Fix the Labour Market to End the Crisis

 The ILO and the IMF are holding an important high level conference in Oslo on the “Challenges of Growth, Employment and Social Cohesion” on September 13.  In advance, they have released an important joint discussion paper.  The summary  – highly reflective of the ILO contribution but not contradicted by the IMF contribution – makes a number of the key points I and others in the labour movement have made about the roots of, and ways out of, the Great Recession. 

In summary –  the crisis arose in part from increasing income inequality, the fall in the labour share of national income and the stagnation of real wages of workers, which made growth dangerously dependent upon debt fuelled consumption. Any route out of the crisis must re-establish the link between productivity and real wage growth, which will demand the strengthening of collective bargaining and minimum wage standards as well as social protection. If we don’t get the labour market right, we face a future of high unemployment, precarious work, AND economic stagnation. 

Here are some key extracts:

” Over the past three decades, inequalities have widened in many countries, driven by various factors, including the diminishing share of wages in national income and increasing inequality within wage income, as well as technological change. This, in turn, has fed back into the globalization process and the structure of demand, contributing to the emergence of imbalances nationally and internationally and raising multiple issues of fairness. Achieving a job-rich recovery and broad based income gains is vital not only for equity and social cohesion but also to lay the foundations for sustained growth made possible by an expansion of potential output matched by adequate effective demand. ”

“The serious deterioration in employment since late-2008 has heightened international concern about the uneven pattern of globalization and the inability of the global economy to generate enough decent work opportunities in all countries, both developing and developed.

“At the same time as there have been changes in the structure of employment, inequality in the distribution of wages and incomes has widened in many countries. Wage and income inequality have increased in a majority of countries, driven largely by increased income for those at the very top of the income distribution. With real wages growing, on average, by only 0.75 per cent for every 1 per cent expansion of GDP, there has been a marked decline inwage shares in many developed and developing countries in recent years.”

“Looking towards the longer term, sustainable growth requires a combination of structural change, and total factor productivity growth with the quantity and quality of employment increasing at the same time. Growing inequality and declining wage shares in many developed and developing countries show however that, in recent years, workers in many countries have not shared significantly in productivity gains. ”

“The world’s labour force represents a key supply-side component of growth. At the same time, its earnings drive consumption, which in turn is the main force on the demand side ofgrowth. For growth to be strong, sustainable and balanced, employment and productivity growth and the shares of income going to capital and labour must also be well balanced.”

“Whether an economy tends to generate close to full employment critically depends on whether effective demand expands at a rate close to the expansion of productive capacity, which is itself determined by the growth of the labour force and the increase in labour productivity. While for a single country net exports are an addition to effective demand, world imports and exports must sum to zero. In the context of the employment challenge, the much discussed “global imbalances” must therefore be analysed within a framework that links global and national effective demand and supply.”

“The combination of productivity and employment growth can also facilitate substantial real wage increases. The effectiveness of mechanisms to ensure that wages and household incomes keep pace with productivity is a critical component of a sustainable growth path. Declining wage shares, rising inequality and weak growth in formal employment thus contribute to national and international imbalances. Both threaten to produce a period of weak world growth and continued high unemployment and reduce the effectiveness of traditional fiscal and monetary policy tools. It may be time to consider policies focused onlabour markets and income distribution to supplement fiscal and monetary policies.”

“This means developing mechanisms to ensure that the gains from rising productivity are widely distributed in the form of increasing wages and improved social protection systems. ”

 “Strong labour market institutions help ensure that trade-offs and trade-ins in employment and social policies are identified and addressed, and if mistakes are made, that they are quickly corrected. Active engagement of representative organizations of workers and employers through mechanisms of social dialogue, based on respect for fundamental principles and rights at work, can ensure that practical knowledge of the impact of policies is well appreciated and that the key actors in the labour market have a commitment to making policies work on the ground.”

“A central issue is the construction of a framework of labour market institutions and regulations that will help produce wage and employment outcomes in the public and private sector that are conducive to sustainable growth and establish efficient and equitable pay relationships. Minimum-wage-setting mechanisms play an important role in this process, including by affecting the employment prospects for low-skilled workers, as do social dialogue and collective bargaining at various levels of the economy.”

“Social protection policies, including unemployment benefits, health care, childcare andincome security for the elderly and persons with disabilities, play a major role in cushioning populations from economic shocks and in improving social cohesion. They also serve as an important countercyclical policy response that can help maintain  consumption, reduce precautionary savings and boost aggregate demand. In the long term, evidence shows that social protection helps to build human capital and labour productivity, contributing to the sustainability of economic growth. Unemployment benefits not only provide income security, they also enable unemployed workers to search for jobs that better match their abilities, thereby increasing the efficiency of the job-matching process.”