ILO study says austerity measures and labour reforms will further increase workplace inequality in Europe

Workplace inequalities have increased significantly across Europe as a result of the global economic crisis and will continue to do so as more and more countries introduce austerity measures and labour reforms, according to a new study published by the International Labour Office (ILO).

Press release | 06 March 2012

Workplace inequalities have increased significantly across Europe as a result of the global economic crisis and will continue to do so as more and more countries introduce austerity measures and labour reforms, according to a new study published by the International Labour Office (ILO).

Work Inequalities in the Crisis: Evidence from Europe1analyses how working conditions, wages and incomes, employment and gender equality, among other workplace issues, have been deteriorating across the continent since the start of the crisis. It includes data from 30 countries and 14 national studies by leading European specialists.

For example, the study looks at how countries that have relied on external flexibility adjustments, such as Spain, have experienced severe difficulties on the employment front. More importantly, it sheds light on one aspect of the crisis that has been poorly documented so far: its microeconomic effects at enterprise level on different worker categories and the areas of work that directly matter to them.

The volume also shows that wage differentials between the top and the bottom earners increased in countries like Bulgaria, Hungary and the United Kingdom.

“The central message of this volume can be summarized in simple terms: not only did work inequalities contribute to generating the economic crisis, but these inequalities have even become worse as a result of it”, says Daniel Vaughan-Whitehead, the ILO’s Special adviser, responsible for wages policies, professor at Sciences Po in Paris and editor of the book. “Our general economic system will thus continue to be at risk until we properly address this critical issue.”

Other key findings include:

  • Workers on temporary contracts were massively affected by job cuts and used as “a sort of employment buffer”, as shows the example of Spain where 90 per cent of employment losses affected temporary workers.
  • Young people are experiencing unemployment rates nearly double those among older workers in the majority of European countries, with sharp increases in the Baltic States of Estonia, Lithuania and Latvia, as well as in Ireland, Spain and Greece.
  • Low-skilled workers have been especially hard hit in the crisis as manufacturing companies started to lay off part of their staff.
  • Despite male workers being initially more affected by the crisis than women (6 per cent more in the three Baltic states, Ireland and Spain), discriminatory practices against female workers have worsened in recent years.
  • Women employed in male-dominated sectors were the first to be dismissed or experienced higher wage cuts than men.

Impact of the crisis on wages in South-East Europe2:

The crisis has more severely hit lower paid workers and also increased wage and income inequalities

Another new ILO book confirms that the financial and economic crisis of 2008-09 had a definite and significant impact on wages in all countries of South-East Europe: a fall in real wage growth and the immediate removal of various types of bonuses3.

Covering a number of Balkan countries – Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia and Serbia – and some new EU Member States – Bulgaria, Hungary and Romania – the book provides empirical evidence that wage and income inequalities have increased during the crisis and the most vulnerable workers have been more severely hit by the economic downturn.

Particularly worrying is the long term increase in the proportion of low-paid workers and the growth of wage disparities between the top and the bottom of the wage scale. The report emphasizes that it is precisely these kinds of trends that contribute – as they contributed to the 2008-09 crisis – to bring about a financial and economic crisis in the first place.

The weak development of wage-setting institutions in South-East European countries amplified the wage impact of the crisis. The lack of consensus and agreement at national level – social partners were rarely involved in the policy responses to the crisis – and the lack of collective bargaining at sectoral and enterprise levels limited the negotiation and conclusion of alternatives to massive layoffs and wage cuts. In contrast, collective bargaining in other European countries such as Germany led to the negotiated reduction of working hours to limit employment and wage adjustments.

At the same time most governments in South-East Europe decided to freeze the minimum wage so that it could not play its function of protecting the most vulnerable workers from the effects of the crisis. This contributed to increase the vulnerability of workers at the bottom of the wage scale: young workers, women, low-skilled workers.

Other institutional weaknesses are also identified in the ILO volume which provides concrete policy recommendations, not only on minimum wages and wage bargaining, but also on the collection of reliable statistics on wages, and the promotion of more effective pay systems linking wages to productivity.

The adoption of fiscal reforms – with the introduction of non-progressive tax systems such as the flat tax rate in Albania and other countries in the region – contributed to further increase inequalities during the crisis. At the same time, restrictive policies in the public sector to face budget deficits led to immediate and significant employment and wage cuts for public sector employees, leading to a new source of inequality and vulnerability.

The new ILO book emphasizes the direct implications of this situation for both social and economic development. On the social side, poverty has increased during the crisis, while on the economic side, large scale wage moderation may jeopardize the economic recovery of these countries due to the decrease in domestic demand and consumption.

Hungary: Crisis coupled with a fiscal squeeze – effects on inequality

The Hungarian chapters of both ILO studies cover the period until 2009 – 2010 and draw attention to two characteristics of the ‘Hungarian way’ of adapting to the crisis by the previous governments in 2008 and 2009: a strong bias towards employment adjustment in the private sector, and a strong bias towards job protection in the public sector that experienced, however, a two-digit, all-embracing real wage cut. This helped to preserve the pre-crisis levels of employment in state-owned enterprises, supported by the provision of job retention subsidies and the creation of public works opportunities.

Apart from financing the benefits of a growing number of entitled job losers, the government cut all other programmes aimed at assisting those who actually became unemployed.

Despite creating and saving somewhere between 50,000 and 100,000 jobs, according to the most optimistic scenario, registered unemployment grew from 424,000 in September 2008 to 659,000 at its peak in February 2010 – an increase of 235,000. In the same period, employment (as measured by the Labour Force Survey) fell from 3.924 million to 3.719 million – a decline of 205,000. It seems that the majority of those at risk of losing their jobs did in fact do so and have poor prospects of finding new ones because of a slump in hiring. The policies chosen by Hungarian policy makers until the beginning of 2010 helped a minority of the population.

Overall income inequalities grew during the crisis, partly due to growing unemployment in the private sector and severe wage cuts in the public sector.

1 Work Inequalities in the Crisis: Evidence from Europe, edited by Daniel Vaughan-Whitehead, 593 pages, jointly published by the International Labour Office (ILO), Geneva, Switzerland, and Edward Elgar, Cheltenham, UK, and Northampton, MA, USA. ISBN 978-92-2-124885-9. The book includes forewords by Maria Helena André, Minister of Labour and Social Solidarity, Portugal; by Nicolas Schmit, Minister of Labour, Employment and Immigration, Luxembourg; and by Guy Ryder, Executive Director, Standards and Fundamental Rights and Principles at Work, ILO.

2 The Impact of the Crisis on Wages in South-East Europe, edited by Verena Schmidt and Daniel Vaughan-Whitehead, ILO, Budapest, 2011, 257 pages /budapest/what-we-do/publications/WCMS_172434/lang--en/index.htm

3 Such as seniority bonuses; or thirteenth month salaries as in Hungary and Romania – and other non-monetary bonuses – such as food in Albania and the former Yugoslav Republic of Macedonia.