By Min Zhu
Over 200 million people are unemployed around the world, with double-digit jobless rates in many European countries and in many emerging markets. Youth unemployment and long-term unemployment are at alarming levels.
The number of unemployed people is nearly 16 million higher today than in 2007 among countries where labor markets are tracked regularly by the IMF. Much of this increase has been in advanced economies (Chart 1).
The need to tackle the unemployment crisis in these economies is self-evident. But what is to be done?
In the near-term, a growth strategy is the best jobs strategy.
Policies that restore growth in advanced economies will also put people back to work in these countries. And the growth spillovers to emerging markets and developing economies will boost jobs there as well.
Put differently, the human costs—in terms of increased unemployment—of making bad policy choices are immense.
The unemployment costs of slower growth
To illustrate the consequences of making bad policy choices in advanced economies consider the following scenario. Suppose that overall growth in these economies slips from the current consensus range of 1.25 to 1.5 percent in 2012-13 to just below 1 percent this year and -0.5 percent next year, as some observers fear.
A template developed by IMF staff makes it easy to quantify the unemployment consequences of this drop in growth.
Instead of the slow decline in unemployment rates we have seen over the past year, unemployment will shoot up to nearly 9 percent, an increase of 1.2 percentage points. To put this in terms the person on the street can easily understand, 5 ½ million more people will be unemployed in the advanced economies from this fall in growth (Chart 2).
The fall in growth in advanced countries will also raise unemployment in emerging markets and developing countries.
Using the IMF’s estimates of growth spillovers and employment-growth linkages, the unemployment rate in emerging markets and developing economies will inch up by ¼ percentage point. This would add over 3 million people to the ranks of the unemployed in these countries.
Avoiding a lost generation
Our work with the ILO documents the enormous personal and social costs from unemployment. Workers laid off in a recession suffer long-term loss of earnings, even once re-employed. Job and income loss has an adverse effect on productivity, health and mortality of the unemployed, and on school performance and future income of their children. High and prolonged unemployment also leads to loss of faith in public institutions.
Restoring growth will help make a dent in youth unemployment. Though the average level of youth unemployment varies across countries due to structural factors, in most advanced countries youth unemployment is also very responsive to growth.
Chart 3 illustrates this strong association for two countries, the United States and Spain, that have experienced a surge in youth unemployment over the past few years.
Policies to foster growth
In short, there is an urgent need to implement policies, particularly in advanced economies, to secure the global recovery. These policies were laid out in a speech by our Managing Director, Christine Lagarde, at the Peterson Institute:
▪ Central banks have announced the right steps. In contrast to the mistakes by central banks that led to the Great Depression, let’s hope that recent actions by the major central banks pull us firmly out of the Great Recession.
▪ Europe is clearly where further action is most urgently needed. We need implementation of announced actions on the firewall, the banking union, and the fiscal union.
▪ In the United States, the immediate need is for actions to keep the country from plunging off a “fiscal cliff”—reducing growth by as much as 2 percent.
These actions in advanced economies would not only restore growth and bring back jobs in these countries, they would also help the jobs outlook in emerging markets and low-income countries.
Of course, even after we surmount these near-term challenges, the need for a more durable model for long-term growth and job creation will remain. We have a long road ahead but first we need to clear the roadblocks to the near-term recovery.