ILO/96/10

GENEVA (ILO News) - The widespread unemployment and job insecurity now affecting the most industrialized economies of the world are "neither inevitable nor irreversible" and the G7 countries have a responsibility "for taking the lead in efforts to combat the global employment crisis", says the International Labour Office (ILO) in a report Endnote1 prepared for the G7 Employment Conference, to be held in Lille, France, April 1-2.

Between 1979 and 1994, the total number of unemployed in the G7 - Canada, France, Germany, Italy, Japan, United Kingdom and the United States - rose from 13 million to almost 24 million, along with 4 million unemployed who have stopped looking for work, and 15 million who work part-time but would rather work full time. The overall G7 employment force rose from 273 million in 1979 to 322 million in 1994, according to the OECD Endnote2.

This job uncertainty has ignited calls for trade protectionism in the United States and triggered widespread strikes in France. Even Japan, long considered as having the most stable job market among advanced industrialized countries, is now experiencing employment problems.

The G7 countries produce two-thirds of the world's total output of goods and services, produce more than half of global exports and attract more than 40 percent of the inflows of direct foreign investment, with just 14 percent of global population. Thus, the way that G7 economies develop and are managed will continue to have a major influence upon the overall world economy, and global employment prospects.

"The employment crisis is one of the main causes of poverty and social exclusion and one of the major obstacles to the achievement of social justice throughout the world," says Mr. Michel Hansenne, Director-General of the ILO.

"In view of their importance to the global economy, the G7 have a lead role to play in solving the crisis of unemployment and exclusion - not only for themselves, but for the benefit of societies throughout the world as a whole."

The ILO report states that unemployment has been concentrated among the young, the unskilled and migrants.

The proportion of long-term unemployed has also risen markedly, especially affecting older citizens. In Italy, France, Germany and Canada, less than half the population between the ages of 54 and 65 are still in the labour force.

The long-term unemployed remain outside the system even during upturns. Substantial job growth occurred during the peak years of 1987-91, but did not make a major dent in long-term unemployment in most industrialized countries.

While unemployment is still relatively low in Japan, it is also emerging as a problem there now. Over the 1979-94 period, open unemployment in Japan rose from 2 to 3 percent.

In the United States, unemployment increased sharply between 1979 and 1982 to nearly 10 percent, but has since fallen to 5.5 percent in February, 1996. The United States and Canada, followed by the United Kingdom, however, have experienced a large increase in the proportion of low-paid workers, considerably higher than any other G7 countries.

This has led to the development of an underclass of "working poor" in the richest nations on Earth. In the United States, around 18 percent of all full-time employees were working for less than the poverty-line income for a four-person household in 1993. In Western Europe, the average is 10 percent.

Causes of High Unemployment and Low Wages

Inadequate economic growth during the past two decades lies at the heart of the employment problems of industrialized countries, even though these problems take different forms in the United States, Japan and Western Europe, the report says.

"It seems to be beyond doubt that current high and persistent levels of unemployment in the G7 are, more than anything else, a result of insufficient aggregate demand linked with lower rates of growth," says the ILO report. "There also appears to be no doubt that slow growth in itself has been a major cause of the structural problems of the labour market."

External shocks such as the two oil crises, insufficient adaptation to structural change and short-sighted domestic policies have also played a role.

The ILO report says that "G7 economies are clearly operating below full capacity: aggregate demand is insufficient, unemployment is massive and inflation is at or below the levels of the 1960s. There is therefore room for some expansion without an excessive fear of resurgent inflation."

Growth is the driving force behind the reduction of unemployment. In the United States, the slowed growth rate has essentially taken the form of an abrupt halt in the rise in individual incomes, as a result of the slow-down in labour productivity gains. On the other hand, the number of jobs rose, keeping unemployment low, at the expense of wage increases.

In Europe, the fact that productivity gains remained at a more constant level meant the decline in growth was reflected in an upward trend in unemployment, but worker's pay kept rising, although at a lower rate.

The ILO report downplays some suggested causes for the employment problems:

• International trade - An expansion of trade with low-wage countries, which some say has a direct downward pressure on wages in high-income countries, is not the problem, because North-South trade still remains relatively modest, whereas the industrialized countries to a large extent trade among themselves.

For example, the share of imports from the Dynamic Asian Economies (DAE) nations plus China to the 24-nation Organization of Economic Cooperation and Development (OECD) represented only 1.5 percent of the OECD gross domestic product (GDP) in 1993, compared with 0.2 percent in 1962. Moreover, their trade with the developing countries, especially with the DAEs, has been in balance or in surplus, which means that such trade tends to be job creating rather than job destroying.

"Developing country workers in low-skilled, labour intensive industries often earn 10 times less than industrialized workers do, so there is just no way G7 countries can compete with them," says Mr. Eddy Lee, senior economist at the ILO. "G7 countries should instead concentrate on high technology industries and the jobs that they create, because it will take many decades before the developing world can hope to catch up in these fields."

• Technological change is often cited as a major cause of joblessness in general, but is often exaggerated, the report says. Technological changes affect the structure of employment and therefore require efforts to adapt labour and production to a rapidly changing environment, but they are not net job destroyers. They are, on the contrary, the locomotives of future growth and job creation.

• High levels of real wages and social protection have also been cited as a major cause of unemployment, but they are not. Structural policies intended to promote greater efficiency and flexibility may have brought about a more efficient allocation of resources but they have had little effect on aggregate employment levels.

G7 employment is now rising more rapidly than their labour force, but if present trends continue, industrialized countries are unlikely to absorb the backlog of unemployment currently confronting them under present policies, the report adds.

However, a combination of technological change and slow growth may produce perverse effects, creating a shortage of labour in a number of top technical occupations requiring highly specialized skills, along with redundant labour in middle-range skill categories rendered obsolete by new categories.

Unless these middle-level workers can be trained or adapted to the risking skill requirements, they will enter the ranks of the unemployed, the report says.

Creating More Jobs

The policy challenge to solve these problems is a double one, the ILO report says:

• How to accelerate the growth in the demand for labour, without provoking a return to inflation and macroeconomic imbalances;

• How to promote the employability and reinsert of the unemployed and socially excluded, while creating room to maintain an adequate social safety net for those that need income support for some time to come.

A mutually supporting set of macroeconomic, structural and sectoral policies are needed to meet this twofold challenge, along with a commitment by fiscal and monetary actors at both the national and international level to keep employment promotion as a central focus of their action.

The role of macroeconomic policies in raising demand and promoting employment-intensive growth is crucial, the ILO report says. Macroeconomic policies must be based on five inter-related elements: an improvement of an international mechanism to coordinate economic and fiscal policies; a lowering of both short-term and long-term interest rates; a halt to the growth of public debt in the medium term by appropriate budgetary policies; and pursuing strategies that avoid wage-driven inflation; and budgetary policies that allow for expenditures to combat unemployment and break recessionary vicious circles in the short-term.

"Such policies need to be supported, however, by strategies involving the social partners - employers, employees and the government that aim at maintaining stability between wage increases and profits," says Mr. Hansenne.

"Only an improved coordination of policy action at the domestic and international level will ensure the confidence of capital markets that the policies will be credible and sustainable in the medium term, thereby providing sufficient signals for the real long-term interest rates to decrease," the ILO report says.

Targeted programs

Targeted interventions are also necessary to make macroeconomic policies benefit the vulnerable and excluded, the report says. It is unlikely that excluded individuals can be provided access to jobs over the next few years. The ILO calls for a range of selective measures consistent with designated macroeconomic objectives to assist these groups.

Examples of such programs are:

• Small, focused training programs aimed at groups facing only moderate problems in the labour market, which have yielded positive results in recent years;

• Subsidized employment, including public investment with quotas for the employment of targeted groups of unemployed;

• Local initiatives, including financing self-employment and the creation of micro-enterprises, and subsidizing useful services such as environmental work.

National Cooperation Needed

"Governments can maximize support and encourage influential groups in society to adopt policies that are broadly consistent with the chosen national economic course. The involvement of representative organizations of workers and employers in a dialogue with government about economic and social issues could contribute to this goal," the ILO report says. "Tripartite dialogue will enhance the acceptability of measures and help focus scarce public resources on those most in need. It will also increase the sustainability of reforms, thereby having a beneficial effect on investor confidence and volatile capital markets."

The ILO says that for these nationwide approaches to be successful, three essential conditions must be met:

• Employer and trade union organizations need to be convinced of the need to give priority to national macroeconomic problems over their more specific concerns in their respective sector of activity;

• A sufficient common understanding must exist both within and among the national labour and employer organizations and the government on basic economic and social issues to allow compromise agreements on wages, other labour costs and employment levels;

• The national labour and employer organizations must be able to demonstrate convincingly to their rank and file the benefits to be derived from the compromises.

Endnote1

Combating Unemployment and Exclusion: Issues and Policy Options, Contribution to the G7 Employment Conference submitted by the Director-General of the International Office, Lille, 1-2 April 1996. ISBN 92-2-110158-4. International Labour Office, Geneva, 1996.

Endnote2

Labour Force Statistics, 1973-1993, ISBN 92-64-04497-3; Quarterly Labour Force Statistics (for 1994), ISSN 0255-3627. OECD, Paris 1995.