Academic journal article International Labour Review

The Imprudence of Labour Market Flexibilization in a Fiscally Austere World

Academic journal article International Labour Review

The Imprudence of Labour Market Flexibilization in a Fiscally Austere World

Article excerpt


This article assesses the effects of combining fiscal austerity with policies aimed at reducing labour costs and, in doing so, sheds new light on current policy debates. Taking a global perspective, the authors explore the aggregation problem by proposing a stylized analytical macro-model with explicit distribution dynamics. In this framework, flexibilization policies that suppress the labour share trigger global feedbacks that result in a downward spiral, with contraction even in export-led economies. The initial gains of more competitive economies are shown to be ephemeral. In the long term, the world economy is essentially wage-led and responds positively to coordinated Keynesian stimuli.

(ProQuest: ... denotes formulae omitted.)

In early 2012, the prospects of a sustained global recovery from the so-called "Great Recession" remained in doubt. Meanwhile, pressed by their country's circumstances or their own political beliefs, most policy-makers assumed the role of guardians of fiscal prudence. Nowhere was this more evident than in the Eurozone where, without central institutional means to avert government insolvency, severe fiscal austerity has been portrayed as the only available policy option. In the prevailing view, reducing fiscal imbalances would restore business and consumer confidence and thus lead to a revival of private investment and consumption. Essentially, the initial loss of aggregate demand triggered by austerity measures would be compensated for by an increase in private spending or exports.

Several critiques of this approach have been made. For example, some studies point out that premature fiscal contraction may be self-defeating, because deficits will likely worsen with slower revenue growth and greater unemployment costs (United Nations, 2012). Other studies show that the very phenomena that called for a fiscal stimulus in the first place - that is, private sector deleveraging and bottlenecks in credit and labour markets - are still unfolding (Ball, Leigh and Loungani, 2011; Burke, Irvin and Weeks, 2011; Izurieta, 2011; King et al., 2012; Pollin, 2011; Papadimitriou, Gannshen and Zezza, 2011; Sawyer, 2012; UNCTAD, 2011a).

Although policy-makers in most OECD countries show no intention of backing down from fiscal austerity, a mighty challenge has emerged in the labour market. Many economies have now lost the small gains in employment that were achieved when the crisis was first met with cash injections and employment promotion policies. According to Eurostat, employment-to-population ratios in European countries are lower than they were before the crisis except in Austria, Germany, Luxemburg and Malta.1 In the so-called "periphery" of the Eurozone and in a few other countries, the fall of employment ratios from pre-crisis levels was particularly severe, averaging 11 percentage points in Ireland, 7-8 points in Greece, Latvia and Spain, and 2.5 points in the United Kingdom and the Netherlands. The average drop for the OECD was 4 points, with Australia and Japan at the lower end, around 1 point. In the United States, where stimulus reversal began in 2012 and is expected to continue in 2013, the employment-to-population ratio was around 58.5 per cent in early 2012, an improvement over the 57.5 per cent low of the previous year but significantly lower than the 63 per cent peak of 2007.2

In the ensuing quest for employment growth, the few successful performers - most prominently Germany - have become role models. However, most praises overlook the role of employment protection schemes, which helped to keep workers employed in Germany and in a few emerging economies (United Nations, 2010). Instead, the emphasis has been placed on labour market flexibilization. The logic underlying this policy has noteworthy parallels with prescriptions made by the Bretton Woods Institutions in developing countries during the epoch of structural adjustment.3 If government spending is restricted by fiscal austerity and households are not able to be meaningful drivers of demand, growth and employment can only be supported by net exports and investment. …

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