Towards a Double Dip Recession and Unemployment?
Capital and Labour in the Neoliberal World Order
Last month we published excerpts from latest documents by the IMF and the WEF to show how they view the unfolding financial and economic crisis. Continuing our reportage, we bring you here some of the more important issues raised in a couple of more recent reports from two other international institutions of capital: the UN and the ILO. In both reports, a sense of panic (to quote, the likelihood of “a worldwide credit crunch and financial market crash ... reminiscent of the September 2008 collapse of Lehman Brothers” and “a dramatic downturn in employment and a further significant aggravation of social unrest”) and helplessness ( there being “no simple solutions that would quickly win political support”) stands out quite clearly. Between themselves the four documents share much in common, (e.g., a concern about the direct link between growing unemployment, particularly youth unemployment, and social unrest) although points of emphasis naturally differ. The ILO for example stands out with a more focused and meaningful discussion of the problem and tries to offer at least a direction towards a solution. “In short, there is a vicious cycle of a weaker economy affecting jobs and society, in turn depressing real investment and consumption, thus the economy”, it observes, and adds: “This vicious circle can be broken by making markets work for jobs – not the other way around”. It is another matter though that such pieces of good advice are always commended (Prof Amartya Sen has just been awarded the 2011 National Humanities Medal in the US “for his insights into the causes of poverty, famine, and injustice”) but never implemented – until compelled by economic catastrophe and/or powerful popular movements. – Ed.
Global economic prospects for 2012 and 2013
The world economy is on the brink of another major downturn
The world economy is teetering on the brink of another major downturn. Output growth has already slowed considerably during 2011 and anaemic growth is expected during 2012 and 2013.
The problems stalking the global economy are multiple and interconnected. The most pressing challenges lie in addressing the continued jobs crisis and declining prospects for economic growth, especially in the developed countries. As unemployment remains high, at nearly 9 per cent, and incomes stagnate, the recovery is stalling in the short run owing to the lack of aggregate demand. But, as more and more workers are out of a job for a long period, especially young workers, medium-term growth prospects will also suffer because of the detrimental effect on workers’ skills and experience.
The rapidly cooling economy has been both a cause and an effect of the sovereign debt crisis in the euro area, and of fiscal problems elsewhere. ...The fiscal austerity measures taken in response are further weakening growth and employment prospects....
The United States economy is also facing persistent high unemployment, shaken consumer and business confidence, and financial sector fragility. The European Union (EU) and the United States of America form the two largest economies in the world, and they are deeply intertwined. Their problems could easily feed into each other and lead to another global recession. Developing countries, which had rebounded strongly from the global recession of 2009, would be hit through trade and financial channels.
The global jobs crisis
High unemployment is a major stumbling block on the path to recovery
Persistent high unemployment remains the Achilles heel of economic recovery in most developed countries. The unemployment rate averaged 8.6 per cent in developed countries in 2011, still well above the pre-crisis level of 5.8 per cent registered in 2007. In many developed economies, the actual situation is worse than reflected in official unemployment rates. In the United States, for instance, labour participation rates have been on a steady decline since the start of the crisis. Increasing numbers of workers without a job for a prolonged period have stopped looking for one and are no longer counted as part of the labour force. About 29 per cent of the unemployed in the United States have been without a job for more than one year, up from 10 per cent in 2007.
High youth unemployment is a concern worldwide
Unemployment rates among youth (persons 15-24 years of age) tend to be higher than other cohorts of the labour force in normal times in most economies, but the global financial crisis and its subsequent global recession have increased this gap disproportionally. Barring data limitations, the jobless rate among young workers increased from an estimated 13 per cent in 2007 to about 18 per cent by the first quarter of 2011....In Spain, an astonishing 40 per cent of young workers are without a job.
The recovery of world trade slowed down in 2011 as growth in merchandise trade declined to 6.6 per cent, from 12.6 per cent in 2010. In the baseline outlook, world trade growth will continue at a slower pace of 4.4 and 5.7 per cent in 2012 and 2013, respectively.
Fragilities in the international financial markets are affecting financing for development
The uneven global recovery, the risk of European sovereign debt crises and a growing liquidity squeeze in the European interbank market have heightened risk aversion and led to increased volatility in private capital flows. At the same time, official development assistance (ODA) and other forms of official flows have been affected by greater fiscal austerity and sovereign debt problems in developed countries. Not unlike private flows, aid delivery has been pro-cyclical and volatile.
Waves of capital inflows that are in excess of an economy’s absorptive capacity, or highly speculative in nature, may lead to exchange-rate overshooting, inflation, credit booms and asset price bubbles. More importantly, volatile capital flows carry risks for financial and economic stability, with the threat of sudden stops and withdrawals of international capital owing to heightened risk aversion potentially contributing to the spreading financial crises. Short-term portfolio equity flows to developing countries went into a tailspin in the second half of 2011. As a result, net inflows of portfolio equity to emerging economies in 2011 are estimated to register a decline of about 35 per cent from 2010 levels, exhibiting vivid proof of the high volatility these flows tend to be subject to.
Uncertainties and risks
Risks of another global recession
Failure of policymakers, especially those in Europe and the United States, to address the jobs crisis and prevent sovereign debt distress and financial sector fragility from escalating, poses the most acute risk for the global economy in the outlook for 2012-2013. A renewed global recession is just around the corner. The developed economies are on the brink of a downward spiral enacted by four weaknesses that mutually reinforce each other: sovereign debt distress, fragile banking sectors, weak aggregate demand (associated with high unemployment and fiscal austerity measures) and policy paralysis caused by political gridlock and institutional deficiencies. All of these weaknesses are already present, but a further worsening of one of them could set off a vicious circle leading to severe financial turmoil and an economic downturn. This would also seriously affect emerging markets and other developing countries through trade and financial channels.
The efforts to solve the sovereign debt crisis in Europe failed to quell the unease in financial markets during November of 2011, and fresh warning signs of further problems emerged as Italy’s cost of borrowing jumped to its highest rate since the country adopted the euro. Another sign of increasing financial distress was a jump in the Euribor-OIS, Europe’s interbank lending rate, from 20 to 100 basis points—not as high as at the onset of the 2008 global financial crisis, but high enough to cause concern. A large number of banks in the euro area already stand to suffer significant losses, but contagion of the sovereign debt crisis to economies as large as Italy would no doubt overstretch the funds available in the European Financial Stability Facility (EFSF), put many banks on the verge of bankruptcy and trigger a worldwide credit crunch and financial market crash in a scenario reminiscent of the September 2008 collapse of Lehman Brothers Holdings Inc. Such a financial meltdown would no doubt lead to a deep recession, not only in those economies under sovereign debt distress, but also in all other major economies in the euro area, possibly with the intensity of the downturn seen in late 2008 and early 2009.
The political wrangling over the budget in the United States may also worsen and could harm economic growth if it leads to severe fiscal austerity with immediate effect. This would push up unemployment to new highs, further depress the already much shaken confidence of households and businesses, and exacerbate the beleaguered housing sector, leading to more foreclosures which, in turn, would put the United States banking sector at risk again. Consequently, the United States economy could well fall into another recession. The United States Federal Reserve might respond by adopting more aggressive monetary measures, for example, through another round of quantitative easing; but in a depressed economy with highly risk averse agents, this would likely be even less effective in terms of boosting economic growth than the measures taken in previous years.
GDP growth in developing countries would decelerate from 6.0 per cent in 2011 to 3.8 per cent in 2012, that is, to almost half the pace of growth (about 7 per cent per year) achieved during 2003-2007 and about 3 percentage points below the long-term growth trend.
Growth of WGP (World Gross Product) would decelerate to 0.5 per cent in 2012, implying a downturn in average per capita income for the world.
Mounting external liabilities by the United States, associated in part with increasing fiscal deficits, have in fact been a major factor in the downward pressure on the United States dollar against other major currencies since 2002, although there have been large fluctuations around the trend.
As companies face greater difficulties in pricing their products and anticipating their costs, business planning becomes more uncertain, underpinning a generally more cautious approach that also includes an even greater reluctance to hire new employees.
Most developed economies—Europe and the United States, as well as Japan—find themselves in a difficult economic bind. There are no simple solutions that would quickly win political support. Their economies have been growing too slowly for too long, making it more and more difficult to pay for the increasing costs of health care and pensions for ageing populations. The United States and Europe face the risk of their problems feeding into each other. Recent economic stagnation may make voters and policymakers unwilling to opt for hard choices, and the political paralysis might, in turn, worsen the economy by creating new financial turmoil.
International Labour Organisation
World of Work Report 2011
Making markets work for jobs
Editorial by Raymond Torres
Director, International Institute for Labour Studies
The economic slowdown may entail a double-dip in employment …
The next few months will be crucial for avoiding a dramatic downturn in employment and a further significant aggravation of social unrest. The world economy, which had started to recover from the global crisis, has entered a new phase of economic weakening.
Based on past experience, it will take around six months for the ongoing economic weakening to impact labour markets. Indeed, in the immediate aftermath of the global crisis it was possible to delay or attenuate job losses to a certain extent, but this time the slowdown may have a much quicker and stronger impact on employment. After the collapse of Lehman Brothers in 2008, many viable enterprises expected a temporary slowdown in activity and so were inclined to retain workers. Now, three years into the crisis, the business environment has become more uncertain and the economic outlook continues to deteriorate. Job retention may therefore be less widespread.
Moreover, government job- and income-support programmes, which proved so successful in cushioning job losses and supporting job retention practices in firms at the start of the global crisis, may be scaled down as part of the fiscal austerity measures adopted in a growing number of countries. Lastly, and more fundamentally, while in 2008-2009 there was an attempt to coordinate policies, especially among G20 countries, there is evidence that countries are now acting in isolation. This is leading to more restrictive policies driven by competitiveness considerations, and job retention measures could fall victim to it.
The latest indicators suggest that the employment slowdown has already started to materialize. This is the case in nearly two-thirds of advanced economies and half of the emerging and developing economies for which recent data are available. Meanwhile, young people continue to enter the labour market, exacerbating inequalities and social discontent.
As the recovery derails, social discontent is now becoming more widespread, according to a study carried out for the purposes of this Report (see special focus on social unrest in Chapter 1). The Report shows that the trends in social discontent are associated with both the employment developments and perceptions that the burden of the crisis is shared unevenly. Social discontent has increased in advanced economies, Middle-East and North Africa and, albeit to a much lesser extent, Asia. By contrast, it may have stabilized in Sub-Saharan Africa, and it has receded in Latin America.
... and further delaying economic recovery.
The worsening employment and social outlook, in turn, is affecting economic growth. In advanced economies, household consumption – a key engine of growth – is subdued as workers become more pessimistic about their employment and wage prospects.
In short, there is a vicious cycle of a weaker economy affecting jobs and society, in turn depressing real investment and consumption, thus the economy and so on.
This vicious circle can be broken by making markets work for jobs – not the other way around
Recent trends reflect the fact that not enough attention has been paid to jobs as a key driver of recovery. Countries have increasingly focused on appeasing financial markets. In particular, in advanced economies, the debate has often centred on fiscal austerity and how to help banks –without necessarily reforming the bank practices that led to the crisis, or providing a vision for how the real economy will recover. In some cases, this has been accompanied by measures that have been perceived as a threat to social protection and workers’ rights. This will not boost growth and jobs.
Meanwhile, regulation of the financial system – the epicentre of the global crisis – remains inadequate. In advanced economies, the financial sector does not perform its normal intermediary role of providing credit to the real economy. And emerging economies have been affected by the massive inflows of volatile capital.
In practice, this means that employment is regarded as second order vis-à-vis financial goals. Strikingly, while most countries now have fiscal consolidation plans, only one major advanced economy – the United States – has announced a national jobs plan. Elsewhere, employment policy is often examined with a fiscal lens.
It is urgent to shift gears. The window of opportunity for leveraging job creation and income generation is closing, as labour market exclusion is beginning to take hold and social discontent grows.
This requires, first, ensuring a closer connection between wages and productivity, starting with surplus countries...
It is time to reconsider “wage moderation” policies. Over the past two decades, the majority of countries have witnessed a decline in the share of income accruing to labour – meaning that real incomes of wage earners and self-employed workers have, on average, grown less than would have been justified by productivity gains.
Nor has wage moderation translated into higher real investment: between 2000 and 2009 more than 83 per cent of countries experienced an increase in the share of profits in GDP, but those profits were used increasingly to pay dividends rather than invest. And there is no clear evidence that wage moderation has boosted employment.
In fact, wage moderation has contributed to exacerbating global imbalances which, along with financial system inefficiencies, have led to the crisis and its perpetuation.
By ensuring a closer connection between wages and productivity, the global shortfall in demand would be addressed. In addition, such a balanced approach would make ease the pressures on budget-constrained governments to stimulate the economy.
... second, supporting real investment notably through financial reform...
There will be no job recovery until credit to viable small firms is restored. In developing countries, there is significant scope for increasing investment in rural and agricultural areas. This requires targeted public investment, but also curbing financial speculation on food commodities in order to reduce the volatility of food prices. Food prices were twice as volatile during the period 2006-2010 than during the preceding five years. As a result, any increase in agricultural income is perceived by producers – especially small ones – as temporary. Producers thus lack the stable horizon needed to invest the agricultural-income gains, perpetuating food shortages and wasting decent work opportunities.
... third, maintaining and in some cases strengthening pro-employment programmes funded from a broader tax base ...
No country can develop with ever rising public debts and deficits. However, efforts to reduce public debt and deficits have disproportionately and counterproductively focused on labour market and social programmes. Indeed, cuts in these areas need to be carefully assessed in terms of both direct and indirect effects. For instance, cutting income support programmes may in the short-run lead to cost savings, but this can also lead to poverty and lower consumption with long-lasting effects on growth potential and individual well-being. Increasing active labour market spending by only half a per cent of GDP would increase employment by between 0.2 per cent and 1.2 per cent in the medium-term, depending on the country (Chapter 6). Moreover, pro-employment programmes are not expensive to the public purse. ... there is scope for broadening tax bases, notably on property and certain financial transactions. Such measures would enhance economic efficiency and help share the burden of adjustment more equitably, thereby also contributing to appease social tensions.
... and putting jobs back on top of the global agenda.
The responsibility for making markets work for jobs rests primarily with national governments. They have at their disposal a rich panoply of measures inspired by the ILO Global Jobs Pact – ranging from job-friendly social protection programmes, to well-designed minimum wages and employment regulations and productive social dialogue- which can be quickly mobilized in combination with job-friendly macroeconomic and financial settings.