Labour Market Weaknesses and Persisting Macro Headwinds in the Global Economy

Transcription

1 Labour Market Weaknesses and Persisting Macro Headwinds in the Global Economy UN DESA Expert group meeting on the World Economy October 2015 Moazam Mahmood Deputy Director Veronika Zhirnova Research Department ILO

2 Labour market downside stems from macro cyclicality and structural reforms with unintended consequences 1. ILO reporting continued downside in employment prospects: due to 2. Persistence of deficit in agg D and N 3. Labour market reforms have not worked as intended 4. Giving threat of deflation which is now wage based as much as energy based 5. Conventional QE now played out 6. But low yields bring back the efficacy of fiscal policy to raise agg D and N

3 Global growth: Advanced Ecomomies at stall speed, EEs struggling: GDP growth rate (%), by regions GDP growth rate ( %) World Euro area Emerging and developing Asia Latin America and the Caribbean Sub-Saharan Africa China Advanced economies Emerging market and developing economies Emerging and developing Europe Middle East and North Africa Brazil India GDP growth rate in 2015 (%): World: 3.1 LAC: -0.3 AEs: 2.0 Brazil: -3.0 Eurozone: 1.5 China: 6.8 EEs: 4.0 India: p 2016p 2017p 2018p 2019p 2020p International Monetary Fund, World Economic Outlook Database, October 2015 p- projection

4 Labour market weaknesses: The backlog of unemployment persists from the crisis ILO: Unemployment expected to increasedby 2mil in 2015 compared to a year earlier, 20% of job seeker concentrated in Developed economies and 20% in East Asia. Total unemployment (thousands) by regions, p 225, , , , mil (5.5%) Youth 11.7% 197mil (6.1%) Youth 12.9% Lat Am & Carib Sub-Saharan Africa Middle Middle East East 201mil 203mil (5.9%) (5.9%) Youth 13.0% Youth 13.1% North Africa 210mil (5.8%) Youth 13.1% 125, ,000 South Asia South East Asia & Pacific 75,000 50,000 East Asia Centr & South-East. Europe & CIS 25,000 Developed econonomies & 0 EU p 2016p 2017p 2018p 2019p Source: ILO - Trends Econometric Models, January 2015

5 Employment Gap Global employment (millions) 3,500 3,450 3,400 3,350 3,300 3,250 3,200 3,150 3,100 3,050 3,000 2,950 2,900 2,850 2,800 2,750 2,700 2,650 2,600 Pre-crisis 2010: 57.0 mil 2015: 63.2 mil Estimated/Forecast ed 2019: 80.2 mil Upper and Lower bound of the confidene interval around the baseline forecast 2, Source: ILO - Trends Econometric Models, November 2014

6 So double whammy for employment -no recovery from earlier GDP recovery now another wobble in GDP Jobs Crisis Gap (millions) by Region WORLD Developed Economies & European Union Central & South- Eastern Europe (non-eu) & CIS East Asia South-East Asia & the Pacific South Asia Latin America & the Caribbean Middle East North Africa Sub-Saharan Africa Source: ILO Global Employment Trends, November 2014

7 Regional employment Total employment levels, compared to the same quarter a year earlier, and percent change in quarterly GDP (Q to Q2 2015) Employment levels (thousands) 8.0 GDP percentage change Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Germany United States Euro area ( countries) OECD - Total -8.0 Germany United States Euro area (19 countries) OECD - Total Sources: OECD Note: The estimated output and employment loss can only be calculated by considering the simple average over the quarter.

8 Regional employment Total employment levels, compared to the same quarter a year earlier, and percent change in quarterly GDP (Q to Q2 2015) Employment levels (thousands) GDP percentage change Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Turkey -5.0 Turkey Russian Federation Poland Russian Federation Poland Sources: OECD Note: The estimated output and employment loss can only be calculated by considering the simple average over the quarter.

9 Regional employment Total employment levels, compared to the same quarter a year earlier, and percent change in quarterly GDP (Q to Q2 2015) 1000 Employment Levels 10 GDP percentage change Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Japan 0 Korea -2-4 Japan Korea Sources: OECD Note: The estimated output and employment loss can only be calculated by considering the simple average over the quarter.

10 Regional employment Percent change in quarterly GDP and total employment levels, compared to the same quarter a year earlier (Q to Q2 2015) 2500 Employment levels (thousands) 12.0 GDP percentage change Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Brazil Chile 2.0 Mexico Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Brazil Chile Mexico Sources: OECD Note: The estimated output and employment loss can only be calculated by considering the simple average over the quarter.

11 Regional employment Percent change in quarterly GDP and total employment levels, compared to the same quarter a year earlier (Q to Q1 2013) Employment levels GDP percentage change Thousands per cent Indonesia 1.0 Indonesia 0 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Sources: OECD Note: The estimated output and employment loss can only be calculated by considering the simple average over the quarter.

12 Regional employment Absolute change in quarterly GDP and total employment levels, compared to a year earlier (Q to latest quarter available) outh Africa bsolute change in total employment (000's) ( )Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Employment levels,000 Sources: International Monetary Fund World Economic Outlook April 2013; Laborsta Short-term Indicators, OECD Short-Term Indicators, Eurostat Quarterly tables. Note: The estimated output and employment loss can only be calculated by considering the simple average over the quarter.

13 Unemployment - Advanced economies 7.7% 30 Total unemployment rate, % of labor force, Q Q Euro area (19 countries) European Union (28 countries) Germany Greece Japan South Africa Spain United States 0 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: OECD

14 Long term unemployment (measured as % of total unemployment, includes individuals that have been unemployed for 12 months or more), at the end of 2014 was onequarter in the USA, one-third in OECD countries, half of Spain and Italy, over two-thirds in Greece Long term ( >1 yr) unemployment, % of total unemployed; European Union (28 countries) France G7 Germany Greece Italy Japan OECD - Total Russia South Africa Spain United Kingdom United States Source: OECD

15 Long run trends: Dependency ratio 0.7 Dependency Ratio*, % European Union (27 countries) France Germany Greece Italy Japan United Kingdom United States Source: ILO calculation based on OECD * Ratio of young population (0-14) and elderly (above 65) to working-age population

16 abour market weaknesses based on macro cyclicality and structural reforms with nintended consequences: 1. Households are not spending more as they repair their balance sheets to recover from loss of asset and wage income. 2. Firms not making further investments: Despite low interest rates, and 3. Banks not lending more: Still carry large piles of nonperforming assets, including sovereign debt, on their balance sheets, hampering them to expand credit in the advanced economies. New guidelines to expand credit 4. Rising government debt rising yields: Doom loops: bank risk bailouts sovereign debt increase bond prices fall & yields rise. Private sector bailouts have largely led to mushrooming public debt and budgetary deficits, in some euro area countries have raised costs of borrowing, bond yields. 5. Austerity cuts: To bring down bond yields, public debt and budgetary deficits, austerity measures have focussed on both raising revenues and reducing public expenditures. 6. Therefore agg D deficit: one good measure of this: Euro S-I gap of 2% GDP = CA balance; US I shortfall $400 bn

17 abour market weaknesses based on macro cyclicality and structural eforms with unintended consequences:. Labour market reforms with unintended consequences: The cost of adjustment, for both, generating growth hrough increased competitiveness, and effecting austerity through reduced debt and budget deficits, have dually ascaded onto the labour markets, particularly in the Eurozone. i) Given weak domestic demand, main driver of growth is export competitiveness. Lack of exchange rate flexibility n Eurozone, preventing external devaluation, has led to cuts in wage bill through wage and employment cuts. ii) Dovetailed with the austerity-induced public expenditures cuts, being effected through cuts in the public sector age bill.. Deflationary now based on real wage: Inflation allows real wage to fall, cutting ULCs. Low inflation puts pressure on cutting nominal wage to cut ULCs. Annual inflation 2014: 0.4%; 2015 June 0.2%. USA: Inflation of 0.3 % as of Sept. 2015, since 2012 below 2% (low service inflation, slow wage growth besides tumbling oil prices and a strong dollar). Deflationary pressure in Asia (falling export value, producer price deflation due to weak demand from the advanced economies). China s producer prices are down 10.8% in 2015 compared to their peak in QE now played out with low bond yields: QE 1 to QE3 to buy $85/$15bn mortgage bonds per month; now wind down after unemployment 5.5% ECB s LTRO plus OMT to do whatever it takes to buy government bonds and increase liquidity, + r slashed to 0.15%. + QE of $65 bn per month BOE QE, now also wind down Abenomics QE persisting 0. But low bond yields allow more efficacious fiscal policy

18 Consumption recovery weak relative to exports Impact: Country classification with respect to the percentage point change in Consumption and Exports, for the crisis impact period (Q208 -Q209) Variation (in percentage points) Q208 to Q209 Household Consumption <2 2 to 5 >5 >-2 United States, Poland, New Zealand, Australia, India, united Kingdom, Korea, Ireland, Iceland Turkey, Brazil Exports -2 to -5 France, Spain, Mexico Argentina <-5 Belgium, Estonia, Netherland, Israel, Hungary, Indonesia, South Africa, Denmark, Italy, Portugal Luxembourg, Slovak Rep., Slovenia, Finland, Austria, Czech Rep., Sweden, Germany, Norway, Japan, Canada, Chile, Switzerland Russian Federation Export fall Consumption cushion Recovery: Country classification with respect to the percentage point change in Consumption and Exports, Q to Q Variation (in percentage points) Q213 to Q209 Household consumption < 2 2 to 5 >5 < 2 Argentina, Israel, Sweden, Norway, Finland., Indonesia, Korea, United Kingdom, United States, New Zealand, Australia, Iceland India, Russian Federation Chile Exports 2 to 5 Austria, Canada, Japan, Germany, Turkey Brazil 5 < Italy, France, Denmark, Poland, Luxembourg, Belgium, Mexico, Portugal, Netherlands, Slovenia, Ireland, Hungary Czech Rep., Estonia, Slovak Rep., South Africa, Spain, Switzerland Export led recovery Consumption led recovery Source: ILO s calculation based on OECD statistics

19 Average quarterly growth rate of Gross Fixed Capital Formation, by region and selected countries, for impact and recovery period Impact Recovery Averages of regions and selected countries Q2_08-Q2_09 Q3_9-Q2_15 East Asia European Union (28 countries) United States South Africa India South East Asia and Pacific Latin America Russian Federation China Japan, Korea 2 Australia, India, Indonesia, New Zealand 3 Argentina, Brazil, Chile, Mexico 4 Calculation based on annual growth rates data taken from the World Bank WDI, 2015 Source: ILO s calculation based on OECD Statistics

20 Bank lending weak Euro Area Bank Loan Growth Rates Euro Area Loans to Financial Intermediaries, Non-financial Corporations and Households (Growth Rates) Insurance Corporations and Pension Funds Other Financial Intermediaries Non-financial Corporations Q Q May 2015 June 2015 July 2015 Aug* trend Households Source: European Central Bank Monetary Statistics September 2015 * provisionary

21 Public deficits versus private surpluses Variations in budget balance, private net savings and current account balance between 2007 and 2004 ( percent of GDP in pps) Region Budget Balance Private net savings Current account balance Advanced economies ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, Vietnam) European Union Central and eastern Europe Commonwealth of Independent States Emerging & Developing Asia Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa ariations in budget balance, private net savings and the current account balance between 2015 and 2007 (in pps) Region Budget Balance Private net savings Current account balance Advanced economies ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, Vietnam) European Union Central and eastern Europe Commonwealth of Independent States Emerging & Developing Asia Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa ource: IMF, World Economic Outlook Database, October 2015

22 Monetary policy has brought down bond yields in the range of 1%-2% ECB s bond-buying plan - Outright Monetary Transactions(OMT) ECB: EU 0.5 trillion 3-year credit line LTRO for banks to cut bond yields Sept. 2014: Further cut down to 0.05%, and launch of assetpurchase program Oct. 2014: further cut on deposit rate now at -0.20%. Spring 2015: ECB QE of $65 bn per month Taper talk SEP; Nov ECB cuts rates to 0.25% June-July 2015: Grexit panic: bond yields up again Refinancing rate cut at 0.15% and deposit rate at -0.10% to counter very low inflation in the EU area 10-year bonds yields March June Sept. Dec. March June Sept. Dec. March June Sept. Dec. March June July August Greece Ireland Portugal Spain ermany Italy France ource: European Central Bank (*Harmonised long-term interest rates for convergence assessment purposes)

23 So what policy can be advocated responsibly? 3 largest economies in the Eurozone stalled Italy, France and Germany flat exports and manufacturing down large share goes to EEs like China, whose growth also lower on trend Deflation increasingly wage led QE: Efficacious but: played out with low bond yields Macro debate: but bond yields under 1% imply conventional QE not effective any more Larry Summers: But low r in log term imply increased fiscal space for higher deficits and debts to up I & agg D Do labour market reforms work: ILO simulations: Wage cuts work through r, and zero lower bound limits : Keynes and Pigou Social protection impact on growth observed, but not on aggregate D Tax wedge on the wage shows low impact on competitiveness Labour flows: Germanys efficient matching in the labour market has shifted Beveridge curve in, so more demand and investment needed to post more vaccancies

24 Compendium of labour market policies enacted or contemplated Public Expenditure Measures Public Revenue Measures Labour Market Measures Public wage freeze/cut Austria -freeze for 2013 Cyprus - 10% cut for new entrants - freeze for 2 years Czech Republic - 10% wage cut Estonia - freeze at 2011 level Greece - 10% cut for local political staff - 15% cut in public sector salaries Hungary - freezing gross wage bill and abolishing bonuses Ireland - 10% pay cuts to new entrants Italy - freeze until incremental cuts to central govt ministries between Portugal - 5% pay cuts for senior public sector staff and politicians Romania - 25% cut Slovakia - 10% cut in state wage bills Slovenia - 15% cut Spain - 5% wage cut in 2010, frozen in 2011 UK - freeze for 2 years until 2014 Reduction in the size of government Austria - hiring freeze until 2014 Belgium - 5.5% during Cyprus over the next 5 years France - replacement freezing scheme affecting civil servants Greece - 1:10 hiring attrition rule - Reduction of public sector jobs until 2015 Ireland - reduction by staff over 2008 levels Portugal - recruitment freeze Spain - Hiring freeze in 2012 UK - 7.4% drop in public employment since late jobs cut by 2014 (target) Romania - replacement of 1 staff for 7 leaving Pension reform and reduction in subsidies Austria - stricter eligibility conditions on pensions and early retirement Belgium - retirement age from 59 to 62 Bulgaria - 1 yr increase of retirement age France - retirement age from 60 to 62 Greece - reduction of supplementary pensions 10-20% Hungary - removal of 13 th monthly pension - restrictions to disability pensions - reduction in housing, student, pharmaceutical subsidies Ireland - progressive tax-relieved levy on the gross pay of pensionable public servants Italy - increase in women retirement age to 65 - requirement to work 41 years before retirement Luxembourg - 10% cut of subsidies to companies Romania - increase in retirement age to 65 (men) / 63 (women) by 2030 UK - removal of child benefits for high income families Increase in social security contribution Czech Republic - increase for high income earners Estonia - increase in unemployment insurance tax up to 4.2% France - increase of 0.2 point of 2% social security contribution on capital income Hungary - increase by 1% Italy - extension of tax base Latvia - increase by 2 percentage points as of 2011 Romania - introduction of the obligation to pay 5.5% health contribution when income is higher than 173 Slovakia - nonmonetary benefits proved to employees became subject to social security and health contributions Poland - increase in disability pension contribution paid by employers by 2 percentage points Increase in income tax Cyprus - contribution on gross pensionable earnings (3%) - temporary contribution on gross earnings of public/ private sector employees for 2 years Greece - new progressive taxation scheme with 9 brackets (before: 4) with a 45% top rate (from 40%) in 2010 Hungary - increase in corporate income tax rate to 19% from 2010 Italy - 3% tax on individual income above France - temporary 3% increase on high income households - 5% increase in corporate tax Portugal - 3% increase in corporate tax rate Spain - temporary increase in personal income tax UK - increased tax for the wealthy Latvia - increase of the general rate from 23% to 26% in taxation of fringe benefits in 2010 Minimum wage Bulgaria - Raise from BGN 270 to BGN 290 (monthly minimum wage as a % of average wage decline from 39.5% in 2008 to 33.7(p)% in 2011) Greece - Cut of 22% (32% for those under age 25) Ireland - one euro cut to 7.65 in 2010, reversed in 2011 Spain - freeze