Riding Your Luck and Adopting the Right Policies: Why the Australian Economy is Rebounding Strongly

Bob Kyloh

The global economic crisis that commenced in 2008 has had devastating effects across rich and poor nations. But the impact on growth, employment and incomes has not been uniform across countries. Economic performance has depended critically on the policy response adopted by governments. Other authors writing for this Column have made a convincing case for an income led growth strategy in response to the recession. At least one country has clearly demonstrated the benefits of this approach.

Australia is often referred to as the “lucky country”. The recent economic performance of this resource rich nation has helped reinforce this notion. Indeed recent economic achievements down-under may be partly due to the good fortune of rebounding commodity prices and expanding Asian markets. But the terms of trade actually moved against Australia in the last eighteen months and net exports detracted significantly from economic growth in 2009. Economic recovery is actually the result of public policies that boosted the disposable incomes of low and middle income families when aggregate demand was plummeting.

The Australian economy has performed better than any other advanced economy since the onset of the global financial crisis. Real GDP increased by 1.1 % in 2008-09 in year-average terms. The economy remained resilient and recorded moderate growth when most other advanced economies were experiencing a deep recession. Looking ahead (in early November 2009) the Australian Treasury was forecasting economic growth of 1.5% in 2009-10, 2.75% in 2010-11 and projected growth of 4% over the period 2011-12 to 2014-15 before returning to trend growth of 3% in 2015-16.

The Australian labour market is rebounding strongly. Employment increased in the latter months of last year, creating 95,000 additional jobs between September and December 2009. There are now grounds for optimism that the unemployment rate, may have peaked.  As of December 2009 the national unemployment rate stood at 5.5%, having declined 0.3 percentage points since October. If unemployment has peaked at this relatively moderate level this will be a remarkable achievement. Back in May 2009, when the National Budget for 2009-10 was announced, the Government had projected that unemployment could peak at around 10% without any stimulus measures. But because of the actions taken by the Government the unemployment rate was expected to reach a high point of 8.5% in 2010. This forecast was cut to 6.75% in early November 2009. Since this last projection was released conditions have again improved across the economy and in the labour market in particular with the recovery gaining significant traction. All indicators now suggest that the jobs market has stabilised – 136,000 jobs have been created since the labour market upturn began in August 2009. A significant proportion of these new jobs (60/40) are full-time and average working hours have recovered from a recent trough. This is important because much of the contraction in labour demand in 2008-09 had taken the form of declines in average working hours rather than increases in open unemployment. These trends and other partial indicators have prompted several independent economic observers to suggest that the labour market has passed a turning point and consequently incomes, consumption expenditure and aggregate demand may strengthen more than anticipated in the official Government forecasts of November 2009.

The Australian Government introduced fiscal stimulus measures in three stages: in October 2008, February 2009 and May 2009. The total package contained a variety of measures which can be summarised under three headings:  first, increased transfer payments to low and middle income groups which were rapidly disbursed and had an almost immediate impact on consumption expenditure, retail sales and economic growth; second, relatively rapid investments in social infrastructure including schools, health and housing; and third major new investments in economic infrastructure which are more medium term in nature.  The stimulus measures adopted were broadly consistent with proposals made by the Australian Council of Trade Unions.

A striking feature of the Australian response to the crisis, compared to most other countries, has been the emphasis placed on increasing the disposable incomes of low and middle income groups with a high marginal propensity to consume. This approach is in complete conformity with the key aspects of the ILO Global Jobs Pact with its emphasis on income led growth and improvements in the social floor.

The initial substantive fiscal response to the global financial crisis was a 10.4 billion Australian dollar package of measures announced on the 14 October 2008. This package was tightly targeted at sectors of the economy showing particular weakness in the early stages of the downturn - household consumption and dwelling investment. In the second quarter of 2008 household consumption expenditure had recorded its first decline in 15 years. This package included one-off additional payments to pensioners of $A1400 for singles and $A2100 for couples. (Australia has a universal pension scheme with flat rate benefits funded by general taxation. This is supplemented by private contributory pensions or what is called “superannuation”). The package also included additional payments of A$1000 to eligible persons providing care to the aged or disabled and for each child in families receiving the Family Tax Benefit (which is a means tested transfer payment received by low and middle income families).

This package of measures generated significant multiplier effects as the payments were timed to be received by credit constrained families in the lead-up to the year-end holiday period, thus limiting the leakages expected through increased savings.  In Australia, like other advanced economies, consumption expenditure comprises around 60 % of GDP and has important implications for other areas of expenditure, including private investment. At the time of its announcement the Government projected that the above Strategy would boost real GDP growth by between 0.5% and 1% over a period of several quarters.

In early February 2009 the Government announced a second 42 billion Australian dollar fiscal stimulus package.   This included over 12 billion Australian dollars to fund a range of additional one-off transfer payments targeted at a variety low and middle income groups. Well over half the population of Australia received payments of just under a thousand dollars as part of this initiative.  These one-off increases in transfer payments were supplemented by major revisions to the aged pension system and other social security benefits in May 2009. These reforms have resulted in substantial permanent increases in welfare payments. The net impact of these revisions will be to increase expenditure on pensions and related social security payments by A$14.4 billion over the next 4 years.

The above mentioned increases in transfer payments, along with reduced interest rates resulting from monetary easing, helped retail sales remain buoyant in Australia when  economic and employment growth were at their weakest. In November 2009, retail turnover was 7.3% higher than in the pre-stimulus levels of November 2008, having remained largely flat throughout 2008. The contrast in retail spending trends between Australia and other advanced economies is depicted below.

The stimulus measures, and in particular the direct payments to low and middle income households, have also had a significant impact on business and consumer confidence. Consumer confidence is now around 40% higher than the pre- stimulus levels of October 2008, while business confidence is at its strongest level in over seven years.

The effects of the first stage of the stimulus packages, involving increased transfers, are now abating. But the second and third phases of the stimulus - involving significant investments in what was colloquially referred to as “shovel ready” social infrastructure projects and longer term national building projects like roads, rail networks and energy conservation, are now underway. One critical aspect of the social infrastructure projects involved a A$14.7 billion investment in school infrastructure and maintenance. This was part of the February 2009 stimulus package and included resources to: build or upgraded libraries and halls in every primary school and special school in the country; to significantly expand the number of schools with science laboratories and language learning centres; and to ensure every Australian school has resources to maintain and renew its buildings. Further substantial investments in universities and tertiary education were provided in the May 2009 measures, thus furthering the education revolution in Australia.

Deep economic contractions can permanently reduce an economy’s growth prospects through the erosion of skills and capital. The public investments in education plus other social and physical infrastructure were designed to mitigate these effects and position Australia for economic recovery by raising productivity and expanding the supply side potential. Fortunately, with the downturn now expected to be shallower and the labour market recovering rapidly the long term output loss should be mild and the economy should return to capacity sooner than expected.

Australia is in the vanguard of the economic recovery among advanced economies because it took swift and concerted action to boost the disposable incomes of working families and welfare recipients, who spent rather the saved these payments and thus sparked recovery. Australia has demonstrated the potential of an income led growth strategy as advocated by the ILO.  It pays to be lucky and also adopt the right strategies.

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Bob Kyloh is a Senior Economic Advisor in the Integration Department of the ILO. He has previously worked for the Bureau of Workers Activities in the ILO and the Australian Government.

Beyond “Stimulus” - Fiscal Policy after the Great Recession

(by Andrew Jackson)

As the communiqué from the Pittsburgh G20 summit put it, “it worked”. Unprecedented macro-economic stimulus in the form of ultra low interest rates and large government deficits has pulled the global economy back from the abyss, at least for now. But what comes next? Conventional economic wisdom is setting the stage for deep and damaging cuts to public expenditures if labour and the progressive left do not win the argument for public investment led growth and increased fiscal capacity.

Now is definitely not the time for a quick return to budget balance. Not only is the recovery very fragile, interest rates are likely to remain low. This means we can finance public expenditures which create jobs now while raising our productive potential and the future tax base. Debt incurred today to create a larger economy tomorrow is no burden on future generations.

The IMF, the OECD and most governments accept that stimulus should continue a bit longer while awaiting convincing evidence of a sustained revival of private sector demand. But spending cuts are clearly on the agenda. Citing the need to stabilize public debt in the context of rapidly ageing societies, the International Monetary Fund recently (November 3, 2009) painted a grim fiscal outlook for the advanced industrial countries, calculating that the primary budget balance (the surplus of revenues over program expenditures) will have to be increased by a hefty 8 percentage points of GDP from 2010 levels to bring government debt down to a tolerable 60% of GDP by 2030. The conventional view is that this move back to balanced budgets will have to come much more from deep cuts to public spending than from tax increases.

The dominant view is that both fiscal and monetary policy should tighten over what already promises to be a very sluggish recovery. That is a pretty dismal prospect. It translates into continued very high unemployment and substantial slack in the economy. Operating below capacity means low levels of public and private investment, which in turn lowers the potential for future growth. In human terms, an economy bumping along bottom means no jobs for young people, rising inequality and rising poverty. Moreover, fiscal retrenchment will translate into an unwelcome combination of public sector job cuts, cuts to public services and cuts to income support programs, all of which are central to the well-being of working people.

Workers face the imminent prospect of paying for the economic crisis twice, first in the form of job and wage losses, and second in the form of cuts to the already inadequate public services and social programs which existed in most countries before the recession.

While interest rates should remain low, there are major problems with any combination of fiscal austerity and loose monetary policy. Ultra low interest rates and major injections of liquidity into the banking system are already fuelling new financial asset price bubbles. Led by major institutional investors, the shift back into equities and other assets has got well ahead of any recovery in the real economy. Meanwhile, low interest rates alone will not revive private sector demand. In most advanced industrial countries, especially the US, the UK and Canada, households are already deep in debt. Because of global over-capacity and unbalanced trade with Asia, real private sector investment in the advanced industrial countries is likely to remain very depressed.  Thus fiscal austerity combined with monetary ease will not fix the underlying problem of stagnation.

One way out of this problem is to more closely control the credit process.  We could and should be limiting highly leveraged financial investments and controlling unsustainable credit flows. The other way out of the problem is to run productive fiscal deficits to ensure that the impact of low interest rates is felt through higher public investment. It is desirable that the overall credit creation process should be driven by investment rather than by speculation and debt financed consumption and, under today’s circumstances, this requires high levels of public investment.

Now is the time to launch major medium and long term public investments to drive job creation, and also to create new investment opportunities for industrial sectors which remain in deep crisis. We must address long-standing investment deficits in basic municipal infrastructure; build new urban and inter city transportation systems; invest in energy conservation; dramatically expand non-carbon based energy sources; expand basic public services such as not-for-profit child care and elder care; and invest much more in public education at all levels as well as in workers’ skills.

Well selected investments can yield very high rates of return on a number of fronts. For example, investment in transit and passenger rail can have large positive job impacts, significantly cut carbon emissions, and also generate high rates of return to individuals and businesses in terms of reduced travel time and reduced road congestion. We know that all of these investments – especially those in public services and energy efficiency – are labour intensive and create many more jobs than increased consumer spending, and simultaneously promote our environmental, community development and social justice goals.

What we need is a period of public investment led growth to drive the whole economy. Good public infrastructure and good public services are key drivers of private sector productivity. Public sector investments drive investment by private sector suppliers, especially if twinned to coherent industrial strategies. The key point is that deficits can and should be incurred so long as they are twinned to public investment programs which can be demonstrably linked to increasing overall economic potential and to furthering environmental and social goals. The challenge for labour and the left is to move from talking about temporary “stimulus” to promoting a pro active, longer term public investment agenda.

But how are we going to pay for major new public investments when deficits and debts are, supposedly, already too high? In the short-term, low interest rates make viable a huge raft of potential public and environmental investments which will more than pay for themselves over time. In the longer term, a decade and more of expensive and wasteful tax cuts mainly in favour of corporations and those with very high incomes means that there is ample room to increase government fiscal capacity to balance budgets without cutting spending, and without undermining the living standards of working people.

Labour and the left have to recognize that decent levels of public services and social programs ultimately have to be paid for from a high, comprehensive and fairly flat tax base including consumption and payroll taxes. If we want Scandinavian type welfare states, we will have to pay Scandinavian level taxes as a share of GDP. This reality is often ignored at our peril. In low tax countries like Canada, the US and the UK, we have to make the argument that we are all better off if we enhance fiscal capacity by raising money from a comprehensive tax system, and spending the proceeds on a broad array of equalizing public services and social programs. We have to make the case for a shift from private consumption to public services and public investment, rather than pretend we can deficit finance permanent increments to the social wage.

To be sure, we also need to enhance the progressive elements of the overall tax system. We could and should gain useful amounts of revenue by levying higher rates of income tax on the very affluent. True, the rich are few in numbers, but they do have a high and rising share of personal income in most countries. This should be reduced by raising their taxes and redistributing the proceeds as equalizing transfers. Corporations could also pay more, though there is a case for redirecting higher corporate tax revenues into more effective ways of supporting real economy private investment rather than into general revenues. The G20 agenda should include co-ordinated upward harmonization of taxes on all forms of capital and on high incomes, as well as a financial transactions tax which would hit unproductive but highly profitable financial sector hyper-activity.

To conclude, we will soon be entering a major debate in most countries over the pros and cons of fiscal austerity. The right will argue that we need to cut quickly and deeply in the name of future generations. Our argument has to go beyond the need for temporary “stimulus”. We must call for a deliberate strategy of public investment led growth, and the gradual enhancement of fiscal capacity to pay for a more equal society.

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Andrew Jackson is Chief Economist and National Director of Social and Economic Policy with the Canadian Labour Congress (CLC), where he has worked since 1989. He is also a Research Professor in the Institute of Political Economy at Carleton University, a Research Associate with the Canadian Centre for Policy Alternatives, and a Fellow with the School of Policy Studies at Queen’s University. He has written numerous articles for popular and academic publications, and is the author of Work and Labour in Canada: Critical Issues, published by Canadian Scholars Press (2005).

Creating jobs now and changing the economic growth model for the future

(by John Evans)

I do not need to remind anyone reading this column that the financial crisis, which took a dramatic turn for the worse in September 2009, has plunged the world into a deep recession in which workers in industrialised and emerging countries are losing their jobs, their homes and their pensions. For those in developing countries, the consequences are even more acute. According to the ILO, globally, 60 million more workers will become unemployed this year, with an extra 240 million workers earning below one Euro a day.

The collapse of production in the last quarter of 2008 and the first half of 2009 was on a scale unseen since the 1930s. The talk of the “green shoots” of recovery is more a dream of financial markets than reality for the workers losing their jobs. There is a vicious circle where unemployment – which almost doubled in OECD countries in 2009 and will continue to rise to above 9 per cent in 2010 – also leads to collapsing house prices, driving asset prices down, pushing the financial sector into further crisis and leading to further bankruptcies and job losses in the real economy. We have not yet reached the bottom as far as unemployment is concerned, and the OECD World of Work report published in December 2009 warns, on the basis of current policies, that industrialised country unemployment will not return to pre-crisis levels before 2013.

Unless governments take the unemployment crisis more seriously, the 2010s will become a “lost decade”. The global trade union movement is united in its determination to ensure that this does not happen.

In the short term, we have sought to protect our members, workers at large and their families from the worst effects of the crisis. In this, we have pushed for governments to take the lead and insisted that there can be no “exit” from stimulus measures until there is recovery in the labour market. The Global Unions’ statements to the G20 Summits have set out the criteria that should be applied to stimulus, recovery plans and public investment, in particular:

• Action must be fast;
• Action must make a maximum impact in creating jobs;
• It must be socially just and protect the worst off;
• And action must be transformational in terms of helping to resolve climate change, raise productivity and skills for the future and get economies back onto a higher growth path.

The IMF, the OECD and the G20 Pittsburgh Summit came out against prematurely withdrawing economic stimulus – this much we welcomed. The US administration has just agreed to release TARP funds (Troubled Asset Relief Program) to create jobs and the Hatayama Administration in Japan has announced a recovery package. But much more is needed. Action has to be targeted at having the maximum impact on employment, rather than wasting money on tax cuts for the wealthy or on corporate tax cuts.

The Trade Union Advisory Committee (TUAC) to the OECD, the International and European Trade Union Confederations (ITUC and ETUC) have called for a real recovery plan that commits a further 1% of GDP in public investment in each of the next three years and is coordinated internationally. Our estimates indicate that this would slow and then stabilise the otherwise catastrophic rise in unemployment.

Far more of the stimulus programmes have to be devoted to keeping workers in economic activity until investment measures have their impact. On average, only 3-5% of the expenditure in stimulus plans has been devoted to active labour market measures – at the most the figure is 8%. We need schemes such as intelligent work sharing where workers are kept employed until demand picks up, if necessary, with short-time working compensated by state support for training and retraining. Measures also have to be targeted at young people, to avoid having a cohort, if not a generation, of our youth leaving education, moving into unemployment and being passed over by employers when the recovery comes. The International Labour Conference’s Global Jobs Pact, which was agreed on a tripartite basis at the ILO last June and endorsed at Pittsburgh, must now lead to action by governments.

At the Pittsburgh Summit it was announced that a G20 labour ministers meeting would be held in Washington in April 2010 with the involvement of the ILO, business and labour. But there is a need to act before then.  Trade unions are demanding that a permanent tripartite G20 Working Group be established to act on and monitor unemployment.

We should all be concerned at what model of growth emerges from the crisis. Governments are already talking of the need for an “exit strategy” from the crisis that puts into reverse what they describe as the “exceptional” policies of the past year. The question that must be debated is “exit to what?”. The crisis was not just another financial crisis that can be avoided in the future by tighter financial regulation alone. The “Shadow Gn” group chaired by Joe Stiglitz and Jean-Paul Fitoussi has noted that this crisis is unprecedented for at least four reasons:

First, it is truly global in nature – global markets have spread the crisis most to those dependent on exports.

Secondly, the crisis is profoundly unfair – those suffering most from its effects were least responsible for its creation. It comes on top of a general increase in inequality, a shift from wages to profits over the past 15 years across the globe and a transfer of market risk from employers and governments on to workers and their families as seen in the wave of privatisation of pensions, healthcare, and public services.

Thirdly, the causes of the crisis were structural – the imbalances in the model of global growth and inequality in incomes – as well as the consequences of insufficient financial regulation, if we can speak of “regulation” at all.

And fourthly, the crisis was produced by an ideology of market fundamentalism – a belief in the self-regulating properties of markets and denigration of the role of the state and public welfare systems.

It is imperative that the new policies are put in place to ensure that economies exit to a very different model of growth than that of the past 20 years. So far, there is little recognition of this in the international economic institutions, despite the fact that for the mainstream economics profession the crisis was the equivalent of the political scientists’ “Berlin Wall moment“ – i.e., nobody saw it coming.

The IMF and OECD economists prepared a paper for the G8 in June 2009 on the medium-term policies. This is not a call for a return to “business as usual” once the crisis is over – from a labour perspective it is much worse, as it involves:

• drastic cutbacks in public expenditure to curb the accumulation of public debt, in part debt accumulated in bailing out the bankers;
• cutting back pension entitlements, notably those of public sector workers, in view of demographic changes;
• more regressive tax systems, cutting on corporate income tax and top personal income tax, while increasing taxes that hit working families front on, such as VAT;
• wage flexibility, i.e. wage reductions and more labour deregulation in OECD countries to compete with a Chinese economy becoming more integrated into the global economy.

That is a profoundly unacceptable vision of the future. Rather, we have to use this crisis to move to a very different exit from the crisis, one that does not just get us out of the mess, but in which governments act together to create a new and different future:

• Where growth is more balanced between North and South;
• Where growth does not destroy the environment and is part of a carbon free future;
• Where global finance is downsized – including with an international tax on financial transactions – and the financial sector is restored to its legitimate role of financing real investment;
• Where the public sector plays a key role and we have fair tax systems;
• And above all where the fruits of growth are distributed fairly within and between countries.

That vision will require a very different model of global growth than one that the IMF is likely to propose. In TUAC we have established a task force jointly with the ITUC and the ETUC to bring together trade union thinking on this new model of growth over the coming months. We will want to work with the Global Union Research Network (GURN) as a forum for testing our ideas and bringing in new thinking. No one can doubt the difficulties of shifting the paradigm thinking of the past 20 years – but we have to succeed: we cannot allow the victims of this crisis to be the ones who pay for it. We must come out of the crisis with strengthened economies, strengthened societies and a strengthened labour movement.

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John Evans is General Secretary of the Paris-based Trade Union Advisory Committee to the OECD (TUAC). Prior to joining TUAC, his previous appointments have included Research Officer at the European Trade Union Institute (ETUI) in Brussels, Industry Secretary at the International Federation of Commercial, Clerical and Technical Employees (FIET) in Geneva and Economist in the Economic Department of the Trades Union Congress (TUC) in London. He is currently a member of the Board of the Global Reporting Initiative, and member of the Helsinki Group.

Why we should care about wages

(by Patrick Belser)
A labour market view of the crisis

The past two years have witnessed the worst global economic recession since 1929. The financial crisis, which started in the US and was triggered by a speculative bubble in the housing market, sent a shock wave through the real economy and labour markets around the world. The most immediate impact on labour markets has been the explosion of unemployment rates. In the US, unemployment figures have exceeded the 10% threshold in October 2009. The Euro area is not far behind, with an average unemployment rate of 9.7% in September 2009. In some European countries, the proportion of people looking for a job has reached dramatic proportions, with figures close to 20% in both Spain and Latvia.

But that is not all there is. Focusing on unemployment rates alone understates the true extent of the deterioration of employment and conditions of work in labour markets. Everywhere, the crisis has led to cuts in working time, which has damaged the living standards of workers and their families. In the 27 member states of the European Union, full-time employees work about three-quarters of an hour less every week than they did before the crisis. In the US, weekly working time for production and nonsupervisory workers has fallen by about half an hour. These average changes may seem relatively small because not everyone was affected, however, for those who were hit, the cuts in hours have often been severe. Similar trends have been observed elsewhere and, globally, the number of involuntary part-time workers appears to have increased.

The result, in most cases, has been a fall in take-home pay for workers at the end of the month. Figures collected at the ILO for 53 countries show that in 2008 real monthly wages (i.e. wages adjusted for inflation) fell in one quarter of all countries. In most other countries, particularly developing countries, wages continued to grow but at a much slower pace than before the crisis. The situation is likely to have been even worse in 2009, given the quarterly figures already available and the increase in the supply of unemployed people looking for jobs. Another worrying problem is the increase in the late-payment or non-payment of wages, particularly in transition economies such as Russia and Ukraine.

Wages and the recovery

Why should we care about wages, and not just unemployment? There are at least three reasons. The first has to do with social justice and the hardships that lower wages inflict on workers and their families, particularly at the lower end of the income distribution. In the US, 7.5 million people work for earnings that fall below the poverty level and in Europe 8% of workers can be called “working poor”. For these workers even small changes in wages can represent large differences in living standards. Furthermore, the crisis comes after years of wage moderation and increasing inequality. Before the crisis, the wages of median and low-paid workers have remained largely flat despite considerable increases in economy-wide productivity. So one question is: where has the money gone? Research shows that high earners have benefited most, and that a large share of the rest has gone into corporate profits and investment.

The second reason why we should care is that a continued deterioration in wages is bad news for the economic recovery. The pace of the recovery depends largely on the extent to which people are able to consume whatever the global economy produces. And consumption, in turn, depends on the level of wages. In fact, in some advanced economies, almost 80% of household income comes from wages and salaries. Although GDP figures in the course of 2009 provided indications of a possible economic rebound, the trends in real wages observed during the past few quarters raise serious questions about the true extent of a global economic recovery and also highlight the risks of phasing out government rescue packages too early. As the experience of Japan during the past decade has cruelly shown, wage deflation deprives national economies of much needed demand and can result in lengthy periods of economic stagnation.

Finally, we should already be thinking about the post-crisis world. Before the crisis, in the period from 1995-2007, the share of wages in GDP had declined in a majority of countries for which data is available. This may have been due to a combination of weaker trade unions, labour-saving technology, openness to trade and the pressures arising from the financial of markets. Whatever the cause, the imbalance between increasing profits and stagnating wages has contributed to the crisis by creating an explosive mixture of high liquidity on financial markets, low rates of interest, and huge household debts. A system of bonuses which distorted incentives towards short-term risk provided the additional dynamite. For a more stable future, we should identify policies which ensure that productivity growth - when it is back - translates into adequate increases in wages for a majority, and not just higher bonuses for a few. Only this way can advanced economies achieve more sustainable patterns of consumption and investment.

Where to start?

The first immediate priority for governments in advanced economies has been to provide support to economic activity through large fiscal stimulus packages. Through this channel governments have provided some much needed demand for goods and services, which in turn has prevented a further decline in labour demand, employment and wages. Thanks to these measures, a social catastrophe has been avoided. For a sample of 19 OECD countries, the ILO estimates that fiscal stimulus packages have prevented between 3.2 million and 5.5 million additional jobs losses.

A majority of governments in OECD countries have taken additional measures to limit the damage inflicted by the crisis on employment and wages. One effective method has been the use of work-sharing arrangements, which have often combined shorter working times (to avoid layoffs) with wage subsidies. The latter have been provided through partial unemployment compensation or from general government revenues. According to the OECD, 22 out of 29 countries surveyed have put in place such a system. The most publicized example has been the case of Germany’s “Kurzarbeit” (short work) which has benefitted up to one and a half million workers. Companies have also benefitted from being able to keep their skilled workers on the payroll. Given the severity of the employment crisis, these temporary measures should not be phased out to early.

Worldwide, a considerable number of countries have also increased the purchasing power of low paid workers through minimum wages. Figures collected by the ILO show that in 2008 half of 86 countries sampled have increased the minimum wage in real terms. A number of countries, including major economies such as Brazil, the US, Japan and Russia have pursued this policy in 2009. Minimum wages can have negative impacts on employment if they are set too high. However, the more recent literature shows that when set at a level which takes into account the situation of workers and their families as well as productivity and other economic factors (as recommended in ILO Convention 131), minimum wages can increase the living standards of low-paid workers at little or no cost to aggregate employment. And for individual companies that are in such severe economic difficulties that they cannot even afford to pay minimum wages, there is always to possibility to provide smart exemptions or tax incentives, as is done in Indonesia for example.

But the deeper, more challenging need is to strengthen collective bargaining over wages. The ILO’s Global Wage Report in 2008/09 showed that when a large share of workers is covered by collective bargaining agreements the transmission mechanism between productivity and wages works pretty well: over the period 1995-2007 a 1% increase in GDP per capita (an indicator of productivity growth) translated into an almost equal increase in wages. But where the coverage of collective bargaining is weak, the report calculated that each additional 1% growth in GDP per capita only led to a 0.65% increase in average wages. Thus, governments and social partners would be well advised to start consultations on how to strengthen constructive collective bargaining as part of a wider set of economic and industrial policies that can contribute to a fairer and more sustainable global economic recovery.

References:
ILO, Global Wage Report 2008-09
ILO, Global Wage Report, Update 2009
http://www.ilo.org/public/english/protection/condtrav/index.htm

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Patrick Belser is the principal editor of the ILO Global Wage Report. Before working on wages, he spent 5 years with the ILO programme on fundamental principles and rights at work and co-edited a book called “Forced Labor: Coercion and Exploitation in the Private Economy” published in 2009 by Lynne Rienner. He holds a Ph.D. from the Institute of Development Studies (IDS) in Sussex. Before joining the ILO he worked at the World Bank in Vietnam and at the Swiss Secretariat for Economic Affairs in Berne.

Financial Crises, the Informal Economy and Workers Unions

(by Renana Jhabvala)

Workers all over the world have been hit by the financial crisis and the unemployment rates, particularly in developed countries, have risen to high levels. Little is known, however, about the effects on the informal workers in developing countries who have no social security net or unemployment insurance, and no personal savings cushion to tide them over the crisis. Even worse, as the crisis deepened and the world began looking for solutions, these workers’ voices and concerns were not heard, as their ‘unemployment rates’ were rarely measured. Unemployment in the informal economy cannot be measured by “jobs lost”, but rather by income decline, decrease of days of work available and disappearing livelihoods.

The importance of understanding the impact of the global recession on the informal economy cannot be underesti¬mated. The informal economy includes all economic units that are not regulated by the state and all economically ac¬tive persons who do not receive social protection through their work.  The size and significance of the informal economy is tremendous, and in develop¬ing regions, the informal economy makes up anywhere from 60-90 per cent of the total workforce.  Moreover, the formal and informal economies are not entirely distinct. In global value chains, produc¬tion, distribution and employment can fall at different points on a continuum between pure ‘formal’ relations (i.e. regulated and protected) at one pole and pure ‘informal’ relations (i.e. unregulated and unprotected) at the other, with many intermediate categories in between. Workers and units can also move across the formal-informal continuum and/or operate simultaneously at different points along it. These dynamic linkages of the formal and informal economies highlight the importance of understanding the ‘informal¬ity’ of the global economy and recession.

Before the financial crisis the GDP growth rates in the Asian economies were among the highest in the world, with the 2008 growth rate in India being over 9 percent. Banks in India had been well regulated and so did not undergo the same crises as the Western banks, but because of the uncertainty in the economy they were wary of lending and the credit slow-down added further to the reduction in investments. However, the financial system has become internationally connected and  in January 2008, the Bombay stock exchange Index which had grown 21,000 points began to fall rapidly.  It had fallen to 15,000 points in June 2008 and to 10,500 points in Oct  2008. This caused a severe shortage of liquidity and a major reduction of investments as the capital of traders and industrialists eroded. At the same time, industries dependent on export began a slow down with spiral effects into the rest of the economy. The worst-hit industries were diamonds and other gems and jewellery as well as textiles, garments and metalware. 

Studies were undertaken by SEWA  in early 2009 and later by WIEGO  found crises in sectors where the informal economy was concentrated. It is estimated that 1-2 per cent of the urban population of the world lives off collecting and recycling paper, cardboard, plastic, glass, and metal waste. The earnings of these poorest workers declined considerably world wide—by more than 50% according to the SEWA survey-- as the drop in demand for manufactured goods from developed countries led to a decline in exports of manufactured goods from developing countries which, in turn, led to a decline in demand for recycled waste materials and a drop in the selling price of waste. The net result was that tons of waste materials accumulated on streets or in warehouses, containers loads of waste are stockpiling at harbours or was going directly to landfills and incinerators without being sorted for what can be recycled. 

SEWA’s waste collector members in Ahmedabad said they compensate for lower prices by spending more hours to collect the waste. They used to go in the morning at 5:00 am but now they start their work at 3:00 am with the mentality that ‘someone else will come early and pick it up, instead I will take it first.’ Earlier, the woman of the family would go to pick up the waste, now they prefer to take more members especially children of the family so that more waste is collected. As they are now unable to pay the fees and other expenses for education they have taken them out of school and started to involve the children in waste collection as well as sending them for other income earning activities.

Construction was another industry hit worldwide and the main sufferers were the construction workers, who are paid by the day and whose days of work as well as earnings reduced considerably. The Indian survey showed whereas normally 85% of women full time work of more than 20 days a month, after the crisis only 11% had full time work. Most of them worked less than 15 days a month and 10% had no work at all. There was also a 30% decline in their daily wages.

One of the first ill-effects of the crisis seemed to be psychological, with increasing conflicts and growing drunkenness, especially among men. Families responded also by reducing their food intake—three meals instead of two, reducing ‘expensive’ foods like milk or eggs. Some families went into debt to pay for illnesses or other major expenses; others pulled their children out of school or moved them to cheaper education. 

In India, we seem to be coming out of the crisis as the stock market rose 70% from its low of last year. Industrial production is up, as is employment in many industries such as construction with the daily wage increasing almost to pre-crisis levels. Although some export-linked industries such as diamonds are still in difficulties, it seems that on the whole Indian informal workers are recovering their employment.  However, this does not mean all is well. As the economy recovers, inflation rises too and the prices of staple food have gone up by 17% in 2009.

From the point of view of the workers, their work lives are full of insecurity. During the crises, they lost their earnings and had no social safety net or cushion to fall back on. As the economy pulls out of the crisis, they face price rises, and without a social protection cover they have to pay for health care and insure themselves against personal crises from their own earnings and savings.

The world has focussed intensively on the financial crisis brought about the unregulated greed in the financial systems, and will perhaps bring reform within those systems. But for the informal workers, the financial crisis was just one more hurdle in a work-life of continuous insecurity. The solutions lie in more complete systems of social security and voice for informal workers, who constitute the majority of the work-force today.

Given that informal workers constitute such a large section of the work force, and that most countries are democratic, with being Governments being elected on the will of the majority, the real question is why is a system of social protection not already in place? Such a system would act as a cushion during crises and help the worker secure the volatilities present in the system. The answer to this lies in the balance of power. Today much of the policies and regulations favour those with capital and especially the larger corporate structures. Those groups which are able to organize and make their voice heard are able to access the countervailing power either through the political system or directly in the market. Unfortunately, informal workers are barely organized today and as a result have neither voice nor representation nor any countervailing power. In fact they, the most vulnerable of people, become a cushion for the economic system. They are the ones who absorb the maximum shocks in the system.

The voice of the informal workers needs to be heard, and its effect felt in the political system, in order to start the process of a social safety net for informal workers, which can only happen by organizing. On the ground many trade unions, especially in developing countries have organized informal workers and brought their voice to the bargaining table. These include agricultural workers and transport workers through Ghana Trade Union Congress and street vendors in CROC Mexico . SEWA is an example of a national trade union which has reached a membership of 1.2 million informal workers. At the international level networks of organizations of informal workers such as the alliance of Street Vendors (Street Net), the alliance of homeworkers (HomeNet), and the newly developing alliances of domestic workers through the IUF and waste collectors alliances are identifying their issues and bringing the voice of informal workers to the international arena. Equally important is the role of WIEGO which highlights these issues and takes them into the policy arena. However, the scale at which the voice of the informal workers is still far too small.  A fairer international economic system requires a representation into policy making of the informal workers. This will only happen if workers organize on a large scale.

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Renana Jhabvala is one of the early founders of Self Employed Women’s Association (SEWA). She has been a Secretary of SEWA and the Chair of SEWA Bank. Presently she is the Chair of SEWA Bharat, which is the all India federation of SEWA. She has written extensively on the informal economy.