Employment friendly macroeconomic frameworksJob recovery in times of constrained public finances

Ekkehard ErnstPrincipal Economist, International Institute for Labour Studies

ernste@ilo.org

Overview

• Common crisis

• Divergent recovery

• Tailor-made policies

• Alternatives?

I

Common crisis

The trade crisis has affected everybody in the short run...Correlation of trade flows in OECD countries

Glo

ba

l fin

anc

ial c

risi

s

IT b

ub

ble

cra

sh

Asi

an

an

d R

us

sia

n c

ris

is

Sav

ing

s &

Lo

an

s c

risi

s

Fir

st o

il c

risi

s

Sec

on

d o

il cr

isis

an

d V

olc

ker

sho

ck

5060

7080

9010

0

Tra

de c

orr

elat

ion

(in

%)

1970

m1

1980

m1

1990

m1

2000

m1

2010

m1

Trade weighted unweighted

Global trade collapse

...but in the long-run, investment will follow too...

Deleveraging of households and firms has already started

50

100

150

200

1998q1 2000q3 2003q1 2005q3 2008q1 2010q3 2013q1

(in %

of

GD

P)UnitedKingdom

Euro area

UnitedStates

Fina

ncia

l cris

is

...as long as financial markets remain stressed

Financial stress index in 2009

-10

-5

0

5

10

15

20

Swed

enTu

rkey

Mal

aysi

aTh

aila

ndCo

lom

bia

Chin

aSr

i Lan

kaFr

ance

Braz

ilSw

itzer

land

Finl

and

Kore

a, R

ep.

Spai

nM

exic

oA

rgen

tina

Peru

Indo

nesi

aCz

ech

Repu

blic

Phili

ppin

esA

ustr

iaJa

pan

Chile

Pola

ndRo

uman

iaIta

lySl

ovak

Rep

ublic

Aus

tral

iaSl

oven

iaEg

ypt

Sout

h A

fric

aRu

ssia

n Fe

dera

tion

Isre

alM

oroc

coBe

lgiu

mD

enm

ark

Cana

daPa

kist

anH

unga

ryIn

dia

Uni

ted

Stat

esG

erm

any

Nor

way

Net

herl

ands

Uni

ted

King

dom

II

Divergent recovery

The sovereign debt crisis has brought divergence...

Variation of government bonds long-term rates in the Euro area (2001-2010)

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

...and caused global fiscal consolidation

Stimulus vs. consolidation packages

-15

-10

-5

0

5

10

15

Fisc

al b

alan

ce i

n %

of

GD

P

Earlier announced stimulus packages

Announced or implemented consolidation packages

Problems on the labour market become entrenched

Increase in long-term unemployment (2009Q1 to 2010Q1, in %)

-30

0

30

60

90

120

150

180

Lith

uani

aD

enm

ark

Esto

nia

Irel

and

Cypr

usLa

tvia

Uni

ted

Stat

esSp

ain

Nor

way

Finl

and

Swed

enU

nite

d Ki

ngdo

mSl

ovak

iaPo

rtug

alBu

lgar

iaCz

ech

Repu

blic

Slov

enia

Gre

ece

Turk

eyFr

ance

Hun

gary

Ital

yJa

pan

Net

herla

nds

Belg

ium

Pola

ndM

alta

Braz

ilLu

xem

bour

gSo

uth

Afric

aAu

stria

Rom

ania

Ger

man

yM

aced

onia

, FYR

Croa

tia

III

Tailor-made policies

Three main principles

• Policy intervention necessary as long as financial stress is high- Stressed financial market conditions increase fiscal multipliers

- This makes fiscal policy interventions particularly cost-effective

• Use fiscal space where available- Fiscal space also depends on the multiplier

- Especially in emerging economies, these multipliers might be large

- There, even small amounts of fiscal stimulus can make a difference

• Switch to most effective (labour market) policies- Avoid unemployment to become entrenched as much as possible

- Target long-term unemployment more aggressively

- Large expenditure necessary as policies loose effectiveness

Fiscal policies most effective when financial stress is high

-50

51

01

5C

oef

ficie

nt e

stim

ate

Low Intermediate HighFinancial stress tercile

Note: Iterated estimates

Government consumption

20

30

40

50

Co

effic

ien

t est

imat

e

Low HighFinancial stress tercile

Note: Iterated estimates

Public employment

-10

00

10

02

00

30

04

00

Co

effic

ien

t est

imat

e

Low Intermediate HighFinancial stress tercile

Note: Iterated estimates

Direct job creation

-50

05

01

00

Co

effic

ien

t est

imat

e

Low Intermediate HighFinancial stress tercile

Note: Iterated estimates

Unemployment benefits

Policy effectiveness in job creation, at different levels of financial stress

Fiscal stimulus can have a strong impact, especially in emerging economies...

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Em

ploy

me

nt m

ulti

plie

rs

Isre

al

Sw

itze

rland

Un

ited

Sta

tes

Ca

nada

Jap

an

Slo

ven

ia

Un

ited

Kin

gdom

Fra

nce

Aus

tral

ia

Italy

De

nma

rk

Ge

rman

y

Bel

gium

Short-term multiplier Long-term multiplier

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Em

ploy

me

nt m

ulti

plie

rs

Arg

ent

ina

Ken

ya

Sou

th A

fric

a

Mex

ico

Bot

swa

na

Bra

zil

Sau

di A

rabi

a

Alg

eria

Tu

rkey

Egy

pt

Ch

ina

Short-term multiplier Long-term multiplier

...but effects change depending on the instrument used

17.1

3.9

15.0

3.4

1.4 1.2

05

10

15

20

Con

trib

utio

ns (

in %

)

Governmentspending

Government non-wage spending

Government wagespending

Policy contributions to outflows (short- vs. long-term)

Short-term effecton outflows

Long-term effecton outflows

39.2

5.3

25.7

4.0

15.7

3.5

15.6

3.5

7.5

2.8

01

02

03

04

0C

ontr

ibut

ions

(in

%)

Unemploymentbenefits

Hiringincentives

Trainingexpenditures

Public employmentservices

Direct jobcreation

Labour market spending: Contributions to job creation (short- vs. long-term)

Short-term effecton outflows

Long-term effecton outflows

IV

Alternatives?

Additional spending could be a win-win option

Exit scenarios from the crisis in advanced G20 countries

-2.0

-1.5

-1.0

-0.5

0.0

2007 2010 2013 2016 2019

Panel A - Government deficit

Baseline scenario Global fiscal consolidation Additional stimulus

-1.0

-0.5

0.0

0.5

2007 2010 2013 2016 2019

Panel B - Employment growth

Baseline scenario Global fiscal consolidation Additional stimulus