L20 Summit - Session VI

A G20 strategy for reducing unemployment and income inequality

Remarks by Sandra Polaski Deputy Director-General for Policy, ILO

Statement | Brisbane, Australia | 14 November 2014
Good morning. And thanks to the ACTU, ITUC, L20 and Friedrich Ebert Stiftung for inviting me.
The ILO believes, as you do, that one of the key challenges facing the G20 is how to accelerate employment growth and improve the quality jobs. We don’t simply count this as one of a list of challenges, but insist that to recover from the lingering effects of the crisis and put the global economy on a track to renewed growth we must address the deficits in jobs and incomes.

Let me start with a snapshot of the most recent developments in the G20 labour markets.

In the last 12 months, the majority of the G20 countries have witnessed a modest reduction in their unemployment rates, with some exceptions including Australia, Italy, the Republic of Korea and Turkey. These positive developments were due to welcome net job creation, especially in the United States, but in some cases resulted in part from declines in the labour force participation rate (e.g. Argentina, Brazil, Spain and the United States) as discouraged workers stopped looking for work.

However unemployment is still higher in almost all G20 countries than it was before the crisis and job growth is weaker in most G20 countries than GDP growth rates—themselves below trend—would imply. The employment intensity of growth has weakened in many countries, and even countries with very high growth rates over recent years, including China, India and Indonesia, did not produce comparable growth in employment.

ILO has projected that jobs gaps will remain large in advanced G20 economies at least until 2018, based on the IMF growth outlook of October 2013. However with the recent slowing of growth in Europe and many emerging G20 the jobs gap may widen even further. We are now expecting that our new projections, which will come out in January, will be worse than before.

Job quality is also suffering.

Coinciding with the sizeable jobs gap is a deterioration in job quality in a number of G20 countries. Underemployment and informality continue to be serious challenges in many emerging G20, while involuntary temporary work, involuntary part-time, low-paid work and insecure working arrangements have expanded in most advanced G20.

According to our forthcoming report on wages (ILO Global Wage Report 2014-15), to be released on December 5, average real wages have grown by only 1 to 2 per cent in the G20 over recent years. That modest growth was attributable almost entirely to emerging economies, particularly China, where wages have grown at a rapid rate for more than a decade. Wage growth in advanced economies has been fluctuating around zero since 2008 and been negative in some countries (e.g. Spain). Even in advanced economies that have experienced rapid employment growth, such as the UK, median pay is now significantly lower than it was in 2007. In Germany the incidence of low pay in 2012 was higher than in 2002 and the average German worker has experienced a decline in real wages for about 10 years.

Young people have been particularly hard hit by the crisis and weak recovery of labour markets, with about 75 million young people unemployed in 2013 and the global unemployment youth rate almost three times as high as the rate for adults. The Eurozone economies have youth unemployment rates exceeding 20 per cent, ranging up to 50 per cent in the crisis countries.

Not all the news is bad. Working poverty has declined in many emerging G20 countries, most notably China. Our current work shows that, overall, an estimated 447 million workers in emerging G20 economies were extremely or moderately poor in 2013, a reduction by half since 1991. Yet if you add to that number the near-poor workers, over half of the workforce in emerging G20 countries was either poor or just above the poverty line in 2013. So good progress in poverty reduction has been made, but there is a lot more to be done in the future.

Why are we seeing persistent jobs gaps and deteriorating job quality?

There has been a perception that unemployment was a temporary, cyclical challenge that would be overcome when growth resumed. However it is gradually being recognized that the causality runs mainly in the other direction—more jobs with better pay are required to reignite growth. As we have explained in our recent report to the G20 Labour and Employment Ministers, the combination of unemployment, stagnant wages and job insecurity in most advanced G20 countries and the continuing prevalence of informality and underemployment in many emerging G20 are the main reasons for slow growth in household consumption. Without confidence in their job and income prospects, households in most countries continue to be cautious about consumption.

And let’s recall the basic composition of overall GDP:
consumption + investment + government spending + net exports

So consumption is constrained. What about investment? Firms have held back from investing in the real economy, because they do not see reliable sources of demand for their products and services. Investment rates in most G20 are far below pre-crisis rates. Weak consumption and weak investment also reduce government tax receipts and their ability to make needed investments in infrastructure, education and other public goods. These investments would create jobs in the short term and improve the productivity and output potential of economies in the medium and long term. Instead, unemployment and stagnant incomes start a vicious cycle of low consumption, low investment, low government tax revenues and low government spending. This is the reason for slow growth in most of the G20 and in parts of Europe it is leading to new recession.

Weak household demand also contributes to global imbalances, as economies constrained by domestic consumption turn to export-led growth. This increases the risk of beggar-thy-neighbour strategies. If many countries compete for a larger share of stagnant or slow-growing export markets through cuts in wages or social protection systems, global aggregate demand will contract even further.

How has the G20 responded?

We have been putting this analysis before the G20 for the last two years and many governments agree with it. However the G20 reflects the debate that is still underway—in the Eurozone, in the US between the executive branch and the congress and elsewhere. One camp—and this includes the ILO—believes that the evidence has now clearly demonstrated that the only way to break out of the current slow growth trap is through increased wages, stronger social protection systems, government spending on needed infrastructure and public goods and progressive tax policies. But this debate is far from being settled.

What does the ILO recommend to the G20?

We have advanced many proposals to the G20 on a range of issues, working through the Sherpa track and several working groups. However in light of slow and weakening growth and the continuing employment crisis, I would highlight seven key measures.

Strengthen minimum wages:
Minimum wages can create an effective wage floor. Recent research suggests that governments have considerable space for utilizing minimum wage policy. This research—by the ILO, World Bank, academics and others—shows that, when minimum wages are set in a way that balances the needs of workers and their families and economic factors, there is no trade-off between increased minimum wages and employment levels. There had been a conventional “wisdom” that increases in the minimum wage would reduce employment. But the best contemporary evidence shows that there is no empirical basis for that view. The research shows that minimum wage increases either have no effect on employment levels or have very small effects, which can be either positive or negative depending on the specific circumstances. It also shows that minimum wages do contribute effectively to reducing poverty and income inequality. Further, low-wage workers and households have a high propensity to spend their increased earnings because of unsatisfied needs, so the wages feed back in to aggregate demand, thus benefiting firms and the overall economy.

Strengthen collective bargaining: This is a key institution for addressing inequality in general and wage inequality in particular. Where collective bargaining is extensive, there is less wage dispersion and more wage equity. The widening gap between productivity growth and wage growth, which has been observed in most advanced G20 and several emerging G20 economies, will be difficult if not impossible to address without stronger collective bargaining.

Target necessary interventions for vulnerable workers: Extending minimum wages and collective bargaining to low-paid workers will generally be helpful in reducing inequality, but will not eliminate all forms of discrimination or pay gaps, which constitute a significant source of wage and total inequality. Laws and policies are needed to combat discrimination and to protect the rights of vulnerable workers, such as migrant workers, to equal pay and treatment. Additional measures are also needed to create a level playing field for women.

Address inequality through tax policy: In many G20 countries tax systems have become more regressive. Restoring progressivity to tax systems is essential to reduce inequality while raising government revenue for needed public investment. And let’s remember that those investment—in infrastructure, education, research and development and other public good—make an indispensible contribution not only to the quality of societies but to the proper functioning of the private sector and firms. In some emerging economies there has been significant progress in raising tax revenues by bringing informal workers and firms into the formal economy. This benefits the government, the affected workers and firms and also the formal economy firms who now can compete on a more equal basis. Stronger action against tax evasion and aggressive tax avoidance is needed in all countries.

Address inequality through transfers and social protection: Increased revenues can also be used to extend and upgrade social protection systems. There is some good news here: many G20 emerging economies have expanded social protection systems significantly over recent years, although benefits still remain low and more progress is needed. In emerging economies, adequate social protection floors help vulnerable workers and households invest in their health, their skills or their children’s education, thus increasing their productivity. They build the resilience of households and can help prevent them from slipping back into poverty or distress migration. In advanced economies countries with established social protection systems there are often still gaps, such as in early childhood education, nutrition programs or affordable child and elder care that if filled will not only make society more equal but will also increase productivity and labour force participation of women.

Invest in needed infrastructure: At a time of historically low interest rates and large infrastructure deficits in both advanced and emerging G20 this is win-win proposition, as it creates needed jobs in the short term and increases output and productivity in the medium and long term. This benefits workers, households and firms and has been shown to have high multiplier effects in terms of the impact on demand and economic activity.

Improve availability of credit for SMEs: Many firms, especially SMEs, are constrained from expanding by lack of credit. These firms can be powerful job creators if they can access the financing they need. Because of the legacy of the crisis, many financial institutions are risk averse and are lending less than the amounts that would be optimal for the real economy. Governments can facilitate improvements in both the quantity and quality of lending through smart regulation, incentives and other measures to redirect the financial sector to its proper role in the economy.

What comes next in the G20?

Some important innovations have been launched this year that can be used in the future to gradually assemble an overall G20 strategy for jobs and growth. For the first time the twenty governments developed growth strategies that start with a diagnosis of the problems facing their economies and then commit to responsive policies. While the quality of the strategies varies, many are quite good at both the diagnostic level and the policy response. The governments also established employment plans, which go into considerable detail on labour market challenges. Many include ambitious policy actions. There are signs that the Turkish presidency may place a high priority on the link between employment and growth and on the declining labour share, which could point the way to a more comprehensive approach to tackling growth, jobs and inequality. This would be an encouraging development.

But there is no room for complacency, and the situation could get worse over the next few years with weaker growth and continued labour market distress.

What is needed is a G20 strategy that puts job creation and measures to improve the quality of employment at the centre of recovery efforts. Well-designed employment, wage and social protection policies, implemented in coordination with supportive macroeconomic policy mixes and sound taxation policies, can reverse the current self-reinforcing cycle of slow growth, weak job creation, low wage growth and low investment. This is the way forward for the G20.

The L20 can play an important role by continually reinforcing that message.