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Jobless? Blame the banks

The global economy needs to create 80 million jobs over the next two years just to reach pre-crisis employment rates, says a grim report from the International Labour Organization.

"In most regions, in particular in advanced economies and a number of Arab countries, it is increasingly difficult to obtain stable employment with decent career prospects - many new jobs are insecure and precarious, reflecting the uncertain economic prospects facing enterprises," notes ILO. "The job situation among youth is especially problematic."

Lack of jobs was one of the key catalysts for Arab Spring which saw regimes of at least three countries - Tunisia, Egypt and Libya -- being toppled and unrest in Yemen, Bahrain, Syria and Iraq.

And the unrest has manifested themselves in other ways in other parts of the world. Riots in the U.K., an endless stream of street protests in Greece and the 'Occupy Wall Street' movement that has spread to other advanced countries, is a reflection of great unrest with citizens feeling left out, underemployed, and robbed of their entitlements and benefits, while the rich get richer.

See report: 255,000 ME millionaires

Much of the recovery will have to be shouldered of non-OECD countries, as the developed world will not be able to return to pre-crisis employment levels before at least 2016.

The ILO reports notes that at least 33 of the 119 countries surveyed may suffer from unrest over the next few years.

"Moreover, in 50 out of 99 countries with available data, survey respondents indicate that their confidence in national governments is declining. Lack of good jobs is at the heart of these developments as the Report shows that these trends are strongly linked to the employment situation and perceptions that the burden of the crisis is shared unevenly."

While the challenge is pronounced in European states, it is impacting even some of the emerging markets such as Russia and Mexico.

An ILO-Gallup poll on social unrest in 2010 highlighted the great levels of stress, with Middle East and Africa citizens leading job dissatisfaction. "Within this region there is considerable intercountry variation, with Egypt, Jordan and Lebanon reporting that in 2010 more than three-quarters of people were unsatisfied with the availability of good jobs."

But European citizens were not far behind, with Greeks, Italians, Portugese and Spainish (part of the dreadful 'PIIGS' label) showing the greatest dismay with their job prospects.

Correlated to the job dissatisfaction is the negative impression of citizens towards their governments - hence the street protests. The Gallup-ILO report shows that among the 99 countries with available information, 50 per cent report lower confidence in government in 2010 than in 2006.

Confidence was lowest in Central and Eastern Europe and CIS, advanced economies and Latin America and the Caribbean, with more than one in two respondents reporting that they did not have confidence in their government in 2010.

The chart below is telling as it shows a strong correlation between unemployment rate and social unrest. Indeed, the primary reason for the Arab Spring was unemployment and high food prices (which ate into disposable income for much of the population). It also shows that deteriorating GDP is hardly a catalyst for social disobedience unless it starts leading to unemployment.


Note: Y-axis units refer to the magnitude of the standardized coefficient estimated. Unemployment rate and international food price are statistically significant at the 1 per cent level. Recent data on measures of income inequality are only available for few countries and were thus excluded from the regressions to preserve the degrees of freedom.

Who's to blame?

The report notes that while the global economy appeared to be expanding in the years before the global financial crisis, here is what was really happening:

While most of the economies saw an 83% increase of the share of corporate profits in GDP from 2000 to 2009, much of the profits were from the financial sector.

Between 2000 and 2007, in advanced economies, financial-sector profits grew by 13 per cent annually, compared with 6 per cent in the case of the non-financial sector, i.e. the real economy. In emerging and developing economies, the figures are around 85 per cent and 20 per cent, respectively.

But corporate profits were not being ploughed back into job-creating enterprises, but in the financial markets.

"In advanced economies, profits of non-financial corporations have increasingly been used to pay dividends and to invest in financial assets rather than to make productive investments. In 2009, more than 36 per cent of profits were distributed in terms of dividends, compared with less than 35 per cent in 2007 and less than 29 per cent in 2000."

"Moreover, total financial assets of non-financial firms in advanced economies increased from 81.2 per cent of GDP in 1995 to 132.2 per cent of GDP in 2007. Due to the financial crisis, there was a decline in 2008 and 2009, but 2010 data show that there is an upward trend in financial investment by non-financial corporations in advanced economies."

The 'Occupy Wall Street' movement may well have a point.

Also Read: What The 99%Want

So, is there hope?

The ILO report offers broad solutions, the kind of broad brushes that you would expect from a global organization trying to cover all bases.

First, it urges that the private sector should be empowered to lead growth. That includes loosening financing for small to medium enterprises. For example, in the UK 22% of SME loan applications were rejected in 2010 compared to around 5% in 2007.

"If private sector investment had grown at the same pace as GDP during the period 2000 to 2009, private sector employment in the advanced economies would have been higher by 5.8 million in 2009," notes the ILO.

There has also been a great disconnect between dividend payouts and declining social benefits - that yawning gap between payouts and compensation needs to be closed. This was especially true in advanced economies, which has seen the greatest decline. Decline in research and development in advanced economies is also a clue to falling productivity.

Brazil, China and South Africa, for example have not seen such a discrepancy and has fared far better than over the past decade.

Reining in corporate pay, initiating boardroom reforms and instilling profit sharing mechanisms are some of the other ILO proposals.

Another key issue is that labour's share of income has lost ground to capital The wage share - the share of domestic income that goes to labour - has declined in almost three quarters of the 69 countries for which data exist.

The chart bellows shows the pronounced deterioration in the Middle East, tempered by wage share clawing its way back after 2005.



"A comprehensive income-generating strategy would have expansionary effects on aggregate demand and employment, without aggravating fiscal deficits," notes the ILO.

The report also examines the impact of food prices, which eats into disposable income and urges greater food security so that it does not hamper economic growth and take away valuable funds from public finances.

Finally, the issue of tax inequality, which is a raging debate in the United States, is a key component of creating employment.

The report notes:

43% of countries decreased top income tax rates during 2000 to 2008; while 70% of countries decreased corporate tax rates during the same period;

30% of countries increased value added tax during 2000 to 2008, which is seen as a regressive form of tax.

Instead of raising the burden on the common man through sales taxes and value added tax, governments could expand the tax base by a mix of wealth tax, capital gains tax, levies on foreign companies and on financial transactions to help reduce fiscal deficits.

Interestingly, much of the arguments set out in the International Labour Organization report have been raised by 'Occupy Wall Street' protestors - alas, the movement lacks the cohesiveness and often appears to be hijacked by fringe groups.

But their key grievances of unemployment and wage inequality runs throughout the ILO report and will be key challenges for governments across the world.

© alifarabia.com 2011