Opinion: What to do about unemployment

By Neville Bennett Unemployment, the principal consequence of recessions, is constricting many economies, not least the USA with a rate of 9.4% and rising. The global rate appears to be about 7.1% and is heading towards 210 to 240 million people. Global employment has been growing since 1991, so 2009 represents the worst global performance on record. The International Labor Organization last updated its commentary in May, and was expecting the worst, although: "The unprecedented speed, depth and broad reach of the global economic crisis and the real prospect of an extended global recession "“ perhaps even depression "“ has prompted a massive global policy response". Most developed countries have adopted a two-pronged approach: targeting demand through fiscal stimulus and low interest rates, and repairing the financial sector's balance sheets. About US$2 trillion has been spent to create and maintain jobs. The current crisis marks a cleavage in the historical unemployment series, and causing problems in predicting the growing carnage. Moreover, the crisis is detrimental for women as they are often in export-oriented production. Youth were, at the global level, 2.8 times as likely to be unemployed as adults, which the crisis has exacerbated. The ILO represents the crisis as "an unparalleled global economic challenge". I agree: unfortunately, there are no magic formulas, no shortcuts and probably no one-size-fits-all model for development. Economic theory Unemployment was a big interest for economists of my generation. Our fathers had suffered massively from it, and it figured largely in the syllabus. We looked at different cases of unemployment, like "frictional unemployment" : people taking time out from work or looking for a different job; and structural unemployment: a mismatch of vacancies and supply (which often requires workers to move homes). There was the classical theory where unemployment resulted from excessive wages, and Keynsian theory of unemployment resulting from too little demand in the economy, requiring stimulus. Seminal work on the labour market in the early 1990's established a conventional wisdom that recessions are mainly driven by high job rate losses. Although economists argue about it, most people would agree that recessions start out with a wave of "separations" and changes in the job-finding rate. It is currently believed that in the US the job-finding rate accounts for two-thirds of unemployment volatility. New work I read Pedro Gomes's (LSE) Bank of England Working Paper (Labour market flows: fact from the UK) with growing fascination. The language is rather technical, but he did an analysis of flows between employment, unemployment and inactivity for 1996 to 2007. In each quarter, 7% change status and 2% change their employer. It is a colossal undertaking: nearly one million people move into new jobs every three months! A large number shift jobs every month. Moreover, the workforce grows by a net 60,000 a quarter. These flows are important for understanding markets. In every quarter, 7% of employees look for a new job. The interaction between employment and inactivity has become cyclic. In booms, fewer people look for a different job but they are more likely to change employer to a similar job. Fewer people get fired in booms. Most unemployment is involuntary. Education is decisive. The less-educated are three times more likely to be unemployed or in inactivity than those with higher education. The less-educated are twice as likely to be fired and have half the job-finding rate of success. The highly educated are a fast-growing proportion of the workforce and have the highest rate of participation. About a quarter of the workforce is in the public sector, which, unlike the private sector, is countercyclical. Jobs seem more secure as the separation level is half that of the private sector. Yet it is somewhat surprising that the unemployed and inactive are six times more likely to get a job in the private sector than the public one; and during booms, fewer employees look for a different job. Job creation The ILO hosts an excellent study by Alejandro Foxley, former foreign and finance minister of Chile. Foxley argues persuasively that reforming labour markets is the key to creating high paying jobs necessary for restarting economic growth. I am always suspicious of "labour reform" when it is code for wage reduction. But Foxley is not politically contentious because he advocates higher-paid work, better standards of living, and more effective government. Foxley appeals to me because of his questioning outlook. For example, he challenges export-driven economic development. He points out that Latin America did better than Asia in the crisis. Asia has placed excessive emphasis on external demand at the expense of domestic consumption. The IMF has also argued Asia should spend more on infrastructure, public health and housing, education and job-training. It could produce more balanced growth with fewer saving imbalances. Foxley also examines consequences for commodity exporters like Chile [and New Zealand]. Chile still sends 85% of its exports to traditional markets and it sends only 10% of exports to countries with which it has negotiated Free Trade arrangements. East Asia has been more active in adding value, and investing in R&D, information technologies and infrastructure. Greater diversification leads to higher growth and few shocks. Nevertheless, the key component of any post-crisis agenda should be job-creation and upgrading skills. The crisis has opened a door for reform. Many labour markets discriminate against two groups: women and youth. For example, in the US and UK 56-59% of women participate in the workforce but it is 49% in East Europe and 52% in East Asia and Latin America. Youth participation is 66% in the UK, but 30% in East Europe, 45% in East Asia and 49% in Latin America. Many middle-income countries limit their growth potential by excluding so many women and youth. Reforms Advanced countries like Denmark and Austria have reduced the cost of hiring and firing, and improved unemployment insurance, thereby increasing flexibility. Youth and women's participation can be increased by day-care and pre-school facilities and job-training. All countries can improve existing workforce skills. Economic growth takes time and persistence to achieve, and labour reform is central to it. ____________ * Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared. neville@bennetteconomics.com www.bennetteconomics.com