980. Indeed, China accounts for three quarters of the people moving out of poverty over the last three decades. It’s worth noting China has never shown any interest in the MDGs.

But China is not the only one. Growth in other developing countries has lifted 280 million people out of poverty since 2000 according to former World Bank economist Martin Ravallion.

There is a lesson in this for foreign aid and charity. If free markets are lifting so many hundreds of millions of people out of poverty, foreign aid must re-cast its role as enabling poor people to participate in markets.

One way to do this is by enhancing individuals’ economic rights. A prime example are property rights. Hernando de Soto estimates that $US 10 trillion of assets owned by poor people aren’t protected by formal property rights therefore restricting grassroots entrepreneurship. Ensuring that women have the same property and inheritance rights as men would drive economic empowerment and equality for women.

Another crucial economic right is the right to engage in free trade. Bjorn Lomborg estimates that removing the despicable trade barriers that prevent developing nation producers from selling their wares in developed and developing markets would make each person in the developing world on average $US 1000 richer per year by 2030 and lift 160 million people out of extreme poverty.

Furthermore, enhancing economic rights by fighting endemic corruption that cripples entrepreneurship is extremely impactful. As is ending the obtrusive industry policies that are rife in the developing world and crowd out entrepreneurship such as the Pakistani government’s price-setting practices in the country’s wheat sector.

The other way foreign aid can help poor people take part in transformative free markets in a sustainable way is to identify and facilitate the development of markets that are beneficial for the most deprived. For example, the Human Capital Project in Cambodia utilises a unique financing mechanism called personal equity finance which enables impoverished students to pay for university without the risk of a standard bank loan.

Proponents of this type of free market poverty alleviation scheme is what development economist William Easterly calls ‘searchers’ – people who develop market-based local solutions for local problems.

That’s not to say there is no room in global foreign aid for targeted government social programs. Brazil’s Bolsa Familia and Mexico’s Oportunidades are successful conditional cash-transfer schemes that have put a dent in poverty. Furthermore, foreign aid is also helpful during natural disasters.

But the UN must realise that the most successful anti-poverty movement in history is called ‘the free market’ and it’s something that thankfully, most people in the world now participate in every day.

Useful links

People, not governments, will end poverty Peter Gregory

The Missing Foundation of Development: Individual Rights Peter Gregory

OECD Development Co-operation Report 2013: Ending Poverty

Quality of jobs created is vital not just for young people, but for the economy too

EYFMarianna Georgallis, Policy & Advocacy Coordinator at the European Youth Forum

One month ago, all eyes turned to the Greek drama playing out in Europe. It has been a month of fraught negotiations, a shock referendum and a European Union and its leaders put under the spotlight, with European values of solidarity and unity questioned and, some might say, threatened. The focus has been largely on numbers – on the billions needed to avoid a Grexit, on the daily €60 cash withdrawal limit currently in place. But the ultimate reason for the past weeks of drama has not been figures – it has been people. The Greek government’s actions, right or wrong, are attempting to reverse the trend of years of wage cuts, welfare cuts, growing poverty, inequality and dire levels of unemployment. Undercutting all talk of currencies, of bailouts and banks has been the grave social impact of the economic and financial crisis and Europe’s response to it.

The statistics are there and are by now well known. The OECD Employment Outlook 2015, published earlier this month, highlights what has been mentioned in countless political speeches over the past years: Europe is suffering a social crisis. Unemployment rates give the first indication of this: Whereas unemployment has fallen below 6% in the United States and is under 4% in Japan and Korea, in the euro area the unemployment rate remains above 11%. It is clear that Europe is still lagging behind the rest of the world when it comes to employment.

These statistics are higher and more shocking when it comes to young people specifically. The share of young people neither employed nor in education or training, the so-called NEETs, has reached a staggering 40 million across OECD countries – with 27 million of these NEETs totally off the radar – a disappeared mass of young people, registered nowhere.

The enduring effects of this are a serious cause for concern. More than one in three jobseekers in the OECD has been out of work for 12 months or more. Long-term unemployment has serious consequences, ranging from deterioration of skills, lack of confidence which can lead to mental health issues and an impact on the economy through inactivity and costs of welfare provision such as unemployment benefits. However, the new finding of this year’s Employment Outlook is that a person’s long-term career prospects are largely determined in the first ten years of their working life. Long-term spells of unemployment can have an influence well into one’s career in terms of earnings – meaning that upward earnings mobility can be reduced having been long-term unemployed as a young person. This in turn raises income inequality and thus impacts economic growth through, amongst others, perpetuating under-investment and lower aggregate output.

However, it’s not just about having a job. The European Youth Forum has been calling for an end to the ‘any-job-will-do’ approach which has persisted since the onset of the crisis, with no real attempt from European policy-makers to address this. The Outlook shows that youth, alongside low-skilled and informal workers, typically hold the poorest quality jobs. The disproportionate increase of young people on temporary contracts over recent years is not a case of voluntary temporary employment – it is clearly a situation of forced, precarious work. Unpaid internships are a clear example of this – you would be hard pushed to find a young person, fresh out of their studies, willing and happy to work for free for 6 months – yet the 5 million interns in Europe, almost half of whom are unpaid, show that this is unfortunately the current reality.

Quality employment is a right, enshrined in several universal legal frameworks. Unfortunately this has been ignored by too many governments and EU leaders; focusing on job quality is perceived as a drag on job creation. The Employment Outlook disproves this, however, showing that the best performing OECD countries in terms of employment rates are also the ones that have the highest level of job quality. This is why the clear message of the Outlook is that governments must take action to foster stronger employment growth, implementing direct measures to improve workers’ access to productive and rewarding quality jobs.

The European Youth Forum views the new Investment Plan for Europe as an opportunity to do this. If the focus is on investment in quality job creation, particularly in emerging sectors with great potential such as the green economy and ICT, there is hope yet that the social crisis, experienced in Greece but also across the board, can begin to be reversed. Governments need to fulfil their duty of ensuring that all young people are able to access their social and economic rights, in order to achieve independence and autonomy, and thus contribute to a healthy economy and an inclusive society in Europe and the world.

Useful links

Employment Outlook editor Paul Swaim writes about this year’s edition here

OECD work on employment

OECD work on youth employment and unemployment

OECD employment database

Green and growing, or ripe and rotting?

Towards green growthNathalie Girouard, OECD Environment Directorate

In a recent lecture on climate change, the OECD Secretary-General stated that “Tomorrow’s societies engineered around yesterday’s solutions won’t get us there.” The OECD’s work on green growth is just one example of where the Organisation is working towards the development of solutions for today.

The OECD’s 2011 Green Growth Strategy set out a framework for governments to foster economic growth and development, while ensuring that natural assets continue to provide the resources and environmental services necessary for human well-being. To ensure the OECD’s advice on green growth did not become a solution for the past, the Organisation recently prepared the Towards Green Growth? Tracking Progress report. The report takes stock of country experiences and challenges in implementing green growth. It reviews and strengthens the green growth strategy based on the lessons from country efforts, as well as advances in OECD work – including more than 130 green growth publications and over 115 country surveillance reviews containing more than 300 green growth recommendations. Lastly, it assesses the green growth mainstreaming efforts that have been made within the OECD, as these experiences are relevant and instructive for governments and organisations going through the same process. The aim of the report is to accelerate countries’ implementation of green growth policies by providing more targeted and coherent policy advice. In other words, provide relevant solutions that are effective for today’s green growth challenges.

The analysis of country experience shows that countries are making progress, but more work is needed. Thus far, 42 countries have signed on to the OECD’s declaration on green growth. Roughly a third of OECD member countries and a number of OECD partner countries have adapted, or are adopting the Green Growth Strategy’s indicator framework. Examples of green growth policies include China’s 12th 5-year plan on green development, Portugal’s Green Growth Commitment, and Ireland’s framework for sustainable development. Yet to date, no country has comprehensively linked environmental and economic reform priorities. The analysis of the OECD’s green growth recommendations identified that common challenges facing countries relate to the implementation of market instruments to price pollution; orienting tax systems to advance green growth; designing environmentally relevant subsidies; and gearing sectoral policy towards green growth.

This analysis, along with the assessment of OECD’s work on green growth allowed for the development of several key findings and recommendations. First, direct pricing of environmentally harmful activity is indispensable to green growth, but political opposition remains a challenge. To respond to this opposition, more effort is required to tackle the social challenges of reform (e.g., labour market and household impacts). In addition, where constituencies are strongly against tax increases or shifts, governments may need to consider policy mechanisms other than direct pricing.

Misalignments in government policy are also acting as a major hurdle to meaningful reform. Two prominent examples are that governments spend roughly $640 billion per year on environmentally-harmful fossil fuel subsidies and that diesel fuel is taxed at a lower rate than gasoline in 33 out of 34 OECD countries – despite the fact that diesel emits higher levels of harmful local air pollutants and CO2.

The analysis of the mainstreaming process for green growth at the OECD showed that it is proceeding rapidly, but unevenly. Around 70% of OECD country policy surveillance documents contain green growth recommendations. This accomplishment is in part driven by the OECD’s Economic Surveys, where over 80% include green growth recommendations. The elements driving this successful mainstreaming include: high-level leadership and clear accountabilities; formal structures for collaboration; clear articulation of how green growth links to other policy priorities; and dedicated human resources. Nevertheless, more work is needed to better integrate green growth into the OECD’s work on investment and innovation. The forthcoming Green Growth and Sustainable Development Forum on Systems Innovation for Green Growth is one mechanism that can be used to advance work in this important area.

To ensure that the OECD’s green growth strategy remains relevant, the report also outlines a series of improvements. These are intended to modernise the strategy and outline work priorities for governments, the OECD and others. These include enhancing the understanding of complementarities and trade-offs between economic and environmental goals; enhancing public trust in green growth by addressing the social impacts of reform; and ensuring that policies are coherent and aligned within and across sectors. Further developing and considering the ocean economy and mining in gearing sectoral policies for green growth. Lastly, using green growth indicators to raise awareness, measure progress and identify opportunities and risks as well as factoring in the challenges and opportunities that green growth represents for developing and emerging economies.

2015 needs to be a big year for green growth. The Tracking Progress Report is just one of the many contributions to continue to advance work in this field. While governments and international organisations endeavour to green growth through the forthcoming Sustainable Development Goals and the COP21 negotiations, it is important to remember that solutions for today can also come from individuals. As George Eliot said, “The strongest principle of growth lies in human choice.”

Useful links

To explore the findings of the report, a publication launch webinar will be hosted by the Green Growth Knowledge Platform (GGKP) on 27 July, featuring Carlo Carraro (Co-Chair of the GGKP Advisory Committee), the OECD’s Chief Economist Catherine L. Mann and Kevin Urama (Managing Director, Quantum Global Research Lab) as the lead discussants.

Key recommendations in English, French and Spanish

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Green Growth and Sustainable Development: Key OECD documents

Regional investment: Time to cooperate

FfD_Logo-140Carole Biau, Investment Division, OECD Directorate for Financial and Enterprise Affairs

One of Aesop’s fables tells of an old man on the point of death, who summoned his sons around him to give them some parting advice. He gave the eldest son a bundle of sticks and asked him to break it. The son was unable to, and his two brothers did no better. The old man then took the bundle apart and gave each of them a stick, which was easily broken.

The moral of this tale – that there is strength in unity – is very straightforward and more or less universal. Similarly, a Kenyan proverb holds that “sticks in a bundle are unbreakable”. However we often seem to lose sight of this basic truth – not only as individuals but also as countries.

Regional economic co-operation has been on the international development agenda for decades. But it requires strong coordination, including in the field of investment policy, and that does not come automatically. On the contrary, countries have often used “beggar-thy-neighbour” policies and seen geographic proximity as a threat rather than an opportunity for investment attraction. Governments have for instance competed to offer investors overly generous tax breaks and incentives, depriving each host country of much needed tax revenues. We have seen similar “races to the bottom” in terms of labour or environmental standards.

Regional collaboration on investment policies can also open up economies of scale. Infrastructure investment in Africa is a case in point: many countries are land-locked and cannot reach ports without cross-border road and rail connections; others are too small to develop cost-effective power or ICT networks; and some potential infrastructure resources (such as lakes and dams) cut across borders and cannot be developed by countries in isolation. In all of these cases, aligning policy frameworks – so that investors face the same ‘rules of the game’ across neighbouring countries – can make a big difference for unlocking investment in cross-border infrastructure projects.

Clearly, whether it is to overcome co-ordination failures or to tap economies of scale in investment policy, regional collaboration – or “bundling of sticks” – is needed. This can help countries move away from a zero-sum game and towards win-win situations.

What are countries doing to strengthen regional co-operation? To take one example: since 2012 the 15 Member States of the Southern African Development Community (SADC) have partnered with the OECD to design the SADC Investment Policy Framework. This framework will be discussed and finalised when SADC Member States come together in Johannesburg on 21-22 July 2015. The framework will help SADC countries to collectively enhance their investment policies, so as to attract investment that can work for the development of the region as a whole. It provides concrete options for: improving coherence and transparency of the investment environment; enhancing market access and healthy competition; reinforcing protection of investors’ rights; and, promoting responsible and inclusive investment.

The Association of Southeast Asian Nations (ASEAN) provides another example of a win-win regional collaboration on investment policy. The ASEAN-OECD Investment Programme allows for experience sharing on investment policy design, implementation and harmonisation across ASEAN Member States. It offers a platform for individual economies to disseminate the results of Investment Policy Reviews undertaken by governments in partnership with the OECD, while benchmarking investment policies and to contributing to identifying good practices. Aesop would be happy with this strengthening of the SADC and ASEAN “bundling of sticks”.

In both regions, these efforts build on the OECD’s main tool to promote investment policy reform and co-ordination: the Policy Framework for Investment (PFI). After having been used by over 25 developing and emerging countries undertaking OECD Investment Policy Reviews since 2006, the PFI has just been updated to ensure its continuing role as a global reference for investment policy reforms and development co-operation. 2015 therefore marks an exciting juncture: the OECD, regional groupings such as SADC and ASEAN, and individual countries, are all embarking on joint work towards implementation of the updated PFI.

Other international organisations, bilateral and multilateral development partners, and the business community, will not be left on the sidelines. In fact when the updated PFI was endorsed in June 2015, they encouraged countries and donors to use the tool as a reference for development co-operation, and particularly as a path towards the new Sustainable Development Goals (SDGs). As the resources needed every year to achieve the SDGs are at least ten times greater than the current levels of aid (ODA), it goes without saying that mobilising private investment flows through instruments such as the PFI will be crucial.

Exactly how different countries and regions can make the most use of the PFI is being discussed this week in Addis Ababa, at the third international conference on Financing for Development. This is a valuable opportunity not only for individual countries to take part, but also for regional groupings such as SADC and ASEAN to share their efforts towards making their bundle of sticks unbreakable and investment for development a “positive sum game”.

Useful links

The Policy Framework for Investment

Southern African Development Community (SADC) Investment Policy Framework

ASEAN-OECD Investment Programme

OECD work on international investment

World Youth Skills Day

worldyouthskillsdayGlenda Quintini and Stéphane Carcillo, OECD Employment, Labour and Social Affairs Directorate

Agnès attended a French High School but left at 16 with poor qualifications. She had not enjoyed school and was pleased to leave but now she would be pleased to go back as work has not been as pleasant or easy as she had expected. She found a job at a local burger company but hated it and felt that she had been very badly treated. She then got into restaurant work with some basic training which was much better but had then been laid off because they were cutting back on staff. She is living with her boyfriend who is also unemployed.

One of today’s top policy priorities around the world is to help people like Agnès and reduce extremely high youth unemployment while easing young people’s access to good quality jobs. As the first edition of “Youth Skills day” unfolds, about 40 million youth aged 15-29 in OECD countries are either looking for work or entirely disconnected from the labour market and from education and training. For the young people affected, this is a major setback that could have long lasting negative implications. For countries, not only does this represent human capital that is not being productively used but it also constitutes a financial cost as marginalisation from the labour market at such a young age is likely to bring about benefit dependency for life.

The so-called NEET rate (the share of youth neither in employment nor in education or training) currently stands at 14% in the OECD on average, up from 12.5% before the Great Recession. But in some countries, the problem is much bigger and has been exacerbated by the crisis. For example, the NEET rate rose by about 10 percentage points to exceed 20% in Greece, Italy and Spain.

NEET rates

The lack of skills is a major factor behind being NEET, along with a number of other barriers to employment – poor health, substance abuse, housing – that put NEETs at high risk of social and economic marginalisation. In Spain and England and Northern Ireland, 40% of NEET youth score at level 1 or below in literacy in the Survey of Adult Skills (PIAAC) – the lowest level of proficiency. And about a third do so in Canada and Norway. In addition, many have dropped out of general education – 40% of NEETs on average only have lower secondary qualifications – and have no recognised qualification to show for in the labour market.

NEET composition

To bring down this alarmingly high rate, the OECD Action Plan for Youth proposes a set of policies to tackle the current youth unemployment crisis and strengthen the long-term employment prospects of youth. It encourages countries to act fast to strengthen and expand cost-effective active measures such as short-term training, job search counselling or hiring subsidies – all crucial to prevent unemployed youth from disconnecting from job search, particularly in times of poor job creation. It also suggests acting now in areas that may take a while to bear fruit. For instance, prevention is better than cure and the accent is put on ensuring that the education system provides youth with the skills needed for the labour market.

A major challenge is how to deal with those young people who are not even looking for work. These youth typically fall through the cracks of safety nets. Reaching out to them and (re)motivating them in participating in education, training or any form of active programmes is challenging and requires frequent contacts as well as a good cooperation and information sharing between social and employment services.

Some programmes have been successful in helping NEETs get back into learning or employment – such as YouthBuild or JobCorps in the United States. They tend to have a significant hands-on learning component and often partner with employers to provide in-work learning modules. However, all this tends to be rather costly – often in excess of $10,000 per participant. Acting early, to prevent disengagement in the first place is therefore crucial. Apprenticeships and VET programmes, if available to all youth in education, can help prevent dropping out without qualifications in the first place, reducing the likelihood of becoming NEET.

Effective action to reduce NEET rates requires coordinated measures across all relevant ministerial portfolios and at the national and local level to ensure that youth acquire the right skills, bring those skills to the labour market and are able to utilise them effectively.

The OECD Action Plan for Youth is intended to build on and support existing national and local initiatives as well as the ILO Resolution on “The youth employment crisis: a call for action”, the G20 commitments on youth employment and the EU Council’s agreement on the Youth Guarantee.

Useful links

OECD work on youth employment and unemployment

Stéphane Carcillo et al.  (2015), NEET Youth in the Aftermath of the Crisis : Challenges and Policies, OECD Social, Employment and Migration Working Papers, No. 164

The OECD Action Plan for Youth