Boosting demand is the goal, so how do we get there?

Comment | 05 September 2013
By Guy Ryder, ILO Director-General

In the last few months we’ve seen promising signs of economic recovery: Growth seems to be resuming in the Euro zone. In the US, economists are predicting that 2014 could be the best year for growth since 2005. China has also seen improvements in the manufacturing sector.

All this is welcome news – but we need to go beyond the headline figures and look at the detail.

It shows a different and worrying picture:

Unemployment is still at unacceptably high levels and, globally, is predicted to rise from the current 200 million to nearly 208 million by 2015. In most G20 countries, labour market conditions have either improved marginally or not at all over the past twelve months. In some cases, they have significantly deteriorated. The youth unemployment rate is double that of adults in all but two G20 countries (Japan and Germany).

Many of those that do have work are in poor quality jobs, often temporary, or are working part-time involuntarily. Real average wage growth has fallen or slowed in several advanced economies such as Japan, the United Kingdom, the United States and Spain. Among emerging economies, real wages are growing at a mixed pace, with some growing rapidly but with wage growth rates in others still below pre-crisis levels.

As we prepare for the G20 Leaders’ Summit in St Petersburg, Russia, disagreements about the best way forward – austerity versus growth policies – are likely to continue.

However, the one thing we all agree on is that at the global level, there is a deficit of aggregate demand. In other words, the total demand for goods and services is not sufficient to employ the millions who want to work or to give enterprises the confidence to expand. Every key component of demand – consumer spending, investment, government expenditure and exports – remains below pre-crisis trends.

It’s a vicious circle that starts with the consumer, causing a knock-on effect in the other spheres and back again: Consumer demand comes from households but their incomes have been affected by years of stagnant wages, which means they can’t afford to buy the goods and services that will stimulate growth. That, in turn affects the level of investment because firms don’t invest unless there is demand. The austerity policies that have been followed by many governments over the last few years depress government demand. Meanwhile, at the international level, trade is a closed system – not everyone can have net exports as a way out of the crisis.

The key to breaking the circle lies in the creation of more quality jobs while increasing productivity. It is about combining economic and labour policies.

This was agreed at the first-ever joint meeting of the G20 Labour and Employment Ministers and Finance Ministers in Moscow in July 2013.

Where there is fiscal space, governments should invest in building roads, schools, and other infrastructure that will increase the efficiency of their economies in the long-run, while creating much-needed jobs in the short-run. Australia, Canada, Indonesia, and Japan have dedicated significant resources to such infrastructure investments.

Governments should also give incentives to banks to lend to small and medium businesses. This will help create a sound domestic investment and business climate, which will also lead to more quality jobs.

Labour market policies are usually seen as an offshoot of economic policies, but in reality they are critical to improving aggregate demand. These include appropriately set minimum wages and policies that reinforce the links between productivity and wages – since increased wages will lead to increased demand.

China has been actively and successfully pursuing such policies, presiding over substantial increases in their minimum wages over the last few years.

Also essential are programmes that expand social protection systems to strengthen families’ resilience to economic shocks and boost aggregate demand. Brazil is successfully running a programme that combines cash transfers, employment opportunities and access to public services, directed at people in poverty.

We hope we are seeing the green shoots of recovery, but the growth is still limited and all too fragile and the employment situation is still getting worse.

With the right mix of economic and labour market policies, we can break the vicious circle that has gripped the global economy, restore sustainable economic growth and create more and better jobs for people.

Until we recognize that policies that suppress demand from working families, small and medium enterprises and governments are the wrong policy mix, any economic recovery is likely to be short-lived.