Forums → WEPR → Unemployment And What To Do About It

Mass unemployment is inevitable whatever governments do, but they can ease or worsen the pain

Thanks to welfare schemes and unemployment benefits, the risk of losing ones job no longer plunges people into destitution as it did in 1929, at least in the developed world.

Not even the most pessimistic would predict that this contemporary crisis will reach the severity of the Great Depression, which shrank the US economy by more than a quarter and put a quarter of the working population out of a job. With the world in the deepest recession since 1929 and global trade shrinking at its fastest pace for 80 years, mass unemployment looms large and raises the question: what should governments do?

Get in Line

In the developed world, job losses are starkest in the US, where the recession began. Due to the flexibility of its labour markets, 4.4 million jobs have been shed since December 2007, including over 600,000 in each of the past 3 moonths. The unemployment rate jumped to 8.1% in February, the highest in 25 years. The jobless in the US today, have less of a chance of finding another one than at any time since records began 50 years ago. The effects of this are amplified when one considers the large number of households that depend on 2 full incomes.

However, it is abundantly clear this recession will not be exclusive to the US and the UK. The output of Japan is falling faster than in other rich economies. Unemployment there is low, but rapid job losses among Japan's army of temporary workers are exposing the unfairness of a two tier labour market and straining an egalitarian society.

In Europe unemployment has grown at different rates in different nations. In Spain and Ireland for example, unemployment has skyrocketed, as building booms have crashed, normally a leading economic indicator. Elsewhwere, unemployment is edging up slowly. In many European nations, the rates are below America's, but that could be due to the rigidity of their labour markets which adjust slowly to changes in demand rather than they are not feeling the global pinch. European economies however are shrinking rapidly, which points out that much worse lies ahead. By the end of 2010, unemployment in the developed world will likely be above 10%.

In the developing world, the outcome will be different, but more painful. With trade shrinking, millions of workers are losing their foothold on the bottom rungs of the global supply chain. Levels of poverty will no doubt rise as they sink into informal work or return to agriculture. The World Bank predicts 53 million people to fall below the level of extreme poverty this year.

Politics dictates that governments must intervene energetically to assist. That's partially because capital has made up such a large share of profits for so many years that the pendulum is swinging back and partially because, having just given trillions of dollars to the banks, politicians will be under pressure to put vast amounts of money into saving jobs. However this runs the risk of causing ogovernment faliure. For example, unemployment remained high for decades after the recessions in the 70s and early 80s due to the rigidity of Europe's labour markets.

Governments are piling in with short term help for workers. In the US, which has one of the lowest social safety nets in the rich world, extending unemployment benefits was, rightly, part of the stimulus package. Japanis giving social assistance to ''non regular'' workers, a group that has long been ignored. However, on the whole, it seems more prudent to pay companies to keep people in work, than to subsidise unemployment benefits. Many nations are topping up the earnings of worker on shortened weeks or forced leave.

These measures are sensible, but only in the short term as understandably, governments need to sustain demand. But this crisis is undoubtedly going to be a long term one. Even if the recession ends soon,(of which there is no sign) the excessive borrowing and asset bust that led to it will overshadow the world economy for years to come. Moreover many of yesterdays jobs will simply not come back, and so workers will need to shift from old to new occupations.

It'll be a Tricky Fix

In the coming years politicians will need to perform policy U turns because, in the long term, what they need is flexibility in the labour markets. That will mean abolishing job subsidy programmes, taking away protected workers privileges and making it easier for businesses to restructure by laying people off. Japan, being a prime example of a labour market with two tiers, one tier being a temporary workforce with few protections, the other being a mollycoddled workforce with many. This disparity urgently needs to be addressed if the world economy is to recover.

The euphemism for that being ''flexibility''. The reality being, the more easily jobs can be destroyed, the more easily they can be created. The programmes operating today to keep people in existing jobs will become a drag on the great adjustment nescessary for recovery. Government spending on job retention will need to be cut and spending on job creation will need to increase. Government will have to switch from demand, to supply side policies, aimed at making AD curves more vertical. This would require some nifty political maneuvering, however for politicians, it is nescessary because without it, new growth will be stifled.

However well governments design their policies, unemployment will rise sharply for some time. At best it will blight millions of lives for years. The politicians job is to ensure the misey isn't measured in decades. I would argue the method of achieving this would be a shift from short term demand side policies to long term supply side policies.