Global Unemployment Crisis, Wage Inequalities Rising

Renewed International Commitment to Full Employment Needed

Released in Geneva and Washington D.C.

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Eddy Lee, ILO economist and author of the report, World Employment 1996/97, will be in Washington and available for interviews on Wednesday, Nov. 20. Please call 703-820-2244 to schedule an appointment

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Nearly one billion people around the world, approximately 30 percent of the entire global work force, are unemployed or under-employed in industrialized and developing countries alike, says a new report by the International Labour Organization (ILO).

In its report, World Employment 1996/97, the ILO calls the global employment situation “grim.” The ILO warns that the growing numbers of “working poor” risk aggravating the social and economic ills caused by high jobless rates.

In the world’s wealthiest nations — members of the Organization of Economic Cooperation and Development — at least 34 million people are unemployed. In the European Union, unemployment increased last year to an average of 11.3 per cent of the workforce; France, Germany, Italy and Sweden registered significant increases. On the other hand, job creation in the United States has intensified and unemployment has dipped below 5 percent. Unemployment rates have also declined in the United Kingdom. However, in both countries, income disparities have tended to widen.

In the transition economies of eastern and central Europe, unemployment rates declined slightly but remained at double-digit levels. In Russia and some other countries of the former Soviet Union, unemployment continued to increase.

Among Latin American countries, Colombia posted a rise in unemployment from 8 to over 10 percent. Unemployment increased in urban areas in Argentina, Bolivia, Ecuador, Jamaica, Mexico, Uruguay and Venezuela. In sub-Saharan Africa and many parts of Asia, data on direct unemployment hardly exists, but problems of massive underemployment and poverty persist in these low-income regions.

The ILO believes that nothing short of a renewed international commitment to full employment is required to reverse the poverty, unemployment and underemployment now prevailing in so many parts of the globe.

“It is not just heartless but pernicious to assume that nothing can be done to remedy unemployment, that so-called “jobless growth” (when a country’s gross domestic product, or GDP, that grows with no substantial job growth) is the best that can be hoped for in an increasingly competitive economy or that current rates of unemployment somehow constitute a natural and inevitable outcome of market forces,” says ILO Director-General Michel Hansenne. “Current levels of unemployment make no economic sense and are neither politically nor socially sustainable.”

The ILO Report identifies the underlying causes of deteriorating labor market conditions as being:

  • Lower growth rates in industrialized countries since 1973 and the failure of most developing economies to recover fully from the economic crisis of the early 1980s;
  • Slow adjustment of wages to declines in labor productivity gains and the emergence of wage inflation, which lasted until the mid-1980s;
  • The progressive eviction from the world of work of the long-term unemployed and the increasing casualization of millions of workers in informal sector activities.

The report concludes that while there is no single ideal prescription for developing, industrialized and transition economies, the “priority requirement for reversing the prolonged deterioration in employment conditions is the restoration of high and sustained rates of economic growth.”

Full Employment: Feasible and Highly Desirable

In a direct challenge to much publicized arguments which forecasts an era of “jobless growth,” the ILO emphasizes that there is little empirical basis for the notion that globalization, technological change or corporate downsizing are ushering in an era of jobless growth or bringing about the end of work as most people have known it.

“The report attributes much popular theorizing about the “end-of-work” and “jobless growth” to “unwarranted extrapolations from dramatic episodes of corporate down-sizing, ignoring compensatory job creation elsewhere in the economy.” These anxieties, the report notes, are understandable “given the almost worldwide deterioration of employment conditions,” the size of layoffs and “the concentration of job losses in particular economic sectors and communities.”

“There has in fact been no generalized decline in the employment intensity of economic growth in spite of rising unemployment . . . Similarly, while there has been some increase in self-employment, part-time work and other non-standard forms of employment, this has not meant the disappearance of regular jobs. Data on job tenure do not show any generalized decline in either the period employed individuals have been with their current employer or in projected future tenure. At the same time, there is also no evidence that the rate of job change has increased in labor markets.”

The ILO maintains that “the concept of full employment, suitably updated, should remain as a principal objective of economic and social policy.”

Michel Hansenne warned against spurning the full employment ideal that guided national and international social policy in the post-WWII decades: “Abandoning the goal of full employment means lowering social expectations at a time when the world economy is becoming more integrated through trade and investment flows.”

“These forces have the potential for spurring higher rates of economic growth and job creation and thus higher levels of well being and social justice,” Mr. Hansenne added. But they need to be harnessed by the right mix of social and economic policies.

Trade, Technology and Globalization

The ILO argues that, contrary to popular misconceptions, the world’s job woes are not being driven by rapid technological progress and trade liberalization, both of which are necessary to stimulating economic growth and productivity. Trade between industrialized and developing economies “is only a minor explanatory factor behind the rise in the unemployment of low-skilled workers and in wage inequality in the industrialized countries.” The report notes that the experience of dynamic Asian economies provides evidence that “sound domestic policies, expanding global trade and investment flows provide rich opportunities for higher rates of economic growth and job creation.”

However powerful the forces of globalization, the ILO points out that it is not “an overwhelming supra-national force” and that “national macroeconomics, structural and labor-market policies are still the dominant influence on economic and labor market outcomes in any country.” Even in an era inclined to minimal government intervention “national policies can and should also give priority to mitigating the negative social effects of globalization.” Increased international cooperation is also possible “especially with respect to maintaining progress towards freer trade and investment flows, reducing the risk of instability to the financial system and preventing the erosion of basic labor standards.”

Boosting Non-inflationary Growth

Foremost among the requirements for reversing the drift away from full employment is “to reverse the trend decline in growth rates over the past two decades” in industrialized countries. While much academic literature maintains that expansionary efforts to boost growth rates will inevitably founder on the rocks of inflation or supply-side constraints, the ILO report insists that a deficiency in demand could well be responsible for the prolonged period of slow growth in the world economy and that wage inflation can be held in check if industrial practices an labor-market regulations are designed to do so.

If countries are to begin creating jobs and reversing wage inequality, it is necessary to increase economic growth rates while strengthening institutional mechanisms for moderating wage inflation and improving the design and implementation of labor-market polices, paying particular attention to the long-term unemployed, says the ILO report.

The report says that “higher growth is possible provided a sustained period of expansionary policies is supported by credible policies to prevent a resurgence of inflationary wage increases and to overcome the skill shortages that will be generated.”

Mechanisms for moderating wage inflation are the second prerequisite if the expansionary impulse is to avoid being choked off by the reaction of financial markets. The report acknowledges that while no easy solutions exist, several options are worth exploring, including “strengthening of the coordination of wage bargaining through the synchronization of bargaining periods and the provision of consensus forecasts of future economic possibilities.” Other options include social pacts between employers, workers, and governments, the encouragement of profit-sharing and tax-based incomes policies.

The third requirement for reversing the rise in unemployment is “to improve the design and implementation of labor-market policies.” In industrialized countries this includes reforming unemployment benefits systems. Subsidies and payroll tax measures designed to promote the reintegration of long term unemployed may prove useful but, should be examined carefully because of the possible side effects. Additional measures include “the correction of market failures which result from the under-provision of training” as well as “training programs targeted on the most disadvantaged groups in the labor market.”

The report maintains that the most often-cited solution for problems linked to high unemployment, further labor market deregulation, is not supported by empirical evidence. While recognizing that there may well be aspects of labor-market regulation that need reforming in different countries, the report argues that “there is no basis for a blanket presumption that these regulations are invariably sources of rigidity and that deregulation is automatically the optimal solution.” In many cases labor-market regulations have the positive benefits of promoting higher productivity and protecting vulnerable workers.

Transition Economies

The unemployment problem in transition economies results from “the legacy of labor hoarding in state-owned enterprises carried over from the previous economic system.” Although enterprises in central and eastern Europe and the former Soviet Union have already undertaken substantial reconstruction, often at the cost of increased unemployment and poverty, the report says that “a formidable challenge still remains in terms of restructuring non-competitive enterprises and of adjusting the structure of enterprises in order to raise labor productivity.”

Given the high and potentially intolerable social tensions this is likely to generate, the ILO underscores the importance for these countries of choosing “economic policies and labor-market institutions that are most likely to reduce unemployment.” Obstacles to new enterprise development need to be reduced and barriers to foreign investment (such as uncertain legal procedures and inadequacies in the business infrastructure) need to be dealt with. Other practical problems include inadequate housing market flexibility and the difficulty of ensuring adequate social protection for workers affected by restructuring. An array of measures, including an improved institutional framework in which unions and employers’ organizations can undertake effective collective bargaining may need to be supplemented by temporary measures to contain the rise in unemployment.

Developing Economies

The majority of workers in developing countries “are engaged in low-productivity work that is often physically onerous but yet yields only meager earnings.” Although the ILO report acknowledges that full-employment is a long-term objective for most developing countries, it nonetheless “provides a useful framework for the formulation of employment policy.” The targets policy makers should aim for include “a rate of growth of productive, modern-sector jobs that exceeds the rate of growth of the labor force and a reduction in the extant of underemployment in the rural and urban informal sectors of the economy.”

The report attributes the deteriorating employment conditions in many parts of the developing world (other than in the dynamic Asian economies) to “the failure to recover fully from the economic crisis of the early 1980’s. Slower, and in many cases, even negative growth has meant stagnation in the creation of modern-sector jobs and consequent overcrowding in low-productivity activities.

The report calls for economic reforms, where necessary, in order to achieve macroeconomics stability and begin generating an “environment conducive to high savings and investment and the efficient allocation of resources” in order to permit developing; countries to “benefit fully from expanding trade and investment flows in the global economy.” The report adds that in many cases “pure market reforms often need to e supplemented by the public investment and other measures to strengthen the supply response of producers to new economic incentives.”

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