There’s a growing consensus among economists that the global economic recovery is looking better and better. Those fears of a “double-dip” recession, in which the world takes a second tumble into a downturn, are fading. Barclays Capital recently upgraded its 2010 GDP growth forecast for the U.S. to 3.8% from 3.5%, and had this to say:
Investors have been worried about a potential double dip to global growth since it became clear at some point last year that the global monetary and fiscal policies that had been implemented would suffice to interrupt the universal freefall…Such concerns are not warranted and by now constitute pure tail risk.
Some of this optimism is being driven by new hope that the all-important U.S. consumer is showing signs of life. As Barclays says:
Expectations for most of the traditional drivers of U.S. consumption growth suggest that its recovery will be sustained…Hence, we feel very comfortable that the consumption growth required to close the output gap will be sustained over the next few quarters.
But simultaneously with reports like this one, a bunch of new research has appeared predicting continued high unemployment throughout the developed world. So if the global economy is healthier, where are the jobs?
It’s an especially relevant question to ask today, since the labor ministers of the G20 (or at least those not grounded by Iceland’s volcanic ash) are meeting in Washington right now to deal with this very question. They have a lot to talk about. Research from the International Monetary Fund, which you can read here, predicts that unemployment in the advanced economies will remain very high – around 9% — through the end of 2011. Why? The slow pace of recovery in the industrialized world means excess capacity will persist, with the jobs crisis intensified by the lingering impact of the credit crunch and housing bust. The report says:
The global economy is recovering from its deepest downturn since World War II, but the speed of recovery differs greatly across regions. For many advanced economies—where the financial crisis was centered—recovery is expected to be slow. In this context, persistently high unemployment may be the key policy challenge facing these economies as recovery gains traction.
Another recent study by the Organization for Economic Cooperation and Development, which you can read here, presents some very alarming data on the level of unemployment among young people in OECD economies. The report says:
The global economic crisis has hit youth very hard. In the OECD area, the youth (15-24) unemployment rate rose by 6 percentage points in the two years to the end of 2009, to reach almost 19%. There are currently nearly 15 million youth unemployed in the OECD area, about four million more than at the end of 2007. And in countries like France and Italy, about one active youth in four is unemployed, while in Spain more than 40% of them are jobless…The short-term prospects for youth unemployment in the OECD countries remain rather gloomy…Given the large spare capacity accumulated by many firms during the recession, job creation is likely to lag significantly behind this modest recovery. In this context, the youth unemployment rate is expected to stay at a high level over the next two years and many unemployed youth are likely to experience a prolonged period of joblessness.
So what can be done? The International Labor Organization, in a report for the G20 conference, which you can read here, says that government action has already done quite a bit to preserve employment, despite the high jobless rates. The ILO estimates that crisis response policies by G20 governments, such as fiscal stimulus, saved or created 21 million jobs in 2009 or 2010. Yet clearly more needs to get done, as the ILO says:
Prolonged labor market weakness has a “scarring” effect on the economy and society that is hard to heal. Furthermore unemployment and underemployment are hampering recovery and heightening risks of a slow return to strong growth. Accelerating the jobs recovery is thus the key policy challenge before G20 countries.
The ILO warns that governments should be wary of exiting stimulus efforts or cutting back on social safety net programs while unemployment is still high. To create more employment, the ILO recommends, among other steps, fostering “green” jobs. The IMF suggests labor demand can be enhanced by the expanded use of temporary subsidies to encourage firms to hire new workers instead of just increasing the workload of existing employees. Another IMF recommendation is to maintain flexibility in the labor force. The IMF worries that political pressures are emerging in some countries, such as Japan, to limit the hiring of workers on a temporary basis, which could curtail employment growth. The report says:
Prohibiting temporary contracts during the recovery may produce the worst of all outcomes: a strong decline in employment during the recession without compensating employment growth during the upturn.
Will any of these steps work? On the margins, I think. These reports left me with the unfortunate impression that there is not much policymakers can do specifically to promote job creation (beyond the usual tools of fiscal and monetary stimulus to maintain demand). That means the jobs crisis won’t abate until the excess capacity built up during the debt-driven boom years works itself out. And with unemployment still high, we can get ourselves into a vicious cycle – joblessness means lower demand, which makes the slack in the economy harder to alleviate, which means a slower recovery, which means fewer new jobs, and so on and so on. So much for optimism.