“Right policy mix” can lead to fiscal consolidation and job creation

The International Labour Organization (ILO) says that between 1.8 and 2.1 million jobs could be created over a one-year period in advanced economies if governments adopt a more employment friendly approach to fiscal austerity.

Analysis | 26 April 2012

GENEVA (ILO News) – The International Labour Organization (ILO) says that between 1.8 and 2.1 million jobs could be created over a one-year period in advanced economies if governments adopt a more employment friendly approach to fiscal austerity.

According to the World of Work Report 2012, this is nearly 3 times the job growth expected if current policies remain unchanged.

Many developed countries are facing a huge fiscal consolidation challenge, as well as difficulties in creating new jobs. Not only did their spending increase as a result of the crisis but, most importantly, tax revenues decreased. At the same time, there is a decline in employment growth as output slows down.

The key question for these countries is how to stimulate economic activity and create jobs against a backdrop of pressures to reign in public expenses and weak private sector demand.

The report calls for a socially-responsible approach to fiscal consolidation, arguing that the pace and content of fiscal cuts are important both in terms of fostering fiscal stability and boosting employment growth.

In over 90 per cent of countries that have implemented austerity measures, unemployment rates are still above their 2007 levels. In close to half of them, unemployment rates had increased further by the end of 2011. There are an estimated 43.5 million unemployed workers in advanced economies.

According to the report, current consolidation policies will lead to weak employment growth and a deteriorating fiscal position in the medium-term. Under this scenario, only 0.8 million jobs would be created in a one-year period in advanced economies.

In contrast, safeguarding employment and social measures – while adhering to the demands of prudent fiscal management – could more than double employment creation and generate up to 2.1 million jobs in advanced economies.

Simulations: number of jobs that would be created between Q2 2012 and Q2 2013 depending on different policy mix scenarios, advanced economies (millions of jobs)
Fig 3.6 - All scenarios simulate changes in the composition of fiscal balances. They are based on the assumption that increases in expenditures are either offset by reductions in other expenses or financed by increases in revenues. Expenditure items are measured as a percentage of total expenditures and revenue items as a percentage of total revenues.
The report says the focus should be on the unemployed, especially young workers, to help them find new jobs. At the same time, there is a need to stimulate private investment. This can be done through public infrastructure investment and support to small-and-medium-sized enterprises (SMEs).

In the case of emerging and developing countries, emphasis should be placed on public investment and social protection to reduce poverty, income inequality and stimulate aggregate demand.

However, the report warns that “international policy coordination is also needed if countries are to avoid racing towards fast fiscal consolidation in the expectation that other countries would take the lead in boosting global growth”.