ESQUEMAS DE CONTROL PROPUESTOS

In 2012, the world of work began experiencing a double dip in jobs. With growth weakening in major economies and regions and the global slowdown affecting ever more countries, employment growth has sharply decelerated and unemployment has begun to rise. While growth is projected to modestly accelerate in 2013, mounting uncertainty regarding the outlook and the capacity of policy- makers to find appropriate instruments to deal with the crisis is holding back investment and hiring. The persistent problems in employment generation have mounted severe challenges. Long- term unemployment is on the rise; mismatches in skills and occupations make it increasingly difficult for those without a job to find decent work opportunities. This is threatening long-term progress in poverty reduction and increased living standards that the world economy has managed to achieve over the past decade.

Policy-makers need to take the necessary actions to prevent a further deterioration of the economic and social outlook. The global economy is far from a regular, cyclical downturn that would correct itself automatically. Rather, without decisive corrective action, it might be pushed into a period of stagnation and social turmoil for years to come. As this report has shown, past experiences from historical financial crises point to the risk of a prolonged period of low growth and high joblessness if no further action is taken. To avoid a further deterioration, policy-makers should concentrate on four interrelated issues: (i) tackling policy uncertainty, (ii) coordinating action to support aggregate demand, (iii) addressing rising labour market mismatch problems and (iv) focusing action on youth joblessness.

Tackle uncertainty to increase investment and job creation

The crisis in the Euro area, the fiscal cliff and now the debt ceiling debate in the United States, growing policy incoherence (discussed in chapter 1) and failure to implement timely reform measures, largely in the advanced economies, have led to heightened uncertainty and currently prevent a broader and more sustainable recovery in developed economies, which has had negative spillover effects to some developing economies. In advanced economies, firms are holding back their investment and hiring plans until they see the new risks and opportunities more clearly. Similarly, deleveraging of banks and households has gone unabated through the recovery period, partly as a result of the uncertain outlook. Private actors, largely in the EU area, prefer to lower their outstanding commitments in order to be able to better face new, upcoming risks. As long as this high uncertainty continues, the recovery is unlikely to take off and recessionary conditions will continue to spread globally. Stabilizing expectations and providing a more transparent policy outlook is therefore key to jumpstart the global economy.

Depressed labour markets and low wage growth are weighing on household disposable income, thereby lowering aggregate demand and prolonging the deleveraging process, in particular in countries that had experienced a strong housing bubble in the build-up of the crisis. Weak private consumption and low consumer confidence further add to the unwillingness of firms to expand capacity. Recent discussions in Spain to install a debt moratorium for households with large, unsustainable mortgages are a step in the right direction to foster stronger consumption growth and ultimately job creation. In addition, targeted credit provision to sectors with impaired access to

funds and which are contributing strongly to employment growth, such as small and medium-sized enterprises in the service industry, can strengthen employment creation and overcome the liquidity constraints that firms continue to face (Calvo, 2011).

A second source of uncertainty stems from the lack of a credible exit strategy for distressed countries. In several (mostly European) countries, sovereign debt levels have reached barely sustainable levels, with serious adverse consequences for the real economy in these countries. So far, policy-makers have not seemed ready to provide a consistent and sound strategy to surmount real and financial problems in these countries. A number of solutions have been implemented to face immediate liquidity problems, such as the outright monetary transaction program (OMT) of the ECB, and the European Stability Mechanism (ESM), which allows direct support to individual banks and helps to break the vicious circle between bank bailouts and national debt. What is further needed is mutualisation of at least part of the debt these countries have accumulated (ILO, 2012d). More ad hoc solutions to problems as they emerge are unlikely to reduce uncertainty.

Finally, several policy measures need to be implemented quickly to restore confidence in financial market stability. First, reform proposals for the financial sector and targeted measures to support the banking industry need to be implemented swiftly. In this regard, the fact that some of the reform instruments that were signed into law in 2010 in the United States as part of the Dodd– Frank Act are still not fully operational, continues to contribute to the uncertain outlook. Similarly, in the Euro area new measures to safeguard the banking sector have in principle been voted and enshrined in the European Stability Mechanism (ESM) but will not actually start to function before the summer of 2013. These measures need to come into effect to further improve financial intermediation. Also, many policy efforts have been aimed at improving conditions for sovereigns to (re-) finance their debt burden, with far less policy action to improve credit conditions for businesses. A better functioning financial sector would also be one that directs more credit and investment towards the real economy, spurring investment and employment. As indicated in the last issue of the Global Employment Trends report, a fully fledged, operational reform framework that stabilizes financial markets is likely to contribute substantially to stronger employment growth. Waiting longer and delaying implementation further adds to uncertainty, thereby restricting credit especially to SMEs and keeping unemployment high and even rising.

Coordinate stimulus for global demand and employment creation

What is needed is an internationally coordinated effort to support global demand more broadly. Currently, the attempt to solve high and unsustainable sovereign debt through austerity measures has created a dangerous downward spiral whereby fiscal retrenchment in one country spills over to neighbours, creating new imbalances that require even more fiscal adjustments. Such policies are unlikely to lead to a sustainable recovery even if the downward spiral eventually bottoms out. Similarly, the strategy currently followed in some European countries to focus on export competitiveness in order to restore engines of growth cannot succeed for all member countries at the same time; as price competitiveness improves in one country, competitors within the region will have to follow suit, further adding to the danger of a downward, deflationary spiral (see ILO, 2010).

Rather, policy actions need to be coordinated globally in order to rebalance growth and to foster multi-polar growth engines. Currently, global growth is impaired by crisis conditions in a few countries that have spilled over, affecting global trade and financial conditions throughout the world. Global growth should rest on strong domestic conditions in several large economies to help stabilize

economic activity around the world. This requires that many more countries than currently should strengthen their domestic economy rather than relying strongly on export-driven growth. While those countries that have been harmed by large and persistent current-account deficits that have led to a dangerous foreign-debt overhang may need to focus on restoring external competitiveness through internal or external devaluation. Other countries, particular among emerging economies, should start focusing more on strengthening domestic demand. This will allow more diversification of the global drivers of growth.

The growing purchasing power of the emerging middle-class in many developing economies could help bring about such a development, supporting stronger investment and consumption in these economies. In time, this could help provide a substantial boost to global aggregate demand, contributing to more balanced and sustainable global economic growth.

Coordinated stimulus requires monetary policy to remain accommodative and to continue its reflationary stance. In particular, major central banks need to keep up with providing liquidity through unconventional policy interventions. In this respect, the deceleration in global inflation is likely to make the task of global rebalancing more difficult for policy-makers. On the one hand, in the presence of nominal wage rigidities it will prevent crisis countries in the Euro area from benefiting from faster improvements in competitiveness, as they cannot devalue their nominal exchange rate. On the other hand, low inflation and even more the risk of a deflation keeps the debt burden up or even rising, thereby further pushing sovereigns, banks and households into deleveraging. Monetary policy-makers, therefore, need to ensure that inflation expectations remain stable or slightly upward-rising. Temporary surges of inflation, in this respect, can help prevent deflationary sentiments from taking hold and might provide growth margins for crisis countries in the Euro area (Schmitt-Grohé and Uribe, 2012).

Address labour market mismatch and promote structural change

The bulk of unemployment created by the crisis has been cyclical. However, the deep and prolonged recession in labour markets has intensified structural problems that predated the crisis. In particular, skills mismatches and occupational shifts have worsened, which is hampering the jobs recovery and reducing the effectiveness of policy interventions to stimulate growth. At the same time, global economic woes have lowered the pace of structural change in many developing regions, an essential ingredient for them to improve employment quality and offer more decent work opportunities to their working-age population. Both call for policies to facilitate workers’ mobility across sectors in order to support continuous job creation and stimulate successful productive transformation. In addition, developing countries need to accelerate productivity growth within sectors, especially in agriculture. This in itself can enable structural change out of agriculture and into higher value-added sectors.

Skill and occupational mismatches can prove to be a transitory phenomenon if properly addressed. In particular during times of rapid structural change, new jobs appear in different sectors and with different competence requirements than those that disappear. Targeted educational and vocational training policies can help to address these problems and prevent job-seekers from losing employability in the more dynamic sectors of the economy. Such policies should be integrated into a wider package of active labour market policies in order to provide the right mix of training and incentives that help workers quickly move to new opportunities.

In addition, well-designed unemployment benefit systems can support a quick and successful restructuring of the economy. As documented by chapter 4, productive structural change, i.e. the reallocation of jobs from low- to high-productive sectors, comes along with less vulnerable employment, less working poverty and a larger working middle-class. However, moving from agriculture to jobs in industry or services often involves significant costs. Workers often have to move from rural to urban areas and face an initial period of unemployment during their job search. Moreover, they face increased risks of unemployment related to probationary periods and potential skills mismatch. Unemployment benefits can alleviate these costs and risks, thereby encouraging and facilitating structural change. In particular, they can help improve the quality of labour market matches, reducing skill and occupational mismatch, and bring benefits both to employment quality and productivity (Acemoglu, 2001; Centeno, 2004; Caliendo et al., 2009). By facilitating labour market turnover, well-designed unemployment benefits also help lift job creation rates and – particularly relevant for developing countries – a shift from agricultural to service employment of around 3 percentage points over the medium run (Boeri and Macis, 2010). Both results suggest that income support for job-seekers as part of the Social Protection floor or – where available and affordable – a fully fledged unemployment benefit system can play a strong role both in addressing skills mismatch and in promoting structural change. Where employment in agriculture is particularly significant, governments also need to pursue measures to accelerate productivity growth in that sector and diversify the work and investment opportunities in rural areas.

Increase efforts to promote youth employment – with a special focus on long- term unemployment for youth

Policy-makers must focus on the problem of youth unemployment. The high youth unemployment rates that continue rising globally have spurred concerns over a “lost generation” with long-term adverse consequences both for their labour market chances and for the economy more broadly (see ILO, 2012a, 2012c). Long-term unemployment in early career has long-lasting consequences in terms of skill loss, lower productivity and additional strain on public finances, which is difficult to compensate for. To draw further attention to this particularly vulnerable group, the ILO devoted its 101st International Labour Conference to discussing policies and measures that are required to tackle the high joblessness among young people. This culminated in “The Youth Employment Crisis: A call for action”, a set of tripartite conclusions agreed by governments, workers and employers that contain a list of tried and tested interventions to promote youth employment under five policy areas.66 _{Besides pro-employment macroeconomic policies and active labour market} policies, three specific interventions relevant for youth employment should also receive wider consideration in dealing with the youth employment crisis. In particular, governments should:

Enhance young people’s employability. Key areas include: improving the links between education,

training and the world of work through social dialogue on skills mismatch; enhancing technical vocational education and training, including apprenticeships; introducing mechanisms for early identification of potential early school leavers to encourage them to stay in school or access other employment, education or training opportunities; including

66_{The conclusions are available for download at: http://www.ilo.org/wcmsp5/groups/public/---ed_norm/---}

job-search techniques in school curricula; improving young people’s access to information on career opportunities; and youth employment guarantee schemes.

Encourage youth entrepreneurship. Policy areas related to this include ensuring that there is an

enabling environment for young people to start and run businesses and improving access to finance (by subsidizing credit, guaranteeing loans and supporting microcredit initiatives) for the operation of sustainable youth enterprises, in particular micro-, small and medium-sized enterprises, cooperatives and social enterprises.

Promote labour standards and rights of young people. Key areas include adopting a rights-based

approach to youth employment, by ensuring that young people receive equal treatment and are afforded rights at work; committing to develop youth employment policies that take international labour standards into account; promoting and protecting young workers’ rights to organize and to bargain collectively; and ensuring adequate social protection for all young workers to facilitate transitions into stable employment and decent work.

Annexes