TWN Info Service on UN Sustainable Development (Nov22/01)
3 November 2022
Third World Network

UN: Labour market recovery threatened by Ukraine war, multiple crises
Published in SUNS #9680 dated 2 November 2022

Geneva, 1 Nov (Kanaga Raja) — While the impact of the COVID-19 pandemic has waned in most countries, multiple and overlapping economic and political crises are threatening labour market recovery around the world, the International Labour Organization (ILO) has said.

In its latest Monitor on the World of Work, the ILO said these crises are likely to further increase labour market inequalities due to the disproportionate impact on certain groups of workers and firms, while contributing to a growing divergence between developed and developing economies.

The latter had already been recovering more slowly from the COVID-19 pandemic, and are now facing less policy space to protect hard-hit workers and enterprises during the most recent crises, it added.

The encouraging recovery in hours worked seen at the beginning of 2022 has not continued, although there continue to be significant differences between regions and income groups, said the ILO.

“Estimates indicate that in the third quarter of 2022, hours worked were 1.5 per cent below the level of the fourth quarter of 2019 (the pre-crisis benchmark), equivalent to a deficit of 40 million full-time jobs.”

The outlook for the labour market is currently highly uncertain, with growing downside risks, including the impacts of high inflation, tightening monetary policy, increasing debt burdens and declining consumer confidence, the ILO said.

On current trends, global employment growth will deteriorate significantly in the fourth quarter of 2022, it added.

“Tackling this deeply worrying global employment situation, and preventing a significant global labour market downturn, will require comprehensive, integrated and balanced policies, both nationally and globally,” said ILO Director-General Gilbert F. Houngbo.

“We need the implementation of a broad set of policy tools, including interventions in the prices of public goods; the re-channeling of windfall profits; strengthening income security through social protection; increasing income support; and targeted measures to assist the most vulnerable people and enterprises,” he added.

“We need a strong commitment to initiatives such as the UN Global Accelerator on Jobs and Social Protection, which would help countries create 400 million jobs and extend social protection to the four billion people who are currently unprotected,” said Mr Houngbo.

“And a rapid end to the conflict in Ukraine, as demanded in the resolutions of the ILO Governing Body, would further contribute to improving the global employment situation,” he added.

According to the ILO, just over one year ago, 94 per cent of workers were residing in countries with workplace closures to control the spread of the COVID-19 pandemic.

The report said at present, almost all countries, with the notable exception of China, have lifted such closures and other restrictions.

“While this gradual lifting of controls has enabled economic activity to return over the course of 2021 and early 2022, there have been significant differences in labour market trends between and within countries.”

In most advanced economies, employment has reached or surpassed pre-crisis levels, while many employers are struggling with labour shortages, said the report.

In contrast, deficits are evident in low- and middle-income countries, reflecting the more limited policy response and ability to protect the economy over the long crisis period, it added.

MULTIPLE & OVERLAPPING CRISES

According to the ILO report, on top of this unequal and incomplete recovery from the COVID-19 crisis, a set of multiple and overlapping crises, compounded by the conflict in Ukraine and subsequent negative spillover effects, have materialized over 2022, which are deeply impacting the world of work in terms of their effect on:

(1) inflation (especially food and energy), real wages and inequality;

(2) shrinking policy space and higher debt burdens in developing countries; and

(3) slowdown in economic growth in 2022 and 2023 (at 3.2 and 2.7 per cent, respectively) and aggregate demand, which will reduce the demand for workers.

Inflation, which was already increasing in 2021 due to COVID-19-related supply-side disruptions and increasing demand as lockdown measures were lifted, accelerated due to the Ukraine war, it added.

In its October 2022 report, the International Monetary Fund (IMF) revised upwards its forecast for global headline inflation, which is expected to peak at 9.5 per cent in 2022 Q3 before falling to 6.5 per cent in 2023. By July 2022, the core inflation rate had surpassed 6.7 per cent in more than half of the countries.

The ILO report said that high and persistent inflation is creating enormous pressures on labour income and workers are struggling to maintain their purchasing power, raising the risk of increased poverty and inequality.

In response to inflation, central banks have quickly and significantly shifted their monetary policy stance by raising their policy rates to reign in demand and price increases, even if supply-side factors continue to play a key role in keeping inflationary pressure high, said the ILO report.

Monetary policy tightening is making access to finance more difficult for households and businesses, while creating negative spillover effects in developing countries, it added.

It said that in the wake of higher spending and lower tax revenues during the pandemic, many countries now have much higher debt ratios than prior to the crisis, which are becoming even more challenging to service as financial conditions tighten.

“The gross public debt-to-GDP ratio increased significantly from 2019 to 2020 in both advanced and developing countries (especially emerging economies).”

In particular, the proportion of low-income countries in debt distress or at high risk of debt distress reached 56 per cent in 2022, up from 49 per cent in 2019, said the report.

“The overlapping crises are directly affecting enterprises, particularly small firms which are most vulnerable to shocks.”

Higher energy and other input prices increase business costs, which are difficult to pass on to customers already facing diminished purchasing power, the ILO said.

It said higher interest rates decrease business investment and increase business debt burdens, further depressing investment demand.

Exchange rate instability also adds to these costs in countries facing currency depreciation, as the price of imported goods rises.

“These conditions create high uncertainty, which is further dampening business investment and impacting on job creation,” said the ILO.

The report said uncoordinated monetary and fiscal tightening will further depress global economic growth and trade, raising the spectre of financial and exchange rate instability, especially among highly indebted countries, firms and households.

At present, it noted, the risk of a recession in 2023 has increased, as reflected by the downward revisions to GDP projections over 2022.

“Given these progressively difficult economic and policy environments, the global outlook for labour markets is increasingly negative in terms of both employment creation and job quality, which also has important implications for inequality,” said the report.

UNEVEN RECOVERY

Global hours worked recovered strongly in the beginning of 2022, as pandemic-era restrictions were lifted in most countries, said the report.

It said during the first quarter of 2022, global hours worked (adjusted for population aged 15-64) were 1 per cent below the level of the fourth quarter of 2019 (the pre-crisis benchmark), equivalent to a deficit of 30 million full- time jobs.

The level of hours worked in this quarter was substantially higher than suggested in the previous edition of the ILO Monitor, it said.

“However, this solid recovery was reversed in the second and third quarters, when the gap in hours worked grew to 1.8 and 1.4 per cent, respectively (equivalent to a deficit of 52 and 40 million full-time jobs).”

The ILO said the deterioration has been largely driven by two main developments: (1) The re-introduction of public health restrictions and the resulting disruptions to the economy and the labour market in China; and (2) the conflict in Ukraine and the related energy and food price shocks, which increased inflationary pressures while dampening labour market recovery around the globe.

The Americas stands out as the region registering the best performance thus far in 2022, with hours worked having exceeded the pre-crisis level since the second quarter of 2022. In contrast, hours worked in all other regions remain well below the pre-crisis level, said the ILO report.

Despite Africa and the Arab States showing an upward trend during 2022, they still present a sizeable gap of 2 per cent in hours worked compared to the pre-crisis level.

The ILO said Asia and the Pacific registered a decline of 1.2 percentage points in the second quarter of this year and, thereafter, saw a moderate improvement of 0.6 percentage points, as activity in China began to recover after the country partially lifted lockdowns.

In contrast, Europe and Central Asia have registered two consecutive quarters of declines, resulting in a cumulative loss of 1 percentage point.

The ILO said this downward trend was caused by a deterioration of hours worked in Eastern Europe, driven by the war in Ukraine.

The ILO said that low-income and lower-middle-income countries have seen their hours worked stagnate in 2022, with a gap in the range of 2-3 per cent, while high-income and upper-middle-income countries have seen hours worked nearly return to the pre-pandemic level, although the rate of improvement has decelerated since the Russian Federation’s aggression against Ukraine.

It said the persisting gaps in hours worked between high-income and middle-income countries were also reflected in employment numbers.

In advanced economies, employment-to-population ratios returned to or exceeded the pre-crisis level by 2022 Q2 in more than 75 per cent of countries with available data.

Similar to the trends in hours worked, the employment recovery in high-income countries was strongest until 2022 Q1 before flat-lining in the following quarter.

In contrast, the majority of middle-income countries in the sample continue to have an employment deficit relative to the pre-crisis situation with an average gap of 2 per cent in 2022 Q2 relative to the same quarter in 2019.

The ILO also said that informal employment has been growing at a rapid pace over 2021-22 after the heavy losses registered in 2020.

The report said new ILO estimates of globally representative trends in informal employment show that between 2005 and 2019, formal employment grew faster than informal employment, leading to a gradual reduction in the informal employment rate by 5 percentage points.

It said the disproportionate impact of the pandemic on informal jobs resulted in a further reduction in the share of informal employment. In 2021, this trend reversed dramatically, and informal job growth fully recovered from the losses experienced in 2020, whereas formal employment did not.

Moreover, in 2022, informal jobs are estimated to be growing at the same pace as formal employment, jeopardizing the slow but consistent trend towards formalization observed over the past 15 years. This global trend is driven by low- and lower-middle-income countries, it added.

LABOUR MARKET FACING MULTIPLE RISKS

The outlook for labour markets is currently uncertain, with growing downside risks on many fronts, the ILO said.

“Inflation is expected to remain high, which continues to hurt workers’ purchasing power and businesses, especially small enterprises. Forthcoming ILO estimates show that rising inflation is causing a decline in real wages in many countries.”

The ILO said this cost-of-living crisis comes on top of significant losses in the total wage bill for workers and their families during the COVID-19 crisis, which in many countries had the greatest impact on low-income groups.

Along with tightening monetary policies and increasing inflation, consumer confidence has been declining for some time; since the onset of the Ukraine war, confidence has collapsed in many countries, reaching lows not seen since the depth of the global financial crisis of 2008-09, said the ILO.

“In addition, it is well established that contractionary monetary policy leads to sizeable effects on economic and work activities. Furthermore, economic studies have shown that declines in consumer confidence have negative impacts on hours worked. All these factors are expected to lead to a worsening of labour market conditions – albeit with some lag,” said the report.

There are already signs of a turning point, particularly in job vacancies. The unprecedented growth in job vacancies during the 2021 recovery led to a significant increase in labour market tightness in advanced economies, it added.

The ILO report said that labour supply factors, such as reduced participation due to health effects, shifts in worker preferences, and migration trends, strongly contributed to increasing tightness, a trend which continued until spring 2022.

“Since then, however, the labour market has cooled considerably, with sharp declines in vacancy growth. After these shifts in vacancy trends, the pace of unemployment reduction has slowed down markedly.”

If current trends persist, vacancies will decline while unemployment will increase in the fourth quarter of 2022, the ILO cautioned.

IMPACT OF UKRAINE WAR

The ILO said that since the initial phase of the conflict in Ukraine started on 24 February 2022, continuous active combat has partially shifted to southern and eastern parts of the country.

It said while this led to some recovery of labour markets in other areas in the short run, the level of destruction of infrastructure, the disruptions in trade and supply chains, absent private investment and the flows of refugees and internally displaced persons will determine labour market outcomes in the medium and long run.

It said the size of the impact will depend on the evolution of the conflict, the level of support given to Ukraine and policy responses in the country to ensure an inclusive reconstruction and recovery process based on social justice and decent work.

The report said the countries of Central Asia continue to be not only affected by broader global trends, but also by their close linkage with the Russian Federation’s economy, particularly in the form of labour migration – raising the risk of further labour market de-stabilization in the region.

In Tajikistan, for instance, the World Bank estimates that GDP will decline by 1.8 per cent in 2022, primarily due to a projected fall in domestic consumption of 10 per cent triggered by a fall in remittances of 40 per cent.

A similar situation is projected for Kyrgyzstan, where the economy could contract by 5 per cent due to a projected decline of 33 per cent in remittances and a fall in investment.

The conflict has had severe repercussions in Europe, leading to rising energy prices, particularly of natural gas, which has weakened consumer confidence, slowed down manufacturing output, particularly in SMEs and energy-intensive enterprises, and created persistent supply chain disruptions and rising input costs, said the ILO report.

“According to IMF forecasts, the Baltic and Nordic states seem to face similar economic prospects to the rest of Western Europe, despite the Baltic countries in particular being more heavily exposed to the Russian Federation via trade links.”

The ILO said that on top of the humanitarian cost of the conflict, its impact on Ukraine’s economy and its labour market has been very negative.

It said that the National Bank of Ukraine projects a loss of economic output of 33.4 per cent in 2022. Estimates indicate that there is already at least $114.5 billion in damage, with reconstruction costs estimated at $198 billion, the latter being almost equivalent to the total GDP of Ukraine in 2021.

About 72 per cent ($82.9 billion) of the damage is accounted for by residential buildings and public infrastructure.

The ILO said enterprises have also endured losses of at least $9.7 billion in physical assets, while the agricultural sector sustained $4.3 billion in losses.

“The oversupply of job-seekers in regions that have received many internally displaced persons (IDPs) exacerbates labour market matching problems and is likely to put downward pressure on wages that are already under strain due to income and employment losses and inflation, which is expected to top 30 per cent by year-end.”

The ILO said its new estimates show that for 2022 as a whole, employment is expected to be 15.5 per cent (or 2.4 million jobs) lower than in the previous year. This compares to the ILO’s previous estimate published in May 2022 that 4.8 million jobs had been lost as of 7 April 2022.

This upward revision reflects the overall improvement in security and stability in areas under full Ukrainian control and the strong financial support the country has received, it added.

The report also said that the number of Ukrainian refugees has continued to grow, reaching 7.4 million as of 27 September 2022.

Though the pace of out-flux has slowed in recent months compared to the initial stages of the conflict, the refugee population has grown by 44 per cent in the five months since the ILO’s first assessment, it added.

It said that more than 17 per cent of Ukraine’s total pre-conflict population and nearly a quarter of the population eligible to leave the country has done so since the start of the conflict.

“In addition, as of August, an estimated 7 million people were internally displaced within Ukraine.”

The refugee outflow had an asymmetric impact on the Ukrainian labour market, said the report, adding that the ILO estimates that approximately 1.6 million Ukrainian refugees, overwhelmingly women, were employed in Ukraine before fleeing the aggression, accounting for 10.4 per cent of the country’s total pre-conflict workforce.

The employment losses in Ukraine stemming from the refugee out-flux are not spread evenly across occupational groups, it said.

“Prior to the war, the main occupations filled by current refugees included clerical support workers, services and sales workers, professionals, and technicians and associate professionals.”

In terms of economic activity, some 16 per cent of Ukrainian refugees worked in education and another 7 per cent in health and social services prior to leaving.

The refugee out-flux is likely to have had a major impact on the workforce of these sectors and occupations in Ukraine, said the report.

Three host countries, Poland, Germany and Czechia – all of which faced labour shortages in some sectors before the pandemic – account for 61 per cent of the Ukrainian refugees registered for temporary protection or similar national protection schemes in Europe.

The impact of Ukrainian refugees on host labour markets is starting to be reflected in unemployment statistics, although there is no evidence that the large influx has undermined the stability of labour markets, said the ILO.

It said in Germany, for example, a rise in the unemployment rate is fully explained by the inclusion of refugees in statistics starting from June 2022, but there are no signs of structural shifts in the underlying parameters of the labour market that negatively affect the non-refugee population. In Poland, despite the vast number of refugees in the country, the unemployment rate recently decreased.

The report said that assisting the labour market in Ukraine even at this stage is important to ensure that economic activity in the country continues, and to provide an income for as many people as possible. Measures taken to date include economic and social protection support to incomes and jobs and for the integration of refugees.

POLICY TOOLS TO NAVIGATE MULTIPLE CRISES

Careful policy choices are needed to navigate the multiple crises that are having far-reaching impacts on the world of work, said the ILO report.

It said that while the recovery in the aftermath of the pandemic has been uneven and incomplete in many countries, labour markets are now facing new challenges stemming from multiple and overlapping crises. The multiplication of crises raises the risk of another significant global labour market downturn.

“Facing more restrictive fiscal space after a period of higher spending and reduced revenue during the COVID-19 pandemic, along with high levels of debt distress in developing countries, policy choices need to be made even more carefully with the goal of preventing such a downturn and avoiding a further deepening of inequality,” it added.

It pointed out that excessive policy tightening is causing undue damage to jobs and income in both advanced and developing countries.

It said the current cycle of policy tightening is already impacting labour markets, with two particularly significant characteristics. First, in many advanced countries, labour markets are showing early signs of cooling down, with declining job openings.

“At the same time, there is no evidence of wage-price spiral effects; on the contrary, with labour markets cooling and inflation rates high, real wage growth will face significant pressure.”

Second, the ILO said monetary tightening in advanced economies is having damaging spillover effects in developing countries. Labour markets there have yet to recover from the pandemic in terms of both quality jobs and incomes.

It said that given that the slower recovery in these countries was mainly driven by informal jobs, labour income in many developing economies remains below the pre-pandemic level and is now being further threatened by soaring inflation.

The ILO said that the set of policy tools to combat the impact of multiple crises on the labour market needs to be widened through social dialogue. Policy options that could be used in the current context include:

* Implementing interventions to set prices for public goods, based on social dialogue.

* Re-channeling windfall profits (particularly in the energy sector) to employment and income support.

* Strengthening income security through social protection, including reviewing benefits, such as pensions, to keep pace with the cost of living.

* Increasing income support to maintain the purchasing power of labour income, which will prevent more people from falling into poverty and food insecurity, such as through wage adjustments (including increasing minimum wages and making use of collective bargaining).

* Targeting support to the most vulnerable people and enterprises to combat the effects on specific groups and sectors, which include measures to promote job creation and social protection for those most affected, along with skills development interventions, active labour market policies (ALMPs) to facilitate their transitions and support to enterprises. +