Worldwide unemployment is challenging policymakers. In advanced countries, the great crisis of 2007-2009 has led to a 3 percentage point increase in the unemployment rate. In the U.S., unemployment has nearly doubled. In developing countries, the increase in open unemployment has been much smaller, 0.25 percentage points, but high unemployment and chronic underemployment have been a persistent problem.
The fear of job losses is growing, particularly in advanced economies. This global jobs crisis is bringing together the International Monetary Fund (IMF) and the International Labor Organization (ILO) in Oslo on September 13 at an unprecedented conference hosted by Norwegian Prime Minister Jens Stoltenberg, with the participation of the prime ministers of Spain and Greece, the president of Liberia, the finance minister of France and many others, to discuss policy options with a focus on jobs. The IMF and the ILO together? Few would have thought this was possible some years ago. The initiative itself is major news.
The IMF and ILO conference discussion paper (pdf) underlines the severity of the unemployment problem and its human costs. The unemployed not only lose current income, but experience shows that the loss in their earnings persists for 15-20 years, their life expectancy is reduced and their children suffer from lower academic achievement. Youth is particularly affected. The increase in youth unemployment averaged 6.5 percentage points in OECD countries compared to 4 percent in previous recessions. Also worrisome is the longer duration of unemployment. In the U.S., the share of workers unemployed for 27 weeks or more has risen to a record 45 percent.
The Oslo conference is taking place at a time when the jobs issue is dominating the policy debate and when macroeconomic policy tools seem to have reached their limits. When the recovery appeared stronger, the talk was all about how the monetary authorities were preparing to reverse their unorthodox quantitative easing policies, how liquidity had to be withdrawn and how policy interest rates would slowly rise. But no longer. At the annual Jackson Hole conference, Fed chairman Ben Bernanke assured that the Fed was standing ready to inject even more liquidity into the system. But all this liquidity no longer seems to help that much. Fiscal policy too is in a bind, with huge disagreements regarding its effectiveness; estimates of government expenditure multipliers range from less than 0.5 to 2 or more. And policymakers are squeezed between fears of killing the fragile recovery and fears of public debt ratios reaching their highest levels in decades.
The current outlook is disconcerting for most advanced countries, including the U.S. There is little doubt that the massive fiscal stimulus and the accompanying expansionary monetary policy were successful in leading to a recovery in output in late 2009 and early 2010. But the recovery is slowing. The view arguing that fiscal policy should remain at least moderately expansionary in the short run but that governments should announce serious future medium-term fiscal retrenchment raises questions of why consumers, who are told they will have to pay higher taxes in the near future, would spend much more today (except the poorest who spend whatever they can). When it comes to monetary policy, short-term interest rates are already close to zero, although more “quantitative easing” remains, of course, an option.
Yet, there is no reason to believe that the underlying potential of the world economy to grow rapidly is less than it was before the crisis. Technical progress and knowledge is increasing (pdf) and the diffusion of that knowledge is easier than ever. Financial resources for capital accumulation needed to translate know-how into production are plentiful worldwide. It is not so much resources for investment that are the problem, but rather a lack of confidence that there will be sufficient effective demand in the years ahead to justify investments.
The Oslo conference paper (pdf) links the macroeconomic policy debate to the longer-term structural issue of increasing income inequality. Given the strong supply side growth potential of the world economy, could it be that effective demand is hampered by the degree of income concentration at the top that started increasing in the 1980s and continues unabated? In “Fault Lines,” Raghuram Rajan stresses that such concentration of income in the U.S. led to policies to prop up demand by extremely low interest rates, exotic subprime mortgages and ballooning credit card debt. True, there was generally “too much consumer demand” in the U.S., as reflected in large current account deficits. But this demand was made possible through ever increasing household debt in contrast to the 1950s to late 1970s, when median household incomes steadily rose in line with productive capacity. In China, the decline in the share of wages and household incomes, particularly in the last decade, led to a strong focus on exports. For different reasons, both the explosion of household debt in the U.S. and the reliance on export surpluses in China cannot continue.
The Oslo conference raises the question of the links between macroeconomic policies and income distribution. There are different emphases between the sections prepared by the IMF and those prepared by the ILO. But both institutions are underlining the waste and human suffering that comes with high unemployment. One focus of the debate will be the question of whether greater balance in income distribution may not only be ethically desirable but also necessary in the longer run to allow growth to reach its potential and macroeconomic policy tools to become more effective again.