10:42 AM Nov 25, 1996

LABOUR: REINSTATE FULL EMPLOYMENT GOAL, SAYS ILO

Geneva 25 Nov (Chakravarthi Raghavan) -- Full employment is still "feasible and highly desirable", and there is a "strong economic as well as moral case for reinstating full employment as an important policy objective," the International Labour Organization said Monday in its just published World Employment Report.

"The concept of full employment, suitably updated, should remain as a principal objective of economic and social policy," the ILO report said and challenged the present conventional neo-liberal economic wisdom about natural rate of unemployment and non-accelerating inflationary rate of unemployment -- both of which see a trade-off between levels of employment and inflation, and sanguinely look upon persistent and growing unemployment.

The ILO report notes that the world employment situation remains grim. Unemployment is stubbornly high in many industrialized nations -- with average unemployment as high as 11.3% in the EU, having risen slightly over the previous year. Within the EU, unemployment continued to increase in France, Germany, Italy, Sweden and Austria, and remained broadly unchanged in others.

Outside Europe, unemployment has risen in Australia and Japan, was unchanged in Canada and continued to decline in the US.

There was a slight decline in the transition economies of Central and Eastern Europe, but still remained at high levels in others (Bulgaria, Hungary, Poland, Slovakia and Slovenia). Unemployment continued to increase in Russia and some other countries of the former Soviet Union.

Only a few of the developing countries have up-to-date data. And those that have show generally rising unemployment, particularly in urban areas (where more reliable data is available).

Together with the persistence of high unemployment in many industrialized countries there has been growing concern over social exclusion that this breeds. There is also the problem of rising wage inequality and the growing numbers of "working poor".

In the transition economies there has been sharp increases in income inequality since the beginning of the transition.

And in the developing world, the majority of the labour force remain trapped in low productivity employment that offers little relief from poverty.

"For the most part," says the ILO, "the race to create a growing proportion of higher productivity jobs for a rapidly expanding and increasingly better educated labour force in the developing world is being lost."

The ILO report analyses against this background two major and growing concerns that "globalization" will aggravate a bad situation and that technological change is resulting in "jobless growth".

The ILO finds both these anxieties to be "greatly exaggerated" and argues that the unemployment problem as well as some of these concerns are traceable to the abandonment of the full employment concept.

"Trade with low wage economies," ILO says, "is only a minor explanatory factor behind the rise in the unemployment of low-skilled workers and in wage-inequality in the industrialized countries."

In the developing world, the experience of the dynamic Asian economies points to the fact that, with sound domestic policies, expanding trade and investment flows provide rich opportunities for higher rates of growth and job creation.

In contrast, it adds, economic stagnation in much of sub-Saharan Africa has occurred in the context of growing marginalization from the global economy.

This does not mean there are no new challenges posed to international and national policies because of the globalization.

A world economy that is becoming increasingly integrated offers mutual benefits and growing opportunities for the participating countries; but it also generates social dislocation and demands difficult policy adjustments.

There are also concerns, the report notes, that new constraints, including sentiments and judgements of the globalized financial market, on domestic policy have emerged and complicate the adjustment tasks, and that greater openness also means greater vulnerability to external shocks.

While there is some basis for these concerns, "it is nevertheless not true that globalization is an overwhelming supra-national force that has largely usurped national policy autonomy," ILO says.

"There is still considerable policy autonomy, and national macro-economic, structural and labour-market policies are still the dominant influence on economic and labour-market outcomes in any country."

While financial markets "punish" unsound macroeconomic policies (which in any case are undesirable in their own right), heightened international competition does not mean that cutting wages and social benefits is the only feasible response.

There is the preferable alternative of the "high road" -- raising labour productivity through investment in skill development, in infrastructure and in research and development.

This can be supplemented by exploiting more fully the productivity-raising potential of good labour standards and cooperative forms of work organization.

In addition, ILO ways, "there is evidence that many mandated benefits are ultimately shifted to workers in the form of lower wages and hence do not affect international competitiveness".

ILO challenges the view that rapid labour-saving technological change has ushered in "jobless growth", and that revolutionary changes in work organization and social attitudes to work have rendered conventional concepts of a regular job obsolete.

Careful analysis of the empirical evidence shows "there is little basis for these claims" and much of the "end-of-work" literature rests on unwarranted extrapolations from dramatic episodes of corporate downsizing, ignoring compensatory job creation elsewhere in the economy.

ILO says: "There has in fact been no generalized decline in employment intensity of economic growth, in spite of rising unemployment. The latter has been caused by a decline in growth rates rather than any onset of jobless growth.

"Similarly, while there has been some increase in self-employment, part-time work and other non-standard forms of employment, this has not meant disappearance of regular jobs. Data on job tenure do not show any generalized decline in either the period employment individuals have been with their current employer or in projected future tenure... there is also no evidence that the rate of job change has increased in labour markets... public opinion surveys do not also reveal any decline in the desire for paid work or that unemployment has become increasingly voluntary in nature.

"Far from being passe, full employment is still feasible and highly desirable. The current high unemployment in industrial countries has human costs of the utmost severity for those directly involved and breeds crime and other social pathologies from which everyone in society suffers. There is thus a strong economic as well as moral case for reinstating full employment as an important policy objective. This is highly relevant in spite of the rise in non-standard forms of work and other recent changes in the labour market."

The report also challenges the view that labour market rigidities are the cause of rising and persistent high unemployment. The empirical evidence for this is "far from conclusive" says the ILO and points out that labour market rigidities have not been increasing over the period of rising unemployment. If anything labour markets have become more flexible as a result of efforts at deregulation.

"A more plausible view is that rise in unemployment cannot be explained by labour market factors alone and that the interaction between the macroeconomic environment and the labour market has to be taken into account... the slowness of adjustment mechanisms in the aftermath of serious supply shocks and the substantial rise in interest rates in the 1980s are important parts of the explanation of the rise in unemployment. More generally, the slowdown in growth since 1974 has been the major underlying cause of rising unemployment."

"The onset of a combination of slower growth and labour market deregulation, including deunionization, appears to be part of the explanation of rising wage inequality," the ILO adds.

For reapproaching full employment in industrialized countries, the ILO sets out three main requirements:

* The first is to reverse the trend decline in growth rates over the past two decades.

This is important both for increasing the rate of employment creation as well as for reversing tendencies towards rising wage inequality.

The ILO joins issue with "mainstream academic" view that this will not be feasible because potential growth has declined and expansionary policies will be futile because of supply side constraints, and that any expansion will be thwarted by financial markets.

"There is no convincing evidence that it is supply-side constraints, rather than a deficiency in demand that have caused the prolonged period of low growth," says ILO. "Higher growth is possible provided a sustained period of expansionary policies is supported by credible policies to prevent a resurgence of inflationary wage increases and to overcome the skill shortages that will be generated. Without this the expansionary impulse will indeed by choked off by the reaction of financial markets."

* The second requirement for reducing unemployment is to put in place mechanisms for moderating wage inflation.

There are no simply ready-made solutions, but a number of routes are worth exploring: strengthening coordination of wage bargaining through synchronisation of bargaining periods and provision of consensus forecasts on future economic possibilities. Others include social pact approach, encouragement of profit sharing and, if there are no alternatives, adoption of some form of tax-based incomes policy.

* A third requirement is design and implementation of labour market policies. This includes a reform of the unemployment benefit system -- expansion and improved design of benefit transfer programs, subsidies for low-wage employment and payroll tax deductions targeted on the long-term unemployed, and correction for market failures resulting in underprovision of training and training programs.

As for the transition economies, given the already high levels of unemployment and sharp rise in income inequalities, another large dose of labour shedding is likely to generate intolerable social tensions, the report says and asks these countries to choose economic policies and labour-market institutions most likely to reduce unemployment. In terms of macro-economic policies, there is need to look beyond simple stabilization targets and to develop the capacity for macro-economic management to support emerging economic recovery.

For most of the developing countries, the report says, it is a far cry from achieving full employment. The majority of their workers are engaged in low productivity work that is not only onerous but yields only meagre earnings.

Although the creation of adequately remunerative jobs for all who seek it will, for many developing countries, a long term process, it is nevertheless important for them to be firmly committed to the objective of full employment, the report says.

Such an objective provides a framework for formulation of employment policy and for defining targets for measuring progress towards full employment.

The report points out that the underlying cause of deteriorating employment situation in most of the developing, except in the dynamic Asian economies, has been their failure to recover fully from the economic crises of the early 1980s.

A priority requirement is the restoration of high and sustained economic growth, the ILO says. This in many cases will depend on successful implementation of economic reforms to achieve macro-economic stability, an economic environment conductive to high savings and investment and efficient allocation of resources, a more open and competitive economy that could benefit from expanding trade and investment flows.

While there is no single, ideal prescription for an economic reform strategy, the ILO report challenges the current thinking favouring a "minimalist" state confined to delivering a "level playing field" in terms of economic institutions and policy environment.

The report argues that there are several important rationales for a more active State. Developing countries are often characterized by market imperfections and high inequality in distribution of income and assets, and pure market reforms need therefore to be supplemented by public investment and other measures to strengthen supply responses of producers to new economic incentives and ensure an equitable distribution of benefits from reform.

Labour market deregulation (often a part of the structural adjustment programmes) as an aspect of economic reform is also challenged in the report. While there may aspects of labour market regulations that are in need of reform in particular countries, there is no basis for a blanket presumption that these regulations are invariably sources of rigidity and that deregulation is automatically the optimal solution.

The facts suggest that labour legislation typically provides only a modicum employment security and social protection and is fairly uniform from one country to another.

"It thus does not impose excessive rigidity, constitute a serious hindrance to labour hiring or have much influence on the relative international competitiveness of developing countries. Wages and employment levels have also been highly responsive to changes in macro-economic conditions.

"It is thus important to bear in mind the positive role of labour-market regulations in promoting higher productivity and in protective vulnerable workers in the labour market."