The Unassuming Economist

Sara Eisen of Bloomberg TV moderated a discussion on jobs and growth at the Tokyo annual meetings of the IMF and the World Bank. IMF Deputy Managing Director Zhu said that “in the near term, a growth strategy is the best jobs strategy”. Read his views here.

My regular look at the global employment picture is available here.

Emerging market and developing economies have enjoyed robust growth during the past decade and bounced back quickly from the Great Recession, in marked contrast to the more tepid recovery—and even renewed recession—in advanced economies. Similarly, although unemployment in emerging market and developing economies did go up during the Great Recession, by 2011 it was essentially back to precrisis levels.Is the observed correspondence between jobs and growth a surprise, or does it represent a systemic feature of emerging market and developing economies? In a joint work with Davide Furceri, we show that the short-term relationship between labor market developments and output growth has been fairly strong in many of these economies for the past 30 years. This is particularly the case in many emerging markets. Hence, although the emphasis on structural policies to lower long term unemployment and raise labor force participation remains appropriate, cyclical developments deserve adequate consideration as well. The short term relationship between jobs and growth suggests that macroeconomic policies to maintain aggregate demand also likely play an important role in labor market outcomes in many of these economies.

Preliminary work on Okun’s Law in advanced economies is available here.

A new IMF report on US structural unemployment says that

while high long-term unemployment has not yet morphed into a permanent structural problem, it does pose an upward risk to the structural rate of unemployment. We have found that long-term unemployed are significantly less likely to find a job now than before the crisis, and that the loss in labor market matching efficiency observed since the recession is entirely due to a worsening of the labor matching of the long-term unemployed. Together, these results point to a risk that the structural rate of unemployment might be greater now than before the crisis.

Hence, forceful measures should be introduced that reduce long-term unemployment and address the risks associated with long spells of unemployment, namely skills erosion and a weaker attachment to the labor force. These measures include policies to increase demand for the long-term unemployed in the short run (active labor market policies, ALMP). When appropriately designed, such policies have been shown to be effective in improving employment and earnings prospects of long-term unemployed workers (Card et al, 2010; Card and Levine, 2000; Heinrich et al., 2008; Hotz et al., 2006). In particular, as discussed in the Staff report, a significant increase in ALMP resources is warranted given the persistently large pool of long-term unemployed and the risk that, as duration lengthens, their skills and attachment to the workforce might erode. Indeed, in terms of resources per long-term unemployed, the United States spends relatively little on active labor market policies, both compared to other OECD countries, and relative to its own pre-recession levels.

According to a new IMF working paper:

The large fiscal legacies of the global financial crisis have reignited the debate around the impact of fiscal policy onto economic activity during fiscal consolidations. The analysis in this paper shows that withdrawing fiscal stimuli too quickly in economies where output is already contracting can prolong their recessions without generating the expected fiscal saving. This is particularly true if the consolidation is centred around cuts to public expenditure—likely reflecting the fact that reductions in public spending have powerful effects on the consumption of financially-constrained agents in the economy—and if the size of the consolidation is large. Large consolidations make recessions more likely even when made at an expansion time. From a policy perspective this is especially relevant for periods of positive, though low growth. Accordingly, frontloading consolidations during a recession seems to aggravate the costs of fiscal adjustment in terms of output loss, while it seems to greatly delay the reduction in the debt-to-GDP ratio—which, in turn, can exacerbate market sentiment in a sovereign at times of low confidence, defying fiscal austerity efforts altogether. Again this is even truer in the case of consolidations based prominently on cuts to public spending. 

Thus, a gradual fiscal adjustment, with a balanced composition of cuts to expenditure and tax increases boosts the chances that the consolidation will successfully (and rapidly) translate into lower debt-to-GDP ratios. Monetary policy can likely help alleviate further the pain of fiscal withdrawal if it is used proactively via reduction in the real interest rate.