Governments see employment rates as an important measure of how successful their economic policy is. In election years politicians look with even more attention at the employment rates, as they can make or break political careers.
During the last three decades direct employment creation has been seen as a problem for well-functioning labour markets rather than a solution in economic development strategies. The focus of policy has been on well-established financial markets, technology and skill improvements, low inflation rates, and open deregulated markets. This should stimulate economic growth where more and better paid jobs are created. Job creation is a matter of letting markets work well.
Mainstream neoclassical economists also believe that the current economic and financial crisis is a temporary economic slowdown. For them, a growth strategy would be enough to trigger job creation again. However, things are changing in the economic debate. Although demographic trends in each country can explain some employment trends (see the article, ‘Fragile employment’ by Annemarie and Vanessa in the dossier), there is an increasing amount of evidence that some fundamental assumptions which could explain growth-related job creation are under pressure. Higher productivity nowadays, for example, does not increase wages. International competition among countries does not create better jobs for the majority. And financial globalization, which means free capital markets, are threatening job creation as profits are invested more in capital markets and less in labour, trade or productive sectors.
The increasing concern about work and employment creation can be illustrated with the decline of middle-class jobs in developed countries. This demographic is also referred to as the ‘squeezed middle’. What is happening is that the middle class must compete more with low-wage jobs. In Europe and the United States, manufacturing jobs have been outsourced to low-wage countries, like China, Thailand, as well to Eastern European countries. As Niels Beerepoot explains in his article in this dossier, the service sector, not the manufacturing sector, has become the main generator of jobs. However, not everyone can find well-paid professional jobs in the service sector. Lots of workers have started working in lower paid jobs in call centres, for instance. However, administrative and callcentre jobs are also being outsourced now, which is destroying a lot of jobs in developed countries. Furthermore, automation in the service sector and in – what remains of the manufacturing sector– is on the rise, resulting in even fewer jobs for the middle class.
Prior to the financial crisis in 2008, not many people were bothered by the increasing ‘squeeze’, as the financial sector could compensate it with cheap debt (based on speculative property values) and governments could compensate with providing benefits. However, the financial crisis was, among other things, caused by cheap debts and resulted in welfare cuts in the developed countries. This placed the spotlight on the fact that such forms of compensation cannot hide the structural problems behind work and employment creation anymore. These structural problems can be linked to globalization and advancing technology. The forecast also holds that emerging economies must expect to deal with the threat of continuing globalization and automation which will affect job creation in the near future for both low and middle income groups.
Any policy with the aim to create jobs, therefore, should be aware of four main forces that have a huge impact on labour– technology, trade liberalization, financial globalization and immigration.
The shift of labour from one sector to another (employment reallocation) is assumed to go smoothly, perhaps with some disruptions for one generation. The focus is on the long-term benefit. Studies show that the picture may be somewhat different though.
There is evidence from the US that workers in the auto industry are forced to accept lower wages when other auto plants relocate some of the operations abroad.
This does not only happen in developed countries. In a study of the South African economy, economist Dani Rodrik, from the Institute for Advanced Study at Princeton University, notes that South Africa’s unemployment rate, which is between 24 and 40%,is one of the highest in the world.
Most literature focuses on the success of China and Vietnam to create new jobs due to export-oriented trade, but that was possible due to import restrictions.
Employment creation within the context of globalization therefore largely depends on how easily the workforce can switch to and find work in new competitive sectors. Factors that can disturb this include the skills that are demanded in new sectors, spatial constraints to moving to other parts of the country, and cultural and social restrictions that can exclude parts of society.
The combination of trade liberalization and technological innovation used to be seen as mutual friends that stimulate economies to specialize more every time in higher-skilled labour exports.
This notion is clear in the book,
And this is a global phenomenon. Open markets in developing countries also instigate a simultaneous process of technological modernization in manufacturing and in agriculture (e.g. plants and plantations), depressing the demand for especially low-skilled workers. Due to the development of new sectors and increase of foreign investors as a result of the outsourcing processes somewhere else, there is an increase in skilled labour. But unskilled or low-skilled workers are losing out and remain dependent on the informal economy for their income. A policy to only increase skills and education therefore will not automatically help to create more and better-paid jobs. Higher education and better skills do not result in the same opportunities now as they did three decades ago, and this affects people with low and middle incomes around the world.
In the post-war era large companies shared their benefits from growth among employers and labourers. However, this changed rapidly when power shifted to investors (investment banks, hedge funds, shareholders) and other financial actors as a result of trade liberalization, which propagated free capital flows. Capital became more mobile and investors in open markets could more easily move their capital abroad. At the same time financial markets became the cornerstone of economic growth in many countries worldwide. This shift is also called the ‘financialization of the economy’.
However, financialization shifts profit-making away from production of goods and services and trade (the real economy), and emphasizes profits through financial channels thereby increasing the domination of global financial markets.
The theories behind the Phillips curve point to the inflationary costs of lowering the unemployment rate. The assumption is that as unemployment rates fall and the economy approached full employment, the inflation rate would rise. But this theory also says that there is no single unemployment number that one can point to as the ‘full-employment’ rate. Instead, there is a trade-off between unemployment and inflation. For example, a government might choose to attain a lower unemployment rate but would pay for it with higher inflation rates.
The Keynesian economists emphasized the full employment approach. The answer was an active role of governments to intervene within labour markets. The aim was to reach full employment in a definition of zero percent unemployment with job guarantees and employment schemes. Those who were unable to find work in the private sector were employed (temporarily) by the government. A stimulus programme to increase the demand side of the economy was also implemented, with infrastructure and house-building programmes administrated by governments. (Following the successes of the Keynesian New Deal policies of the 1930s the idea of a New Green Deal to tackle economic recession and climate change nowadays can be linked to Keynesian economics as the markets are not changing into green economics themselves and need a push from government. The idea is that this will increase employment in new sectors (green jobs)).
What are the solutions if unemployment remains high and real wages continue to decrease? Some post-Keynesian economists (i.e. Minsky, Mitchell, Watts, Wray, Papadimitriou, Forstater, Fullwiler and Kaboub) are calling for policies that put work creation on the agenda as one of the main tasks for governments’ economic policy instead policies which only ‘please the market’
Policies based on job guarantees are not copies of previous policies that were initiated all around the world after the second World War and which lasted until the1970s.Rather, the so-called Keynesian model of full employment (see box 1), would increase government debt on the short-term to enable growth out of a recession.
Some voluntary jobs could be transformed into paid jobs. For example, organizing and managing a community garden to provide food for the poor could be a paid job, but outside the market and paid by government. The same can apply to a surfer who might be required to conduct water safety awareness for school children.
The wage rate for the job guarantee should not be set by the private sector’s capacity to pay, but should be “the aspiration of the society of the lowest-acceptable standard of living”.
“In the first scenario, finance wins on both accounts: financial regulation will be minimal and international capital markets will remain wide open. Governments will be constrained by their lack of additional funding, making any attempt at reorienting the growth process towards new, more sustainable sources difficult if not impossible. In this scenario, job volatility will remain high and employment growth may recover to earlier rates, but with the heightened risk of new periods of financial instability and crashes.
In a second scenario, finance dominates the regulatory process, but sources of growth will be sought domestically. This may happen when protectionist reactions take over during the recovery phase. World trade will not return to earlier rates of expansion and global growth may remain below pre-crisis rates. In this scenario, employment may lose out on two grounds: economic dynamics will be lower and – due to the financial markets’ dominance domestically – jobs volatility will remain high.
A third outcome might be that financial market regulation stiffens substantially, but that international market openness continues. Such financial regulation could follow today’s best practice countries (e.g. Canada), and banks might be required to hold higher reserve margins or to participate in a country-wide stabilization fund. Markets for goods and (financial) services would remain open, but the more restricted financial sector activity at home and the domestic quest for new sectors of growth will improve the bargaining power of workers and create new opportunities for employment. Destruction of jobs in declining industry may remain high, but so will job creation in new sectors. In this scenario, transitory job and worker flows are likely to be large and governments will need to make sure that they put policies in place to help the process.
A final scenario might be that governments manage to impose a search for new domestic growth drivers. World trade is gradually being scales down both as the result of a more restrictive international financial regime and due to – possibly environmentally related – tariff barriers. Bargaining power would shift back to labour, employment creation would intensify and profits would be shared more directly between firms and their workforces, instead of being distributed to financial investors.”
*Note: All text has been directly quoted from Ernst, Ekkehard (2010) ‘The end of an era: What comes after financialization and what will be the consequences for labour?’ in
Something has to change. That is also the message from a growing group of mainstream economists, including within the World Bank and IMF, and as illustrated in critical publications on inequality and technological change by The Economist.
A comprehensive employment strategy will not only put labour at the heart of economic development again, but it will also integrate all policies necessary for a revaluation of employment. Employment policy should therefore take into account the financial sector. It is about the regulation of financial markets and stricter rules for banks, including requirements for them to hold larger stocks of regulatory capital or to pay additional taxes to fund a government-sponsored financial safety net, for example. It also entails a curb in international capital flows especially regarding short-term speculation. However, governments are increasingly constrained by the financial markets in their quests for new financial sources to fund their rising public debt.
The constraint of financialization can conceal the need to invest heavily into the real economy, such as in small-medium size enterprises and productive employment, which add value for the whole society. Instituting taxation systems that stimulate investments in labour instead of capital and anticipating on new and valuable sectors to develop for the future, such as in green sector, add value for all of society. A shift away from financialization is necessary and governments should be aware of how they are going to shape this (See box 2.).Governments must focus more than on rectifying international capital flows and taxation on capital instead of on labour. They must also examine the whole trade system and how it interacts with technological improvement.
The World Bank already made a step in this direction in their 2013 World Development Report
Niels Beerepoot, Lecturer and Researcher, Amsterdam Institute for Social Science Research, University of Amsterdam, the Netherlands
Arjan de Haan, Programme Leader, Supporting Inclusive Growth programme, International Development Research Centre (IDRC), Canada
Rolph van der Hoeven, Professor on Employment and Development Economics, International Institute of Social Studies (ISS), The Hague, the Netherlands
Wiemer Salverda, Special Chair of Labour Market and Inequality, Amsterdam Centre for Inequality Studies, University of Amsterdam, the Netherlands