Slashing Wages Can Hurt Economic Growth – UN Alerts


Human Wrongs Watch

Geneva – Cutting wages tends to increase competitiveness but can also hurt economic growth as it decreases domestic consumption, the International Labour Organization (ILO) has warned.

Image: ILO

The ILO has warned that slashing wages in a bid to boost competitiveness and cut unemployment may well have the opposite effect.

The warning was issued after the European Central Bank (ECB) called in its monthly report for August, for more flexibility in the wage determination process – such as lowering minimum wages – coupled with measures to strengthen competitiveness.

Wage Cuts Increase Export, But Depress Consumption

A decrease in wages does tend to lead to an increase in exports, but it also depresses domestic consumption, which affects growth, ILO experts say.

Given the level of economic uncertainty at the moment, it is also unclear whether wage cuts would generate enough incentives to raise investment.

The ILO is the only ‘tripartite’ UN agency that brings together representatives of governments, employers and workers to jointly shape policies and programmes promoting Decent Work for all.

Less Consumption, Negative Effect

“Whenever a fall in wages reduces domestic consumption more than it increases exports and investment, it has a negative effect on a country’s economic growth,” said Patrick Belser, a senior economist at the ILO’s Conditions of Work and Employment Branch and main editor of the ILO Global Wage Report.

“This explains why declining wages in periods of crisis may actually lead to a spiral of falling aggregate demand and price deflation, rather than to a quicker economic recovery,” its added.

Unsustainable

“If competitive wage cuts are pursued simultaneously in all countries, competitive gains will cancel out and the regressive effect of global wage cuts on consumption could lead to a world-wide depression of aggregate demand and employment,” Belser said.

The ILO also warned that seeking to regain competitiveness through lower unit labour costs – by slashing wages or letting productivity grow faster than wages – would be unsustainable globally.

Wage growth that is systematically above labour productivity growth is unsustainable. The opposite is also true. “The aim is for wages and productivity to grow at the same pace,” concluded Belser.

Promoting youth employment has become a top priority for many governments at a time when 75 million young people worldwide are jobless.

Ahead of the International Youth Day – marked every year on 12 August 12 – the ILO has warned of a “scarred” generation of young workers facing a dangerous mix of high unemployment, increased inactivity and precarious work in developed countries, as well as persistently high working poverty in the developing world.

Promoting youth employment has become a top priority for many governments at a time when 75 million young people worldwide are jobless, ILO said on 9 August.

Youth Guarantees

The ILO reported that programmes that guarantee young people will get a job, education or training have shown good results in a number of countries.

In Finland, the success rate of the youth guarantee scheme is estimated at more than 80 per cent. A registered youth has to be offered a job, academic education, vocational training, or another measure to improve job prospects within three months of unemployment, according to ILO.

In some countries, similar programmes focus more on enhancing educational attainment to improve future employability. In New Zealand, the objective of the Youth Guarantee initiative is to improve transitions between school, tertiary education and work, by providing improved access to study to 16- and 17-year-olds not currently in education.

Vocational Education, Training

Technical and vocational education and training (TVET) can play a central role in preparing young people for work, provided the programmes reflect labour market needs. Several countries have undertaken reforms to make the programmes more relevant to today’s world of work, says the ILO.

In China, more than 3,000 “skilled workers’ schools” offer comprehensive vocational training courses. Nearly 95 per cent of graduates – there were close to 400 million in 1998 – find jobs.

Viet Nam is diversifying its vocational training to include full-time and regular training, mobile training, and training in enterprises and in traditional craft villages – small communities whose inhabitants work together to make specific goods.

The dual system – which combines school-based education with in-company training – is typical of Austria, Denmark, Germany and Switzerland, and more recently Norway.

Denmark and Switzerland are among the OECD countries with the lowest unemployment rates for youth, while Austria is well below the OECD average.

Skills Needs

The ILO underlines that anticipating future skills needs is the first building block of strong training and skills strategies.

The United Kingdom Commission for Employment and Skills (UKCES) provides labour market information and advises local governments on skills policies. It is a public body made up of employers, trade unions, government and civil society representatives.

The Republic of Korea’s sustained growth pattern has been attributed in part to a government-led skills development system designed to ensure industry gets the skilled workforce it needs. Investment in a well-educated and highly skilled workforce has been an integral part of encouraging the adoption of new technologies.

Expanded Public Works Programme

South Africa is plagued with 50 per cent youth unemployment, high levels of poverty and inadequate skills, the ILO reports.

In 2004, the government introduced the labour-intensive Expanded Public Works Programme (EPWP) to provide income relief through temporary work. The programme helps develop marketable skills and entrepreneurship capacities among marginalized sections of society. In 2010–11, it created some 200,000 full-time jobs, half of which went to youth.

The government receives technical support from the ILO in the design and implementation of EPWP.

Wage Subsidies

Wage subsidies and other financial incentives – such as temporary social security exemptions – for employers who recruit young people can help improve school-to-work transitions. In France and Italy, financial incentives are granted to employers who recruit and provide on-the-job training to young jobseekers.

Wage subsidies work best when they are designed to address specific labour market disadvantages faced by young people and when they are provided for a limited period of time.

Reforms to Help Transitions to Formal Employment

Following the economic crisis that rocked the country in the early 2000s, the Government of Argentina introduced reforms to address high-levels of informality.

These included legislation giving small and micro enterprises a 12 month reduction in social security contributions for new recruits, adds the ILO.

Another law established sanctions for enterprises exploiting apprentices and young workers. Specific measures also were adopted to curb informality in the most affected occupations, such as simplifying the registration of domestic workers.

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