The Great Recession, COVID-19 pandemic are slowly leading to more thought for the role of macroeconomic policies: ILO expert

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There are at least two recent reports of the ILO that flagged the poor economic conditions of working people, particularly the lower middle class, after the pandemic and the situation in Ukraine. Is it pointing towards a structural crisis of the global economy? Or is it just a cyclic phenomenon?

Even prior to the COVID-19 pandemic and the spillovers from the war in Ukraine, decent work deficits remained stark around the world. For example, the ILO’s Asia-Pacific Employment and Social Outlook 2022 highlighted how the majority of workers in Asia and the Pacific continue to work in sectors characterised by low productivity and that typically do not offer decent wages, good working conditions or job and income security. The ILO’s Global Wage Report 2022-23 noted that real wage growth has lagged behind labour productivity growth over the past 22 years in 52 high-income countries — with labour productivity growing by 1.2% annually compared to a growth rate of 0.6% annually for real wages. In fact, as that report notes, the gap between productivity growth and wage growth in 2022 reached its widest point since the start of the 21st century, with productivity growth 12.6 percentage points above wage growth. As such, workers have not fairly benefited from their rising productivity, with productivity gains accruing to capital, and the divergence between wage growth and productivity growth explains a large part of growing income inequality within a country.

On the one side, the demand is low, and on the other side, the purchasing capacity of the majority of people is decreasing. Is this pressure on the economies to continue?

Insufficient aggregate demand is a long-standing issue and in fact closely related to the widening gap between productivity growth and real wage growth over many decades highlighted above. Policies and developments have served to translate productivity gains into higher capital income or lower prices, rather than translating it into stronger purchasing power of wage earners and higher aggregate demand. Supply chain disruptions during the COVID-19 pandemic and the spillovers from the war in Ukraine have led to rising inflation, and this is causing real wage growth to be negative in many countries as documented in the ILO’s Global Wage Report 2022-23. This is reducing the purchasing power of workers and is hitting low-income groups particularly hard. And this cost-of-living crisis comes on top of the significant losses in the total wage bill for workers and their families during the COVID-19 pandemic, which again had the greatest impact on low-income groups in many countries. Higher levels of good quality jobs, including through formalisation, and adjusting social assistance and other social protection benefits, including minimum wages, to inflation are important in sustaining demand and the purchasing power of the most vulnerable.

Many economists have been arguing that this crisis shows the characteristics of an economic depression. How do you see this? And what steps must governments, employers and employees take to face this crisis?

There is a great deal of uncertainty on the depth of the current downturn following the recovery from the COVID-19 pandemic, but international financial institutions, including the IMF, have continued to lower economic growth projections for the world economy in the past year. The World Bank also warned of a multi-year period of slow growth in developing countries driven by heavy debt burdens and weak investment. What is clear is that there are currently multiple and overlapping economic and political crises (e.g. financial, food, energy, geopolitical, etc.) and are threatening labour market recovery around the world. The multiplication of crises raises the risk of another significant global labour market downturn. In particular, excessive monetary policy tightening is causing undue damage to jobs and income in both advanced and developing countries. These crises are likely to further increase labour market inequalities due to the disproportionate impact on certain groups of workers and firms, while contributing to a growing divergence between developed and developing economies. The latter had already been recovering more slowly from the COVID-19 pandemic, and are now facing less policy space to protect hard-hit workers and enterprises during the most recent crises. As highlighted in the ILO Monitor on the World of Work (tenth edition), governments, workers and employers need to come together in social dialogue to identify appropriate country-specific policy tools to combat the multiple crises, which could include: (a) interventions in setting prices for public goods; (b) rechannelling windfall profits; (c) strengthening income security through social protection; (d) increasing income support to maintain the purchasing power of labour income; and (e) targeting support to the most vulnerable people and enterprises.

Unemployment, under employment, job loss and wage loss have become common since the pandemic. There are changes in the sectors that generate employment. For example, the manufacturing sector lost a number of jobs. How do you look at this?

Indeed, and I think it is useful to take a longer-term perspective as well. When looking at the development trajectories of the current advanced economies or those countries that have managed to sustain economic growth over extended periods of time to “catch up” with the advanced economies, manufacturing has played an important role in both supporting productivity growth and the large-scale creation of quality job opportunities. However, in many present-day low and lower-middle income countries, manufacturing is not creating many jobs, in part as that sector is becoming increasingly automated and digitalised. These developments whereby countries are experiencing earlier falls in the share of manufacturing employment compared to the current advanced economies is often termed as ‘premature deindustrialisation’. Instead, in today’s developing countries, most of the economic transformation is occurring from employment shifting from agriculture to services, and the majority of employment gains have been in traditional services (such as trade and hospitality sectors), rather than in the more modern services segments (such as business activities and transport and communication sectors) — movements that do not bring nearly the same productivity growth and in which working conditions are known to be, on average, relatively poor, with widespread informality. While a number of country experiences (including India) certainly suggest that modern services can drive the structural transformation process, the evidence to date suggests that sustainable industrialisation and the creation of productive manufacturing jobs continue to play a critical role in development and “catching up”. This is because the share of employment in modern services in lower income countries remains small, limiting their ability to absorb workers reallocating from agriculture or manufacturing into productive employment. Furthermore, the employment and productivity contributions of modern services is often derived from the separation of manufacturing and service activities within a firm, due to the fragmentation of firms’ internal organisation while the demand for modern services is derived to a large extent also from the production of the real sector.

Is the ‘dominant economic model’ intact after the pandemic? Or do you see any other economic models emerging or addressing the crises created by the pandemic and the Ukraine situation?

Economic thinking is constantly changing and I do see orthodoxy “beginning to lose its stranglehold on thinking, at least in political processes, if not in the ivory towers of academia” in the eloquent words of Professor Deepak Nayyar. Up until the 1970s, macroeconomic policy thinking was geared primarily towards supporting growth and employment. The rise of monetarism subsequently led to macroeconomic policy stances in both developed and developing countries being geared towards maintaining macroeconomic stability by targeting low inflation and prudent debt-to-GDP ratios. While such a stance brought economic and social benefits to a certain extent and in some regions, it was clear that maintaining stability alone was insufficient to support sustained and inclusive growth and broad-based productive employment creation, as evidenced by sluggish economic performances in a large set of countries and continued high levels of unemployment, underemployment and working poverty, not to mention repeated economic and financial crises. The Great Recession and the COVID-19 pandemic are slowly leading to more thought being given on the role of macroeconomic policies, including a greater appreciation of counter-cyclical fiscal and monetary policies in fighting recessions and of policy frameworks that support inclusive growth and productive employment.

India is hosting the L-20 in February. Will this crisis come up for discussion? And how do you look at the policies adopted by India to address this crisis?

The cost of living crisis is likely to dominate discussions at L-20. Trade unions around the world have been undertaking protests, industrial action and collective bargaining to protect the purchasing power and working conditions of workers in the face of high inflation, and the issue will likely continue to dominate in 2023. In addition, debt sustainability concerns in developing countries are growing on the heels of rising interest rates which could lead to various austerity programmes, and as such measures to protect jobs and incomes in developing countries are also likely to be a key topic of discussion. In terms of rising food prices and policy responses in India, the international community has much to learn from India. Rather than undertaking ad hoc or knee-jerk reactions, India has relied on its public systems of support for people’s economic security and access to opportunities that it has been building for decades. This includes the expansive food distribution system and a guarantee of 100 days of paid work per year for working-age people in rural areas. This is to highlight the importance of proactively building systems of support and automatic stabilisers versus reactively relying on targeted and temporary approaches to crises. It also highlights the importance of taking into account the demand side in addition to the supply side, that is sufficient income to afford food and energy.