Labour Market Trends in the Wake of the Great Recession: Implications of the 'New Normal', October 2009

The global economy is showing unmistakable signs of recovery from the steepest downturn since World War II. Economic contraction has ceased in North America, Europe, and developed Asia, and most of the advanced industrialised countries are poised for positive GDP growth in 2010. China and India, whose economies decelerated under the impact of the global downturn, have resumed strong growth paths. Manufacturing activity is quickening in response to increasing demand for durable goods. Consumer confidence is rising, while major stock exchanges are posting impressive gains. Battered real estate markets have begun to rebound from the collapse of housing prices. And global financial markets have pulled back from the brink of what many analysts believed would be a 1930s-type implosion.

But while the international community has eluded the “Great Depression” that many feared after the Lehman Brothers bankruptcy in autumn 2008, the “Great Recession” has left substantial damage that limits the world economy’s growth potential during the next decade:

· A massive overhang of household debt that has forced aggressive de-leveraging and sharply reduced consumer demand, which is a foremost driver of GDP growth in the advanced industrialised countries

· The severely damaged balance sheets of financial institutions, which will take years to repair and which will hinder entrepreneurs and small enterprises from obtaining growth capital

· A steep reduction of international capital stock resulting from declining corporate investment and rising scrap rates, which some economists fear will permanently constrain global output

Growth Prospects of the Global Economy

These factors presage modest growth rates in the advanced industrialised countries in coming years. The International Monetary Fund forecasts 2010 growth rates of 0.5 percent in the European Union, 1.5 percent in the United States, and 1.7 percent in Japan. The Fund projects developed economy growth rates of 1.8 – 2.5 in 2014, below their pre-crisis levels. Even these modest growth projections are qualified to the degree that (1) the short-term effects of the fiscal stimulus programmes undertaken in Europe, North America, and developed Asia may dissipate, heightening the danger of a “double dip” recession, (2) the unprecedentedly large budget deficits now burdening the developed countries (reaching a record $1.7 trillion in the U.S.) will prevent Western governments from enacting followup stimulus packages, and (3) the current deflationary cycle gives way to inflation fed by excess liquidity and resurgent energy prices, choking off global recovery.

Unsurprisingly, emerging markets are expected to register more robust GDP growth numbers in coming years. The IMF forecasts China and India to grow by 9.0 and 6. 4 percent respectively in 2010, below their pre-crisis peaks but well surpassing growth rates in the developed countries. Brazil (3.5 percent) and the Russian Federation (1.5 percent) enjoy weaker growth prospects coming out of the recession. As a group, developing/emerging economies are projected to reach 6.6 percent growth in 2014, more than twice the rate of the advanced industrialised countries.

The resilience of China, India and other emerging markets amid the downturn has heightened expectations that those countries will serve as engines of global recovery. Indeed, over the past 18 months, cash-flush emerging markets have acted as liquid buffers to soften the impact of the global credit crunch. But it is far from clear that the GDP growth trajectories of emerging markets will fully compensate for tepid growth in the developed economies.

Impact on the Global Labour Market

Unemployment is historically a lagging indicator, and jobless rates were slow to return to pre-recession levels in previous global downturns. The GDP growth trajectory that followed the 2000-02 recession is often described as a “jobless recovery” insofar as many lost jobs during that downturn disappeared forever. In that instance, the earlier productivity gains of the 1990s (generated by the Information Technology revolution and investments in labour-saving manufacturing technologies) enabled companies to sustain or even boost output levels with smaller workforces, obviating the need to expand their payrolls when economic growth resumed.

The global labour market’s recovery from the recent downturn encounters formidable challenges:

· The sheer scale of global unemployment, which the International Labour Organisation estimates at 50 million people

· The wide swath of industries suffering high joblessness, subsuming financial services, construction,hospitality, retail distribution and manufacturing

· The specter of long-term unemployment, which erodes the job skills and social networks needed to secure gainful employment and prompts disillusioned individuals to leave the workforce altogether

The grim situation in the global labour market raises the possibility of a “New Normal” in which the natural unemployment rate (traditionally placed at 4-5 percent of the workforce) permanently settles at a higher rate (high single digits or even higher).

The acceleration of investment in emerging technologies (e.g., biotechnology, nanotechnology, renewable energy) provides scant cause for optimism that new job creation will substantially reduce unemployment in the New Normal period, as most of those industries exhibit low labour content.

Furthermore, the technology-intensive industries that display the greatest potential for profitable growth (and hence the greatest allure to prospective investors) demand university-degreed professionals and production workers with highly specialised skills. Consequently, the emerging industries that will most likely spearhead GDP growth in the coming decade will not be major sources of job creation for long-term employed persons whose skill sets are misaligned with the needs of the global labour market.

Labour Market Dynamics in the Developed Economies

The New Normal scenario is manifested in varying ways across the global labour market. Current jobless rates in the developed economies range from 18.9 percent in Spain (illustrating the severe impact of the recession on the Spanish construction industry) to 5.5 percent in Japan (demonstrating the long-standing commitment of Japanese companies to lifetime employment). Unemployment in Ireland reached 12.5 percent in 2009, over double the level obtaining the previous year–dramatizing the abrupt reversal of fortunes of a country recently dubbed the “Celtic Tiger”.

Most of the continental European countries have suffered less dramatic increases in unemployment. France’s jobless rate increased from 7.9 to 9.9 percent in 2008-09, indicating that the 35 hour work week system introduced at mid-decade has not shielded the French economy from the contraction in labour demand. But Germany’s unemployment rate registered only a small increase (7.3 to 7.7 percent) during this period, demonstrating the effects of the Kurzarbeit programme that subsidises companies to keep employees on the payroll at reduced working hours. By one estimate, the Kurzarbeit system has saved 500,000 jobs in Germany. Skeptics worry that the job-saving elements of the programme will dissipate once the subsidies lapse. But advocates contend that the Kurzarbeit programme has preserved the worker skills essential for Germany’s export-led economy, and thus positions the German economy for sustained growth when the global recovery takes hold. Some European countries with comparatively low unemployment rates (e.g., Denmark) have responded to the downturn by speeding migration toward the EU’s “flexicurity” model, which aims at increasing labour market flexibility in exchange for strengthening of the social safety net for unemployed workers.

A different dynamic obtains in the Anglo-American countries, where labour market safeguards are substantially weaker than in continental Europe or Japan. In these countries, labour markets adjust more rapidly to economic shifts and displaced workers enjoy less generous unemployment compensation and other forms of government support. In August 2009, the jobless rate in the United States reached 9.7 percent, two percentage points higher than the 2008 level and matching the country’s previous postwar high registered in 1982. Recent spikes in unemployment rates in Canada (8.7 percent) and the United Kingdom (7.9 percent) similarly mirror the relative flexibility of those labour markets. Economists have traditionally assumed that a key advantage of the Anglo-American labour markets over their continental European counterparts is a greater capacity for job creation. But labour market conditions of the New Normal will test that assumption. The United States has lost 7.2 million jobs since the onset of the recession in December 2007, and fully replacing those lost jobs (while creating a sufficient number of new jobs to absorb increases in the working age population) will require GDP growth rates that now appear wildly improbable. According to a Rutgers University study, even if the U.S. resumed the job creation pace of the boom 1990s–a highly optimistic scenario–the country would not return to a 5 percent unemployment rate until 2017.

Unemployment in Emerging Markets

While emerging markets as a group enjoy stronger GDP growth rates (and commensurately lower unemployment rates) than developed countries, that group exhibits significant variations by country. Methodologies for collecting and reporting labour market data differ widely among emerging markets and often diverge from international standards. But against that qualification, certain patterns do emerge.Among the BRIC countries, the Russian Federation displays the highest unemployment rate (9.9 percent in Brazil’s more diversified economy affords greater insulation from the global downturn, and the country’s healthy if unspectacular GDP growth path signals a steady decline in the current unemployment rate (8.1 percent). India appears well-positioned to sustain its IT-driven growth path and thus to stimulate the job creation needed to lower the country’s jobless rate (now 7.2 percent).

China’s officially cited unemployment rate (4.3 percent) seems incommensurate with reports in early 2009 of millions of migrant workers returning from the coastal provinces to the interior in the wake of the collapse of global export demand. Deficiencies in China’s labour market data system frustrate precise judgements about unemployment trends. But it is clear that China’s labour market exhibits contradictory elements: Short-term, Chinese authorities face strong pressure to accelerate job creation and prevent unemployment from reaching politically unacceptable levels. Long-term, China’s demographic profile (aging population, low fertility rate, rising dependency ratio) signals mounting labour shortages in the world’s second largest economy.

The new member states and accession candidates of Central and Eastern Europe are converging toward EU standards on labour market statistics, and the unemployment data clearly show the repercussions of the global downturn on the CEE region. Latvia, until recently the EU’s fastest growing economy with a China-level GDP growth rate, has suffered a devastating economic decline (nearly 20 percent contraction in 2009) and now exhibits one of Europe’s highest unemployment rates. Hungary is also reeling from the recession, and posts a jobless rate approaching double digits. Despite a comparatively robust GDP growth, the Slovak Republic reports a high unemployment rate of 11.6 percent that indicates persistent structural unemployment (mismatch between worker skills and labour force requirements).

Structural unemployment also besets Turkey, underscoring the need for labour market reforms as that country prepares for EU accession. Poland, whose structural reforms helped cut unemployment nearly in half in 2006-08, has experienced a modest rise in unemployment to 8.0 percent. Unemployment varies widely in other emerging markets, illustrating the importance of country-specific factors in shaping labour market dynamics. Noteworthy among second-tier emerging markets is South Africa, whose national unemployment level (23.5 percent) is one of the highest in the world and whose even higher rates of black unemployment raise serious threats to social and political stability.

Conclusion

Global labour markets in the New Normal will display increasing complexity: On the one hand, many workers dislocated by the Great Recession will face long-term unemployment or underemployment. Individuals possessing weak job skills may face permanent/semi-permanent unemployment, underscoring the urgency of investments in retraining programmes to align worker skills with the demands of the 21st century global economy. On the other hand, individuals possessing specialised skills in strong demand by employers in high-growth, high-technology industries will again become objects of the “global war for talent” that dominated discussions of human resource management during the years preceding the Great Recession.