The recent crisis’ impact on the financial markets and
the broader economy has now moved on to the labor market. Here are some
examples of large-scale lay-offs in different countries and industries:
1. In
Cambodia, 30,000 workers were laid off in the clothing industry (Source: World
Bank).
2. In South Africa, 40,000 people lost their jobs
due to the closure of mines and smelters.
3. In
China close to 670,000 small firms went out of business in the coastal cities
of Guongzhou, Dong-guan and Shenzhen.
4. Approxomately
200,000 gem and jewelry workers were laid-off in India in the wake of global
slowdown
Are these and other evidences of unemployment emanating
from the global slowdown expected to be well-entrenched? Will we take a long
time to recover from the evident labor market crisis? There are two distinct
theories regarding this.
On one hand, Milton Friedman argued in 1968 that
economies reach a “natural” rate of unemployment affected by supply side
factors such as unions and geographical mobility of households. After the short-term
tight link between unemployment and businesses dynamic, the normal rate of
employment returns when the demand swings recover to normalcy.
An alternate argument was proposed by Oliver
Blanchard and Lawrence Summers in 1986, who suggest that labor markets could
suffer from “hysteresis” whereby labor will have lasting impact from the demand
swings (similar to the concept of “hysteresis” in physics – iron retains
magnetic properties even after a magnet is removed). The rise and fall in actual
unemployment adversely affect the natural rate of employment. The reasoning
behind this argument is that pay deals are negotiated by workers who keep their
jobs (the “insiders”) making the resulting salaries just high enough to make
the jobless workers (the “outsiders”) unattractive to potential employers, but
not too high such that it could impact their own employment. Other arguments
for hysteresis is that as workers remain jobless their skills atrophy, which
make them unsuitable for the requirements of potential jobs. The idea of
hysteresis does not seem to have a large-scale support among economists. The governmental
actions in the recent year, however, have shown some level of recognition to
this effect. For example, in Germany firms are encouraged to cut hours rather
than jobs. When an employee agrees to shorter hours, the government subsidizes
wages to offset 60% of the loss of income. The number of employees accepting
this option has risen from 80,000 to 1.4 million. This has resulted in slowing
the unemployment rate. About 22 members of OECD nations have adopted this
approach for combating unemployment. The scheme also has some negative effects
as it can be very expensive to execute and can delay the inevitable closure of unviable
firms. In Netherlands firms are required to return half the money is they end
up firing the subsidized workers.
There is a growing recognition that the America’s
system if unemployment insurance makes layoffs relatively cheap for firms.
Companies are able to pay less generous severance package since the state takes
up part of the responsibility. Policymakers of some of the American states have
developed is to the require higher contribution on the part of companies with a
track record of large-scale layoffs, since the employees of these firms make
the biggest demand on the unemployment insurance scheme.
Other ways of handling potential hysteresis are also
observed. One option is to keep the jobless in the labor force, actively
looking for jobs. For example, in this crisis older workers have lost their
jobs but have remained in the labor force. This is partly due to the change in
governmental policies of restricting disability benefits and closing loop-holes
in the early retirement rules. The changes in the policies are a result of the
lessons learnt from the mistakes made during the oil-price shocks of the 1970s.
At that time several European governments tried to cut the unemployment rolls
by letting older workers collect early pensions or draw sickness and disability
benefits even though they did not strictly qualify for them. The expectation
was that by removing older workforce they will make jobs available for young people.
The policy failed in that many old people were lost to the labor force for
ever, at the state’s expense, and few young people were hired to replace them.
In America and Britain, older workers have remained
in the labor force to make up for the loss of pension savings in the financial
meltdown. Many governments are now interested in keeping the older workers in
the labor force. In effect, jobless of all ages are urged to find work or get
retrained as a condition for receiving benefits. This result in keeping the
beneficiaries motivated to find work and be in close contact with the job
market.
Source: “Separation Anxiety: The crunch may entrench
unemployment,” The Economist, October
3rd, 2009: pp. 13-17.