Restoring Jobs by Restoring Growth

By Min Zhu

Over 200 million people are unemployed around the world, with double-digit jobless rates in many European countries and in many emerging markets. Youth unemployment and long-term unemployment are at alarming levels.

The number of unemployed people is nearly 16 million higher today than in 2007 among countries where labor markets are tracked regularly by the IMF. Much of this increase has been in advanced economies (Chart 1).

The need to tackle the unemployment crisis in these economies is self-evident. But what is to be done?

In the near-term, a growth strategy is the best jobs strategy.

Policies that restore growth in advanced economies will also put people back to work in these countries. And the growth spillovers to emerging markets and developing economies will boost jobs there as well.

Put differently, the human costs—in terms of increased unemployment—of making bad policy choices are immense. 

The unemployment costs of slower growth

To illustrate the consequences of making bad policy choices in advanced economies consider the following scenario. Suppose that overall growth in these economies slips from the current consensus range of 1.25 to 1.5 percent in 2012-13 to just below 1 percent this year and -0.5 percent next year, as some observers fear.

A template developed by IMF staff makes it easy to quantify the unemployment consequences of this drop in growth.

Instead of the slow decline in unemployment rates we have seen over the past year, unemployment will shoot up to nearly 9 percent, an increase of 1.2 percentage points. To put this in terms the person on the street can easily understand, 5 ½ million more people will be unemployed in the advanced economies from this fall in growth (Chart 2).

The fall in growth in advanced countries will also raise unemployment in emerging markets and developing countries.

Using the IMF’s estimates of growth spillovers and employment-growth linkages, the unemployment rate in emerging markets and developing economies will inch up by ¼ percentage point.  This would add over 3 million people to the ranks of the unemployed in these countries.

Avoiding a lost generation

Our work with the ILO documents the enormous personal and social costs from unemployment. Workers laid off in a recession suffer long-term loss of earnings, even once re-employed. Job and income loss has an adverse effect on productivity, health and mortality of the unemployed, and on school performance and future income of their children. High and prolonged unemployment also leads to loss of faith in public institutions.

Restoring growth will help make a dent in youth unemployment. Though the average level of youth unemployment varies across countries due to structural factors, in most advanced countries youth unemployment is also very responsive to growth.

Chart 3 illustrates this strong association for two countries, the United States and Spain, that have experienced a surge in youth unemployment over the past few years.

Policies to foster growth

In short, there is an urgent need to implement policies, particularly in advanced economies, to secure the global recovery. These policies were laid out in a speech by our Managing Director, Christine Lagarde, at the Peterson Institute:

▪  Central banks have announced the right steps. In contrast to the mistakes by central banks that led to the Great Depression, let’s hope that recent actions by the major central banks pull us firmly out of the Great Recession.

▪  Europe is clearly where further action is most urgently needed. We need implementation of announced actions on the firewall, the banking union, and the fiscal union.

▪  In the United States, the immediate need is for actions to keep the country from plunging off a “fiscal cliff”—reducing growth by as much as 2 percent.

These actions in advanced economies would not only restore growth and bring back jobs in these countries, they would also help the jobs outlook in emerging markets and low-income countries.

Of course, even after we surmount these near-term challenges, the need for a more durable model for long-term growth and job creation will remain. We have a long road ahead but first we need to clear the roadblocks to the near-term recovery.

10 Responses

  1. [...] –Restoring Jobs: Min Zhu of the IMF says a growth strategy is the best jobs strategy. “Policies that restore growth in advanced economies will also put people back to work in these countries. And the growth spillovers to emerging markets and developing economies will boost jobs there as well. Put differently, the human costs — in terms of increased unemployment — of making bad policy choices are immense. To illustrate the consequences of making bad policy choices in advanced economies consider the following scenario. Suppose that overall growth in these economies slips from the current consensus range of 1.25 to 1.5 percent in 2012-13 to just below 1 percent this year and -0.5 percent next year, as some observers fear. A template developed by IMF staff makes it easy to quantify the unemployment consequences of this drop in growth. Instead of the slow decline in unemployment rates we have seen over the past year, unemployment will shoot up to nearly 9 percent, an increase of 1.2 percentage points. To put this in terms the person on the street can easily understand, 5 ½ million more people will be unemployed in the advanced economies from this fall in growth.” [...]

  2. [...] Dans les pays avancés, la croissance est maintenant trop basse pour faire diminuer sensiblement le chômage. Dans les principaux pays émergents, la croissance qui avait été jusqu’ici vigoureuse a [...]

  3. It is really up to us as individuals to spend our money wisely, and to remember that a bird in the hand is worth two in the bush. In other words, would you allow your employer to pay you with a $500 cell phone rather then cash? Finally, when we all stop worshiping the wealthy, we’ll make much greater progress in life.

  4. Javid: I agree that something needs to be done, but what happens is that employers of all sorts, from massive corporations to small shops, want the cheapest possible labour hire they can get. Most nations allow this type of employment, which is offshoring/outsourcing/employment agencies, and so it creates the “slave & master” rule. In the last 20 years or so, there has been a massive rise in educational “degrees/diplomas” in the 18 to 35 year age bracket and yet most are either unemployed or doing work that is not suitable to their abilities/qualifications and skills. It is productivity that will drive employment!

    Per: re. the older generation standing in the way of the new generation, many are poor and have to keep working to live; many have worked all their lives and have nothing to show for it due to low wages and poor conditions. It is the mentality of the strong to survive?

    Privatisation and entrepreneurship have caused mass unemployment and the GFC!

    Socialism tends to move to Communism and so it fails; Capitalism tends to move to Extreme Capitalism which has also failed; what we need is a reality check. No-one wants to look at it and instead just hallucinates that it will fix itself, which it won’t.

  5. 200 million people are out of a job and mostly in the advances countries. The following suggestions are worth consideration:-

    – Youth unemployment can be reduced by not increasing the retirement age
    – inclusive growth but also enhanced growth to match with the growth of
    unemployment
    – population growth be checked to a feasible extent but not necessarily
    one family one child as practised in China. Natural resources seem to be
    limited as such unlimited population growth will not be sustainable
    – Additional investment be spared for renewable forms of energy which
    essentially needed for production and dependence on oil and gas be
    reduced. IMF should devise some financial incentives in this connection.

    Only central banks cannot be expected to perform all the above functions rather strong political will be needed.

    • “Youth unemployment can be reduced by not increasing the retirement age”

      I strongly agree with that, but politicians/economist say “we need to find the money to pay for pensions” so they have come up with it’s cheaper to pay youth welfare benefits then pension benefits and so keep the elderly working!

      • OK George, but some kind of compromise needs to be developed. This youth unemployment is becoming a more serious problem than keeping ‘the almost exhausted’ seniors on board. Look how speedily in Pakistan this Y generation comes on the roads and becomes uncontrollable.

        Kind regards.

      • For each percentage point the unemployment rate for youth exceeds the overall unemployment rate, the retirement age should be cut with x months, as there is no justice in the old generation, who already had its chance, standing in the way of the new generation.

  6. It is always sad to hear about job loses but it is always great to hear about job creation!

    Investments, stimulus have saved and, in some cases, created jobs but then when countries need to keep borrowing money or get bailouts from other countries, it’s just passing the debt/interest around; it makes the problem go around in circles with no end in sight.

    One way could be to lower the interest rates or have interest free loans to allow money “not debt” to circulate!

  7. What can I say? With capital requirements for banks based on risk, which subsidize the access to bank credit for those perceived as “not-risky”, and taxes the access to bank credit of those perceived as “risky”, like small businesses and entrepreneurs, you have no chance at all of getting sturdy economic growth, just a more flabby economy, with some bowel movements resulting from some temporarily debt financed increased demand.

    Have you ever thought of capital requirements for banks, based on the potential of “job-creation-for-the-young” ratings? That could go a long way toward returning a purpose to our nowadays so purposeless banks.

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