Weak labour markets and increasing inequality cause recovery to falter1. A massive global jobs gap which opened at the height of the financial crisis continues to widen and will do so in the years ahead unless growth both accelerates and is also job-rich. Weakness of global demand is holding back employment creation and wages which in turn is feeding back to retard recovery further. One consequence is a slowing of the pace of poverty reduction in the developing world. The global economy is not yet on a path to strong, sustainable and balanced growth.
2. Furthermore income inequalities have widened and the wage share in GDP fallen in many countries, including the world’s largest economies. Growth is likely to continue to be anaemic until household incomes show more resilience. With inflation low in many countries, there is an opportunity for governments, employers and unions to work together to lift minimum wages, align wage developments with productivity and strengthen social protection systems.
3. Coupled with measures to boost infrastructure investment, support small enterprises and boost skill development, a focus on restoring and improving household purchasing power, especially at low income levels, is essential if a slide into a low growth trap is to be avoided.
4. The risks of slipping into a prolonged period of slow growth are high given dampening effects of continued fiscal consolidation and a winding back of exceptional monetary support in advanced economies. Persistent financial volatility is a serious concern for developing and emerging economies and could damage their efforts to sustain growth. Investment has declined to record lows in some advanced economies, with many businesses sitting on huge cash holdings or increasing dividends rather than investing in productive capacity. Expectations of weak growth in the future and uncertainty about future sources of demand are inhibiting recovery in private sector investment. Reviving international trade also depends on demand recovery.
5. A coordinated effort to restore consumer demand in both developing and developed countries through improvement in disposable incomes of households is essential to get growth moving onto a stronger path. It would stimulate private investment, ease fiscal pressures and speed the unwinding of excessive public and private debt burdens.
The Global Jobs Gap
6. Slow overall growth, weak job creation and weak income growth in advanced economies has spilled over to middle and low-income countries in the form of weaker export demand. This in turn has reduced demand for raw materials and energy. This transmission of low demand has affected labour markets across the globe, with increases in unemployment observed in East Asia, South Asia and Sub-Saharan Africa as well as in advanced economies. Global unemployment continues to rise, reaching 202 million in 2013.
7. Had pre crisis trends in employment growth continued, 62 million more women and men would have been in work in 2013. Furthermore, unless growth picks up, that gap will widen to 75 million by 2018 (See: Global Employment Trends 2014 – The risk of a jobless recovery, ILO).
8. Although unemployment rates are still relatively low in most developing and emerging economies, low quality, low-productivity employment presents an on-going challenge. Much of the underemployment occurs in the informal economy, which accounts for a significant share of employment in developing economies, reaching over 80 per cent in some low income countries. The gradual shift towards more formal employment patterns has slowed in some countries.
9. Youth unemployment is continuing upward and reached 75 million in 2013, a rate three times that of adults. In some countries, almost one-quarter of young people aged 15 to 29 are now neither in employment, nor in education or training (NEET).
10. Long term unemployment is on the rise in many advanced economies. Jobseekers who are out of employment for long periods suffer erosion of skills, making it more difficult for them to find new employment. In addition survey evidence suggests employers may discriminate against job-seekers who have been out of work for prolonged periods. This is debilitating for the individuals concerned, the families and communities in which they live and the growth potential of the economy.
11. Female employment participation rates lag those of males in all countries although there is wide variation. The ILO estimates that in 2012, 73 per cent of working age males were in employment compared to only 48 per cent of women (See: Global Employment Trends for Women 2012, ILO, December 2012). The IMF has estimated substantial GDP per capita losses attributable to gender gaps in the labour market (See: Women, Work, and the Economy: Macroeconomic Gains From Gender Equity, IMF, September 2013).
Slowdown in pace of poverty reduction
12. The number of working poor continues to decline globally. In 2013, 839 million workers (or 26.7 per cent of total employment) had to cope on US$2 a day or less. This is a substantial reduction on the more than 1.1 billion total of working poor of the early 2000s. However, progress has slowed. In 2013, the number of workers in extreme poverty declined by only 2.7 per cent globally, one of the lowest rates of reduction over the past decade (See: Op cit Global Employment Trends 2014, ILO).
13. Although the growth of the world’s working age population is gradually slowing, it is still increasing by around 40 million a year. Looking ahead to 2030 and the post 2015 sustainable development framework under discussion in the UN, the challenge is to create around 670 million opportunities for decent work to absorb labour market entrants, close the jobs gap caused by the crisis and accelerate the pace of poverty reduction.
Falling wage share and widening income inequality damages growth
14. Consumer demand has been constrained by a long-term trend decline in the share of GDP going to labour income in many countries, both developed and developing. Wage growth has lagged productivity growth in most advanced economies for most of the last twenty years (See: Global Wage Report 2012/13: Wages and Equitable Growth, ILO, 2012). In some countries the trend was masked by unsustainable household borrowing before the crisis, but the debt overhang must now be repaid, further constraining consumer demand. Asset price bubbles that built in housing and stock markets in some advanced economies before the crisis also temporarily supported consumption through a “wealth effect”. In retrospect, a structural problem of falling labour share had emerged over a long period but had been temporarily offset and masked by financial market innovations, which were themselves unsustainable, as revealed by the crisis. These long-term structural problems are now weighing on demand and slowing recovery from the cyclical effects of the crisis.
15. Growing inequality in the personal income distribution has accompanied the declining trend of the labour share in market income distribution. Over the period from the early 1990s to the late 2000s, inequality increased in most advanced economies. Inequality also increased in Asia, including India and China, and parts of Africa, particularly Southern Africa. In Latin America, inequality increased slightly in a few countries in the region, but fell in most of the region. Nevertheless, Latin America remains the most unequal region of the world and South Africa the most unequal country. Recent IMF research confirms that lower net inequality is robustly correlated with faster and more durable growth (See: Redistribution, Inequality, and Growth, Ostry, Berg, Tsangarides, IMF, 2014).
16. Both market and post market income distribution can be ameliorated by public policy measures. Minimum wages have proved an effective policy tool which can provide a decent wage floor and thus secure a minimum living standard for low-wage workers and their families. While a minimum wage set too high can theoretically deter hiring, a large and growing body of empirical evidence shows that at actually enacted minimum wage levels there is either no effect on hiring or very minor effects which can go in either direction. A large body of empirical studies also finds that union density, higher coverage by collective bargaining and more centralized and coordinated bargaining all have an equalizing impact on the distribution of earnings, reducing differentials along a number of dimensions such as skill and gender. The extension of collective bargaining agreements in countries such as Germany, Austria, Sweden and Norway has been found to be associated with more egalitarian wage structures. Several studies estimate that the decline of union membership and erosion of collective bargaining institutions accounts for around one third of the rise in inequality (See: The role of collective bargaining in the global economy: Negotiating for social justice, Susan Hayter (ed.) Edward Elgar, ILO, 2011).
17. Inequality produced by market distribution can be reduced through progressive tax systems and social protection systems that redistribute toward lower income groups. Tax and transfer systems can reduce inequality substantially – as demonstrated by countries such as Sweden and the Netherlands. However, reforms since the mid-1990s have lessened the progressivity of income tax systems in a number of advanced economies and reduced transfers, making fiscal policy less redistributive (See: Income Inequality and Fiscal Policy, Bastagli, Coady, and Gupta, IMF, 2012). In addition, the redistributive impact of taxes and transfers is smaller in other parts of the world (See: The impact of taxes and transfers on inequality, Malte Luebker, ILO, 2011).
Reviving growth and development
18. G20 Finance Ministers have agreed to “develop ambitious but realistic policies with the aim to lift our collective GDP by more than 2 per cent above the trajectory implied by current policies over the coming 5 years” (See: Communiqué of Meeting of Finance Ministers and Central Bank Governors, Sydney, 22-23 February 2014). This is a welcome step. However, the employment intensity of growth has been disappointing in most countries in recent years, and modelling of the impact of an additional 2 per cent growth shows that it would still leave a major deficit of 45 million jobs in 2018 compared to pre-crisis trends. An integrated strategy that addresses both the demand and supply sides of labour markets is needed to both lift growth and jobs across the globe.
19. Many countries are considering ways to lift growth through stimulating infrastructure investment and supporting the growth of small and medium-sized enterprises, especially through improving their access to finance. Such plans need to be scaled up and may need support from the multilateral development banks. The direct and indirect job content of such measures can also be maximized by careful design of infrastructure projects.
20. The main route out of poverty for individuals and nations is decent and productive work. The ILO therefore warmly welcomes the World Bank Group’s focus on the twin goals of decreasing the percentage of people living with less than $1.25 a day to no more than 3 per cent by 2030 and promoting income growth of the bottom 40 per cent of the population in each country. Creating jobs and narrowing inequalities are essential both to rekindle a faltering global recovery and to underpin medium term sustainable development.
21. Nationally specific strategies tuned to the differing challenges countries face are essential. However, all countries will need to address global forces such as high and often growing income inequality, developmental transformations, large demographic and technological changes as well as the further expansion of global value chains and increasing international and regional trade integration. These trends will create new opportunities for more and better jobs in some areas but lead to job losses in others. Countries will need to strengthen policies in a number of areas including:
- Anticipating and responding to changing skill needs.
- Providing good labour market information systems to guide career and training decisions.
- Ensuring the acquisition of good foundation skills as the base for learning new skills.
- Giving strong incentives to engage in lifelong learning with a focus on the low-skilled.
- Having effective public and private employment services in place that can help match people to jobs that correspond to their ability and which can provide training to improve employability and sustained improvements in job prospects.
- Adapting labour market regulation to facilitate mobility within and between workplaces through amongst other things effective support to unemployed and other vulnerable groups via strengthened labour market and social protection systems.
- Promotion of well-designed minimum wage setting and collective bargaining mechanisms.
- Strengthening and extension of social protection systems.
- Promoting the participation of underrepresented groups in the formal labour market.
- Tackling barriers to the creation of formal jobs.
- Facilitating innovation and entrepreneurship.