A resurgence in global unemployment, reports ILO

After two years of decline in the number of jobless people worldwide, 2012 saw a rise in unemployment, says the International Labour Organization (ILO), which has urged decisive policy action to promote job creation and investment.

by Kanaga Raja

GENEVA: After a fall for two straight years, the number of unemployed worldwide rose by 4.2 million in 2012 to over 197 million, with a further expected rise projected for this year and the next, according to the International Labour Organization (ILO).

In its Global Employment Trends 2013 report, the ILO said that a quarter of the increase in global unemployment last year was in advanced economies, while three-quarters were through spillovers into other regions, with marked effects in developing economies in East Asia, South Asia and Sub-Saharan Africa.

On a slightly positive note on its gloomy employment forecasts over the next years, the ILO highlighted the continued progress in reducing poverty, with the number of workers living in extreme poverty dramatically declining over the past decade and throughout the global crisis, and the number living in moderate poverty also declining.

As the total share of poor and near-poor workers gradually fell, an estimated 41.6% of the developing world’s workers were attaining the middle and upper-middle classes in 2011, the ILO said. According to current projections, the number of workers in the middle class and above in the developing world could grow by an additional 390 million by 2017, with the share of middle-class workers rising to 51.9%.

“This emerging middle-class in the developing world could bring about a new driver of global growth, with stronger investment and consumption, in particular among poorer parts of the developing world,” the ILO report said.

At a media briefing on 21 January, ILO Director-General Guy Ryder said that the most important headline finding in the report is that after two years of decline in the number of unemployed around the world, the year 2012 saw a resurgence of unemployment by 4.2 million. Today, there are 28 million more unemployed people around the world than there were in 2007.

He also noted that the average duration of unemployment has increased notably, and “long-term unemployment is a major qualitative and very worrying feature of this quantitative situation.”

One-third of all job-seekers in the developed economies have been unemployed for one year or longer, and “I think that the move towards long duration unemployment which affects particularly young people as well should be a matter of particular concern”, he said.

As for future prospects, Ryder cautioned that unfortunately these are “not good”. “We see that unemployment is set to rise again. Our projection would be for 5.1 million more in 2013 and still a further 3 million in 2014. So, the trends are very much in the wrong direction.”

Adverse macroeconomic trends

According to the ILO report, the global economic and jobs crisis has entered its fifth year, following a year of economic adversity and disappointing labour market trends. After a relatively encouraging first quarter, the crisis returned during the remainder of 2012, with weakening economic growth in nearly every region of the world. On an annualized basis, global economic growth is estimated to have decelerated to 3.3% in 2012, compared with 3.8% in 2011 and 5.1% in 2010.

“These adverse macroeconomic trends occurred alongside rising uncertainties stemming from a number of factors, most importantly the prolonged and deepening crisis in the Euro area and policy ambiguity related to fiscal tightening and the debt ceiling debate in the United States.”

Entering 2013, the report noted, the crisis in the euro area constitutes the single biggest risk to global employment trends for the year ahead. The financial crisis in the euro area, brought on by a combination of banking sector distress and protracted financial and household deleveraging, coupled with high levels of sovereign debt and unsustainably high government bond yields in some countries, has emerged as a disruptive and destabilizing force not only in the euro area itself, but also for the global economy as a whole.

To restore confidence, the pressing challenge in Europe and elsewhere is to effectively restart the engines of economic growth – most urgently in countries facing a prolonged contraction in economic activities. Also needed will be continued action on the part of policymakers to enact extraordinary fiscal and monetary measures to support growth, along with strong international policy coordination.

According to the report, the global economy is projected to show a modest rebound beginning in 2013, with output growth edging up to 3.6% versus 3.3% in 2012. All regions are expected to see moderately increased growth, except North Africa, where growth of 4.4% is projected, a reversion to a more typical rate following the post-conflict surge in 2012, and Sub-Saharan Africa, where output is projected to remain at a healthy rate of 5.3%.

“Yet, whether or not the modest global recovery that is currently projected will emerge is highly dependent on the ability of governments to put in place the necessary policy mix in order to reverse negative trends that have become more entrenched over the past year. In particular, this requires ending the negative feedback loop between the macro economy and labour markets, and restoring confidence by seriously tackling tail risks.”

Even if the expected recovery is set to strengthen, global unemployment is likely to remain elevated and even increase further over the short term.

According to the report, key macroeconomic risks to the outlook for 2013 include a further deterioration in the euro area, where the baseline scenario of modest recovery is dependent upon policymakers continuing to establish credible policies to promote fiscal integration of euro area economies.

The negotiations in the United States surrounding the country’s debt ceiling and the expenditure side of the “fiscal cliff” represent an additional risk, as the baseline assumes that policymakers successfully reach agreement to avoid automatic reductions in government expenditure and tax increases, particularly on the middle class.

The rise in estimated global unemployment by 4.2 million in 2012 is one of the largest increases since the early 2000s, excluding the immediate crisis years.

Reaching 197.3 million job-seekers in 2012, the number of unemployed is expected to rise further by about 5 million in 2013 and by 2.9 million in 2014 in the ILO’s baseline projection, which assumes effective policy action in the United States to avoid a sharp reduction in fiscal expenditures and successful resolution of the debt ceiling discussions and no intensification of the euro area sovereign debt and banking crisis.

At the same time, the global unemployment rate is projected to edge higher and remain stuck at around 6% until at least 2017.

The larger increase in global unemployment projected for 2013 as compared with 2012 is due to projected increases in the Developed Economies and European Union region as well as South-East Asia and the Pacific, South Asia and Latin America and the Caribbean. Some of this, in turn, is due to population and labour force growth, while some is due to lags between economic changes and changes in the labour market.

However, said the report, a downside scenario was also estimated, one that assumes an intensification of the crisis in the euro area. In this downside scenario, global unemployment would severely worsen. Global output growth would fall to 2.2% in 2013 and 3.2% in 2014.

As a consequence, global unemployment would increase by an additional 3.5 million in 2013 (a total increase of 8.7 million versus 2012) to 206 million, corresponding to a rate of 6.1%, rising to 212.2 million in 2014, a rate of 6.2%. The bulk of the increase in unemployment would occur in the Developed Economies and European Union region, where the unemployment rate would reach 9.2% in 2013 and rise further to 9.5% in 2014, versus 8.7% and 8.6% respectively in the baseline.

The downside scenario implies that failure to enact effective policies to avoid a further intensification of the euro area crisis would raise the global unemployment rate to a level not seen since the depths of the crisis in 2009. The unemployment rate in the Developed Economies and European Union region would far exceed the peak rate reached in 2010.

“Importantly, this scenario only considers the effects of insufficient policy response in Europe. It does not include a potential double impact of insufficient policies in both Europe and the United States. Such a development would undoubtedly bring about an even larger surge in unemployment.”

The report noted that the labour market situation remains particularly bleak for the world’s youth. The ILO estimates global youth unemployment of 73.8 million in 2012, a rate of 12.6%, versus 12.4% in the previous year. Global youth unemployment has increased by 3.4 million since 2007.

The rise in youth unemployment is occurring alongside a withdrawal of young people from the labour market, with 22.9 million fewer employed youth in 2012 than in 2007, despite growth in the global youth population of more than 12 million. This resulted in a decline in the global youth labour force participation rate of about 2 percentage points between 2007 and 2012.

North-South divide

Unemployment rates remain far above historical levels in the Developed Economies and European Union region (8.6% in 2012 versus an average of 6.9% between 1998 and 2007), while in nearly every developing region, unemployment rates in 2012 were actually below average in comparison with the decade preceding the crisis.

In the Central and South-Eastern Europe (non-EU) and CIS (Commonwealth of Independent States), South-East Asia and the Pacific, Latin America and the Caribbean and North Africa regions, unemployment rates in 2012 stood more than 1 percentage point below the average over the decade from 1998 to 2007.

One reason for this divide is that by and large, developing economies have significantly outperformed developed economies during the recovery period in terms of economic growth. There is also evidence that stimulus packages enacted in developing countries to counter the impact of the crisis were targeted more towards addressing labour market weaknesses.

In contrast, in the Developed Economies and European Union region, broadly weak growth underscored by recession conditions in Europe, and limited effectiveness of fiscal and monetary measures implemented to mitigate the impact of the crisis on labour markets, has contributed to an increase of 14.8 million unemployed since 2007.

This amounts to more than half of the total global increase in unemployment, despite the region accounting for less than 16% of the global workforce.

Another reason for the divide in unemployment trends between developed and developing economies is that in developing countries, which often have large shares of workers outside of formal wage employment, unemployment rates typically have a weaker correlation with macroeconomic changes than in developed economies.

For many workers, job destruction and unemployment associated with the economic crisis has resulted in the need to look for jobs in “new” sectors and occupations. Some of the workers who lost their jobs in the financial and construction sectors, which were the first to be hit by the crisis in late 2008 and 2009, were forced to look for employment in sectors less strongly affected.

The report cautioned that as economies are restructuring, a mismatch may therefore arise between the supply of skills that is available in the large stock of unemployed created by the economic crisis and the demand for skills, in particular in developed economies. Such a mismatch hampers the reallocation of labour and will put upward pressure on unemployment rates.

Although the issue of skills mismatch has received renewed attention in developed economies due to the economic crisis, skills mismatch has affected and continues to affect labour markets around the world, it noted.

As of 2012, the global employment-to-population ratio (EPR) – the share of the working-age population that is employed – stood at 60.3%. The global EPR declined by 1 percentage point between 2007 and 2012, reflecting a substantial weakening in economies’ employment-generating capacity.

The ILO estimates that a global jobs gap of 67 million has emerged as a result of the economic crisis – that is, there were 67 million fewer employed people around the world in 2012 than expected based on pre-crisis trends.

Labour productivity growth slowed sharply in 2012. At the global level, output per worker grew by only 1.9% in 2012, down from an average of 2.9% in the two previous years and below the pre-crisis average growth rate of 2.3%.

All regions excluding North Africa and Sub-Saharan Africa experienced a decline in productivity growth, and growth remains well below the pre-crisis trend in the Developed Economies and European Union, Central and South-Eastern Europe (non-EU) and CIS, East Asia and South Asian regions. In North Africa, the rapid productivity growth in 2012 reflects the sharp rebound in economic growth following the conflict-induced contraction of the previous year.

“The main factor underpinning this broad decline in productivity growth is weak investment. Investment growth has fallen further over the past year, with weakness spreading even to regions such as East Asia, where investment had been holding up well. The persistence of weak investment growth despite progress in repairing balance sheets reflects the new headwinds that have emerged from the sharp increase in macroeconomic uncertainties.”

Poverty decline

Diminished investment and consumption in developing regions is likely to reduce progress in shrinking the share of workers in vulnerable employment – comprising own-account workers and contributing family workers – who are far less likely than waged and salaried workers to benefit from existing social protection systems.

In 2012, 1.49 billion workers in developing countries – 56% of all workers in the developing world – were in vulnerable employment, an increase of more than 9 million from the previous year.

On a positive note, the report highlighted the continued progress in reducing poverty. The number of workers living in extreme poverty has dramatically declined over the past decade and throughout the global crisis: the number of workers living with their families on less than $1.25 a day fell by 281 million in the decade to 2011, leaving a total of 397 million working poor below this threshold. This is equal to just over 15.2% of the developing world’s total employment, down from 30.7% in 2001 and 45.2% in 1991.

The number of workers living in moderate poverty also declined over this period, but by a more modest 35 million, for a total of 472 million workers living with their families on between $1.25 and $2 a day.

Altogether, one-third of the developing world’s workforce was living in poverty in 2011, down sharply from 53.7% in 2001 and from 66.7% in 1991.

New ILO estimates of employment by economic class show that in addition to the 868 million workers living with their families below the $2 poverty line, there are 661 million “near poor” workers – living between $2 and $4 a day – amounting to 25.2% of the developing world’s workforce.

The number of near-poor workers has increased by nearly 142 million over the past decade, with more than 141 million of this increase occurring outside East Asia. Altogether, 58.4% of the developing world’s workforce remained either poor or near-poor in 2011.

As the total share of poor and near-poor workers gradually fell, an estimated 41.6% of the developing world’s workers were attaining the middle and upper-middle classes in 2011.

According to the report, this is a remarkable development given that in 2001, less than 23% of the developing world’s workforce was middle-class versus 53.7% living in poverty.

The decade from 2001 to 2011 saw rapid growth in middle-class employment, with an increase of nearly 401 million middle-class workers (above $4 and below $13) and an additional increase of 186 million workers above the $13-a-day line.

Current ILO projections indicate that the number of workers in the middle class and above in the developing world could grow by an additional 390 million by 2017, with the share of middle-class workers rising to 51.9%.

“This emerging middle-class in the developing world could bring about a new driver of global growth, with stronger investment and consumption, in particular among poorer parts of the developing world.”

The correlation indicates that in recent years (2011) total investment at the country level is associated with the share of the employed labour force that has reached middle-income status or above, thereby increasing domestic absorption. This would help foster structural change in these countries, increase global aggregate demand and potentially contribute to more balanced and sustainable global economic growth, to the extent that rising investment absorbs increasing shares of domestic savings, the ILO said.

Negative impact

The report summarized that available labour market data leave no doubt that the slowdown in global economic growth in 2012 has had a widespread, negative impact on the world of work. Global unemployment is rising once again, with particularly negative implications for the world’s youth. Growth in the numbers of long-term unemployed and increased labour market detachment is raising the risk of the emergence of structural labour market problems that could become entrenched, lowering potential rates of growth and reducing the likelihood of a sustainable recovery taking hold.

The increase in macroeconomic uncertainty is a reflection of the sharp downturn in aggregate demand that has taken place; but increasingly, this macro uncertainty as well as diminished confidence in the ability of policymakers to address the current economic challenges is also one of the main contributing factors to slowing growth and poor labour market outcomes.

“Closing the global employment gap, which has now reached 67 million, will require decisive action by policymakers to restore confidence and promote investment and job creation.”

The report noted that much of the current attention is focused on problems in the advanced economies – with record unemployment, recession conditions in Europe and risks of further deterioration in growth and contagion effects, should tail risks materialize.

Yet policymakers in developing regions also cannot afford to sit idle, as economic growth and trade are slowing, as is the rate of productive structural transformation that has driven much of the developing world’s progress in reducing poverty and growing a larger middle class.

At the same time, this new cohort of middle-class workers in the developing countries provides hope that a new global economic engine will emerge through higher consumption and investment, leading to a more balanced and sustainable growth model in the years to come.

“Above all, at this critical moment for the global economy, what is needed is a renewed focus on the world of work. This will require focusing policy action on employment generation, the promotion of investment and productivity growth. Without a significant improvement in the global labour market situation, there will be little hope of breaking the negative feedback loop still plaguing the global economy.”

The report highlighted several promising areas for action including tackling policy uncertainty to increase investment and job creation, coordinating stimulus for global demand and employment creation, addressing labour market mismatch and promoting structural change, and increasing efforts to promote youth employment, with a special focus on long-term unemployment for youth. (SUNS7509)                        

Third World Economics, Issue No. 537, 16-31 Jan 2013, pp 4-6, 8