Sher Verick

Why did unemployment respond so differently to the global financial crisis across countries? Insights from Okun's Law

The global financial crisis deeply impacted labour markets around the globe. In the case of the United States, some commentators have argued that the subsequent rise in unemployment exceeded previous estimates of the elasticity of the unemployment rate with respect to output growth, a statistical relationship known as Okun’s law. In contrast, others find a stable, long-term estimate of Okun’s coefficient implying that the deviation in unemployment during the crisis resulted from a larger output gap (not a structural shift in the trend). Ultimately, estimates of this relationship will depend on the methodology and data period utilized. Focusing more on short-term fluctuations, changes in unemployment are decomposed to identify the association with other channels of labour market adjustment (hours, productivity and labour force). Results presented in this paper confirm the cross-country variation in the responsiveness of unemployment in the wake of the Great Recession. In the United States, Canada, Spain and other severely affected economies, estimates of Okun’s coefficient increased sharply, departing from pre-crisis levels. In other countries, where unemployment has remained subdued, such as Germany and the Netherlands, the coefficient has fallen dramatically over the short-term. While other factors can explain the heterogeneous impact of the global financial crisis on labour markets in OECD countries, this paper focuses on the contribution of labour market institutions (employment protection legislation) in explaining cross-country differences and shifts in the estimated Okun’s coefficient. In this regard, empirical evidence confirms that the responsiveness in the unemployment rate during the global downturn was lower in countries where workers are afforded greater employment protection such as Germany.JEL codesE24, J64, G01

From the Great Recession to Labour Market Recovery

Introduction I.Islam & S.Verick The Great Recession of 2008-2009: Causes, Consequences And Policy Responses I.Islam & S.Verick The Global Recession of 2008-2009 and Developing Countries N.Majid The Employment Challenge in Developing Countries during Economic Downturn and Recovery R.Islam The Impact of the Global Financial Crisis on Labour Markets in Oecd Countries: Why Youth and other Vulnerable Groups have been Hit Hard S.Verick The Rise and Fall of Orthodox Macroeconomic Policy: Pre- and Post-Crises Perspectives M.Muqtada The Perennial Quest for Fiscal and Policy Space in Developing Countries I.Islam Labour Market Policies in Times of Crisis S.Cazes , C.Heuer & S.Verick Coping With Crises: Easing the Burden of Macroeconomic and Structural Adjustments Through Social Dialogue L.Rychly The Way Forward I.Islam & S.Verick

Strengthening the Turkish Labour Market through More Efficient Regulations

Turkey was directly affected by the great recession of 2008–2009, but showed considerable resilience thanks to a decade of sound macroeconomic policies and reforms implemented after several economic shocks. The large contraction in GDP (by 4.7 per cent in 2009) was largely due to the collapse in foreign demand and was amplified by domestic confidence effects. While unemployment reached 14 per cent in 2009, it soon went back to its pre-crisis level, falling to 10.8 per cent in March 2011. In addition to strong stability-oriented macroeconomic policy, employment and labour market policies were enhanced to support labour demand, develop non-agriculture employment and reduce informality, such as an overall reduction of social security contributions, hiring subsidies or VAT tax reductions. The recent crisis differs, however, from past episodes in Turkey in two ways: first, white-collar educated workers were hit and lost their jobs; second, informal manufacturing and service sector occupations were severely affected so there were proportionately lower formal sector job losses.

The South African Labour Market: Long-term Structural Problems Exacerbated by the Global Financial Crisis

The segregation policies of the Apartheid era in South Africa resulted in low levels of education, suppressed entrepreneurialism and spatial inequalities among the African population. Though Apartheid was dismantled in 1994, economic and social outcomes in this country continue to be heavily influenced by its historical legacy. This is no more apparent than in the labour market, which is characterized by some of the highest unemployment rates and lowest employment—population ratios in the world. At the same time, the informal sector is relatively small, which can be argued to be a manifestation of Apartheid policies that stymied entrepreneurship.

Labour Market Regulations for Development: Enhancing Institutions and Policies in Emerging Economies

The discipline of economics has become increasingly concerned with the understanding of labour markets’ adjustment in response to economic and structural changes and, in particular, the role of labour market regulations (institutions and policies) in influencing that process. The global financial crisis has recently revealed the extent to which the policy and institutional mix had been able to provide fair adjustments protecting workers and promoting employment outcomes. Assessing the impact of labour market regulation is, however, one of the most complex areas since they both constitute a warranty of fair employment conditions, but may at the same time be an obstacle to (formal) employment growth (see Freeman 2005). Therefore, while regulations’ first objective is to correct market failures and improve workers’ welfare, it can lead to adverse outcomes, even for the same workers that regulations want to protect. The perspective of this section is to articulate these two aspects and focus on the ‘economics’ of labour market regulations. As stated before, some of the regulations have to do with the welfare state, as they provide income guarantees; when considered ‘too generous’, they are accused of creating unemployment through two mechanisms: work disincentives and wage behaviour. Others may influence the wage structure and/or labour costs.

Labour Market Trends in Emerging Economies: Decent Work Deficits Persist Despite Growth and Resilience to the Crisis

Rapid and sustained economic growth has become the hallmark of successfully developing countries in recent times. Some of these countries have been able to grow at 8 per cent per annum or more over a long period, resulting in a doubling of the economy every decade. Though such high growth rates have become a benchmark for all aspiring developing countries, history shows that only a relatively small sample of countries has been able to sustain such high levels of growth over an extended time-frame. In this respect, the Growth Commission noted in its 2008 report that only 13 countries have managed to achieve a growth rate of 7 per cent or more over a period of at least 25 years (Growth Commission 2008).1 Nonetheless, growth rates in many developing countries are far greater than witnessed during the Industrial Revolution: for example, Crafts (1985) estimates that the British economy grew on average by only 2.5 per cent per annum between 1831 and 1860.

The Tale of Two Labour Markets: The Resilience of the Indonesian Labour Market to the Global Financial Crisis Versus Increasing Casualization of Jobs

From the 1970s to the 1990s, Indonesia made incredible economic and social progress. During this period, Indonesians moved from rural to urban areas to take up better-paid jobs and, as a result, poverty fell from 40 per cent in 1976 to 11 per cent two decades later (Dhanani and Islam 2001). This rapid development trajectory was brought to a halt by the East Asian financial crisis of 1997–1998 and the subsequent political crisis, which sent the country into a deep recession leaving millions in poverty. Despite this tragic reversal of fortunes, the labour market appeared to be rather stable at the aggregate level — the impact of this crisis was more evident in transitions across different types of employment rather than a fall in the number of jobs, along with a sharp fall in real wages. In particular, the massive economic contraction in 1998 resulted in an increase in agricultural and informal sector employment and a rise in female labour force participation as a household coping mechanism (Fallon and Lucas 2002; Islam and Chowdhury 2009; Manning 2000). The period following the East Asian financial crisis has been described as one of ‘jobless growth’, which has been variously attributed to public sector downsizing, slower industrial growth, the failure of the service sector to take up the slack, and the excessive regulation of the Indonesian labour market (World Bank 2010). In terms of the last factor, many commentators have blamed the Manpower Law (No.13/2003) for the poor labour market outcomes, especially with respect to the rise

Transitions out of Informality and Falling Unemployment: The Transformation of the Brazilian Labour Market since the 2000s

During the 1960s and 1970s, Brazil grew rapidly, thanks largely to strong commodity prices, but this was accompanied by rising inequality. The military junta, which ruled from 1965 to 1985, followed a policy of import substitution. Despite the large accumulation of foreign debt, which financed industrialization, this approach proved unsuccessful and growth slowed considerably in the late 1970s and early 1980s. This downturn and economic mismanagement culminated in the default in 1983 of external debt, which had risen dramatically as a consequence of large inflows of capital. Despite the move to democracy in 1985 and liberalization of the economy over the following decade or so, Ferreira et al. (2009) conclude that the very low GDP growth in Brazil between 1985 and 2004 left the problem of poverty largely unchanged.

The Great Recession of 2008–09: Causes, Consequences and Policy Responses

The historical perspective provided in chapter 1 on the decades leading up to the financial crisis shows that the global economy was by no means as stable as had been suggested by many observers. That said, the crisis was largely unexpected and due to its complex roots, it continued to puzzle policymakers, economists and other commentators as it unravelled and sucked in at first banks and companies, and then economies across the globe. The collapse in the real economy has had devastating consequences for households as a result of rising unemployment and surging poverty. At the same time, some countries have been affected more than others as a result of differences in initial conditions (state of economy, labour market, fiscal space, institutional framework) and exposure to direct and indirect impact of the crisis via credit and trade channels.