IMF study: No drop in unemployment without specific job creation measures

The IMF’s first substantial study on unemployment revises upwards the Fund’s earlier predictions of joblessness in industrialized countries as a result of the current economic crisis. It states that there will be no decline in the unemployment rate before at least 2012 unless countries adopt “policies to jump-start job creation”. Today the Fund released the study, “Unemployment Creation during Recessions and Recoveries: Okun’s Law and Beyond”, in advance of the publication next week of its full World Economic Outlook publication, of which the study is a chapter.

The IMF’s unemployment study has significant shortcomings and contradictions, but importantly puts the finger on “persistently high unemployment” as “the key policy challenge” that many industrialized economies will face in the coming years. The paper predicts that the current high unemployment rate, which averages 9 per cent in industrialized countries, will remain at that level until the end of 2012 unless aggressive job-creation measures are adopted. The paper makes no prediction beyond end-2012.

Among the policy measures put forward in the paper are:
– Maintaining macroeconomic stimulus polices in countries where unemployment is high and economic growth is below potential
– Using temporary hiring subsidies, especially for particular target groups, to stimulate job creation
– Following the example of Germany’s reduced work-time programmes (Kurzarbeit) both to stabilize employment and to avoid hiring and retraining costs; however such programmes should not impede movement of workers from declining to expanding industries and wage subsidies could assist in the transition
– Replacing temporary work contracts, which offer flexibility to employers but insecurity and lack of training to workers, with open-ended (permanent) employment contracts that include gradually increased job security provisions over the course of a worker’s tenure

A substantial part of the IMF’s unemployment study consists of attempts to explain the widely differing performance of labour markets during the current recession. For example, Germany’s unemployment rate dropped even though its GDP declined by 7 percent, while Spain’s unemployment increased by 7.5 percentage points although its GDP declined by less than Germany’s (about 4 per cent). The study concludes that a large part of the difference can be explained by the extensive application of Kurzarbeit combined with relatively strict employment protection legislation in Germany, versus a proliferation of temporary work contracts offering no job or income security whatsoever for many Spanish workers. The study also discusses the differing impacts on labour markets of housing price busts, crisis in the financial sector and other factors.

The IMF’s paper does include some confusing and contradictory approaches, reflexively idealizing highly flexible labour markets and ignoring the negative macroeconomic impacts in some instances, while agreeing that lack of flexibility has been an important tool for maintaining aggregate demand in others. For example, on page 7 the report criticizes centralized collective bargaining systems because they can sometimes impede downward adjustment of wages, but on page 21 it praises compensated reduced work-time programmes because they can “counter potential wage deflation pressures during a severe recession. By stabilizing employment and smoothing income through a downturn, such programs also mitigate large adjustments in domestic demand.”

The report concludes: “The prospect of persistently high unemployment increases the need for policies to jump-start job creation above and beyond generally encouraging wage flexibility and improving labor market institutions.”

The IMF research team that prepared “Unemployment Creation during Recessions and Recoveries” will hold discussions on it in the coming weeks in Washington and in some European cities (Brussels, Paris, Berlin and Milan) and is available to debate the study with interested trade union organizations. We will advise union organizations in those countries of the specific dates.

The unemployment study is available on the IMF’s web site at:
http://www.imf.org/external/pubs/ft/weo/2010/01/pdf/c3.pdf