Labour market

A remedy for inequality

Building and bolstering labour market institutions is crucial for reducing inequality because market forces alone will not do the job.

Comment | 24 February 2015
By Janine Berg, Senior Economist at the International Labour Organization

Janine Berg, Senior Economist at the ILO
Apparently, the first step in solving a problem is admitting that one exists. If so, it is welcome that inequality trends are in the spotlight and there is concern about its potential consequences. But now, it is time to focus attention on reverting these unsettling trends.

A new book, Labour markets, Institutions and Inequality, written by policy experts from the International Labour Office, argues that reducing inequality will require concerted political action to strengthen, and in some cases, institute, labour market and social welfare institutions around the world.

Institutions are needed because equitable societies with large middle classes are not the natural outcome of market forces.

To begin with, countries must abandon the misguided notion that deregulating the labour market will solve problems of underemployment and unequal access to work.

Cheapening the cost of labour doesn’t lead to job creation. What’s needed instead are macroeconomic, trade and investment policies that support job creation – as having enough jobs is fundamental for reducing inequality.

Market reflects biases

The labour market will not value jobs in an equitable way. In some instances, that’s because of surplus labour (or excess supply, in economic parlance).

In other cases, this is because the “market” is merely a reflection of societies’ own biases against certain occupations, or the people who work in those occupations. Domestic work, is perhaps the most emblematic example of these biases but there are many others.

If we want more equitable outcomes in the labour market, then we need supportive institutions, including minimum wages, collective bargaining and laws ensuring equal treatment, regardless of the type of employment contract.

We also need supportive public policies such as public care services and early childhood education, which allow working parents to more easily enter the labour market, by lowering the cost of access.

All of these policies are particularly important for low-earning workers, many of whom are “outsiders” (often including women, migrants and youth). These groups fare better when labour markets have supportive institutions that can increase earnings, limiting the incidence of low-pay work and lowering inequality.

Supportive social policies

Labour markets are also influenced by social policies. Social assistance programmes can lessen workers’ desperation and the likelihood of falling victim to forced labour or other forms of exploitative work.

Unemployment benefits can improve matching in the labour market, as well as workers’ ability to bargain for higher wages. Likewise, employment guarantee programmes can improve compliance with the minimum wage. In-work benefits, on the other hand, risk acting as a subsidy to low wages, unless they are coupled with other policies such as minimum wages.

Policies are needed to support those times in our life when we shouldn’t work – when we are young and should be studying, if we are unable to work due to illness or disability, or when, after decades of work, we take retirement.

Ensuring that individuals and families can refrain from work during these periods requires supportive social policies. This is shown clearly in the data – for example, by the significant negative relationship between the coverage and benefit levels of pensions and the labour force participation of the elderly. There is thus a need to ensure that workers have sufficient income when out of the labour market, by combining contributory pension systems with minimum guarantees for all.

Many developing countries have recently expanded their social assistance programmes, which is a welcome development, given their effectiveness at reducing poverty. But because of the low level of benefits, these policies need to be complemented with other social protection measures that can provide expanded support to workers and have a greater redistributive effect.

Some of the policies discussed require financing, thus a need for countries to have a sufficient tax base that can support redistribution, or the political will to increase revenues if needed.

Tailored approaches

Policy approaches can be tailored to a country’s level of development and economic structure. In some countries, it is more important to focus on providing public services and social transfers that can raise incomes at the bottom and support access to the labour market.

In other countries, social protection systems are well-established but under pressure due to increasingly unequal labour market outcomes that require a strengthening of labour market regulations.

In his analysis of inequality and economic development, Simon Kuznets explained that the inverted-U relationship between economic growth and inequality was the result of growing political pressure from lower-income groups.

As economic wealth increased and democracy spread, these groups exerted political pressure in favour of redistribution. Thus despite being misinterpreted as a “natural law,” the reduction of inequality over time was not a natural outcome. It required political pressure, and the will and commitment to change.

It remains to be seen whether the commitment to address and reverse inequality exists. What is clear is that in the absence of policies which support a well-regulated labour market and provide social protection, we will continue to lament inequality trends.