Focus on employment in economic strategies – Policy recommendations

Inclusive Economy12 Mar 2014Evert-jan Quak

To solve the structural problems related to unemployment, a radical policy shift is needed. Innovation policies must focus on job-intensive sectors. Governments must curb free capital flows with more regulation and stimulate financial institutions to invest in productive sectors and employment opportunities. The current trade and investment regime must be reshaped. Tax on labour needs to be dramatically reduced in order to compensate for low wages. And a basic income should be part of a job guarantee programme.

This article summarizes policies discussed in the five articles in this dossier. In the process, The Broker analyzed academic and policy debate and literature related to employment and job creation. The policy recommendations will be sharpened and deepened through the debate that The Broker is hosting on its website.

Creating employment is currently the domain of labour market policy. On a macroeconomic level, the belief is that GDP growth will automatically create the jobs needed. And to get economic growth requires further liberalization of world trade and capital markets, further flexibility of labour markets, and low wage rates. However, as this dossier on employment shows, such policies are causing wage inequality, precarious work, and job insecurity. Meanwhile, the world is facing a jobless growth.

Job creation is slowing down because of the economic crisis and structural problems related to financial globalization, trade liberalization, the under-taxation of capital related to labour, and computerization. Those jobs that have been created are not automatically better, higher-paid jobs.

Current assumptions behind employment policy will impact dramatically on; the future quantity and quality of work. The basis of policy shift needs to move away from a narrative based on neo-classical economic models. Unemployment is increasingly structural in most economies worldwide and neo-classical economists’ explanation for unemployment – skill mismatch, lack of labour force mobility, market failures – and their policy proposals, are inadequate.

To create more and better jobs in coming decades, the following changes in policy are needed.

  • Job creation and better work must be the objectives of any policy. These can no longer be subordinated to considerations of adjacent policy terrains, such as monetary policy (low inflation) or budget policy (rapid reduction of government deficit).
  • The obsession of international competition with low production costs must be refocused away from the current fixation on lower labour costs. Instead, policy should stimulate ingenuity to reduce other production costs, for example those related to raw materials and energy costs. Industrial and innovation policies must therefore focus (and be stimulated by governments to focus) on job-intensive sectors of the future and the reduction of raw material and energy costs, instead of stimulating technological innovations that will destroy jobs.
  • Two of the main dynamics that currently influence employment are trade liberalization and financialization. Governments should regulate these to curb the free movement of capital. On the local level, some regulations have been implemented, notably in the US and EU. However, their trade negotiators are still pushing for open capital markets and deregulation in other countries in favour of the expansion of their own financial sector. An alternative trade regime should be designed that gives governments more tools to increase job opportunities and stimulate investment in productive sectors instead of for speculative purposes. Trade and investment policies must allow government to stimulate and protect sectors that can become the job generating motor of the future. This should be so even if such measures lead to slightly lower GDP growth in the short term.
  • The introduction of a negative income tax and a basic income is a serious option. Tax on labour needs to go down dramatically to compensate for low wages due to global competition and to make labour more compatible for automation. A lower tax should be compensated with higher tax revenues from non-wage related income, for example from profits, property, or capital flows, as well as environmental taxes.
  • Basic income can be part of job guarantee programmes. This would give people who drop out of the official labour market, by choice or otherwise, a basic income at a living wage level while doing ‘volunteer’ jobs that society needs but does not pay. In such ways the concept of productive work is redefined more on a social basis, to extend beyond the realm of ‘gainful work’ relating specifically to activity that generates private profit.
  • Attempts to link flexibility and job security in the concept of flexicurity are not the solution. Flexibility, although in itself not negative as it can give workers the chance to combine work and duties of care or give more autonomy and independence, is seen increasingly more as the cause of precarious work. Governments should encourage companies to take steps to improve the contracting of workers with a minimum level of flexible work hours, differentiated by sector. It is therefore important that the bargaining power of workers improves. Trade unions should be empowered to especially act on a global scale to deal directly in negotiations with international corporations. As such, they can contribute to restoring the linkage between productivity and wages.
  • Educational attainment levels of the workforce must be increased. This cannot, however, be the overall solution. The effects of technology on workers’ occupational and wage prospects will continue to depend on their education for the foreseeable future. The better the education level of people, the lower the chance they will be displaced by a smart machine. Governments should anticipate now what will happen when the labour of a large number of working-age people (not only low-skilled labour) is rendered technologically redundant, or no longer commands an income adequate to provide a minimally-decent standard of living through work.

In the short term, higher minimum wages can keep a fully-employed worker and his or her family out of poverty. Otherwise, tax credit and cash transfer schemes are needed to help families who are losing out and face squeezed wages. Such a mechanism for the redistribution of benefits of growth cannot be a long-term solution and should not give governments a pretext to carry on as usual, increasing employment problems, and using GDP growth to compensate for shortcomings. However, while long-term and structural solutions are being negotiated, such a policy can offer relief to workers and their families who are losing out in the labour market in the short term.

The Broker has started an online debate and a live discussion on how to tackle these employment issues and further addressing the policies needed for an employment-generated economic growth. Can solutions be found within the current economic model, or should we consider alternative economic models? We call on our readers to further examine these questions and possible solutions. You can send your contributions to the debate to: