Weakness in employment growth, falling labour incomes and stagnant real wages for the bulk of the workforce in most countries has reduced global aggregate demand. It has also created a self-reinforcing cycle of diminished business expectations and low investment, further weakness in demand and insufficient labour market recovery.
Reversing this slide into a slow-growth trap is the challenge facing G20 leaders at their Hangzhou Summit. Medium- and long-term challenges are also daunting. These include eradicating extreme poverty and reducing inequality; adapting to climate change and ageing; responding to growing numbers of young job seekers in Africa and South Asia; and shaping the future of work during rapid technological change.
Labour market policies need to support the recovery by boosting incomes and household consumption. They also need to ease workers’ mobility from low-productivity to higher-productivity jobs as part of significant structural change.
Labour market adjustment is difficult to manage amid slow growth. It involves workers changing jobs, changing employers, learning new skills and sometimes moving home. It can lead to unemployment or lower earnings. These changes are much easier for individuals, families and communities if there is reasonable confidence that the new jobs will be better and support the same or a higher living standard.
The prospect of unemployment or reduced wages brings resistance, though. Such employment adjustment may reduce aggregate demand, slow growth and recovery. The timing and design of labour market reforms must take this into account.
Social and economic priorities
The medium- and long-term challenges must be addressed simultaneously. The political consequences of communities that now have a high risk of being left behind are increasingly evident around the world. Maintaining and increasing the purchasing power of wages – especially minimum wages – and of social benefits are priorities for economic as well as social reasons.
These two policy fields are highly relevant to strengthening demand and recovery and also to ensuring that structural changes lead to much more inclusive growth and development.
Wages make up around two-thirds of national income in most economies and are the main source of household consumption, which drives investment and growth.
Income inequality has widened for several decades as the gap in wages has grown and an increasingly larger share has gone to capital. This has undermined growth. It was a trigger of the financial crisis and resulted in a sluggish recovery.
The level of wages, and their distribution and share in national income, is the outcome of generally decentralised processes between employers and workers and their organisations. Broad coverage of collective bargaining contributes to a narrower distribution of income and more stable growth. However, coverage has decreased in many countries. Declining employment in large-scale industry has probably been the greatest cause. Concerns about low pay and wages lagging productivity have led to more minimum wage-setting mechanisms.
I am delighted that the G20 labour and employment ministers in Beijing on 12–13 July 2016 issued the Sustainable Wage Policy Principles. They encourage the G20 to expand the coverage of, and compliance with, minimum wage legislation and to take measures, adapted to national conditions, to promote collective bargaining. Requests for advice from the International Labour Organization (ILO) on setting and enforcing minimum wages are at a high level, so we have launched a new online policy guide. A key topic is how collective bargaining adapts to economic pressures and changes in the structure of production in order to remain a viable wage-setting mechanism.
I equally welcome the ministers’ focus on social protection. It remains a powerful policy tool in eradicating poverty and rebalancing the inequalities that arise in market economies.
The ministers’ Policy Recommendations for Promoting More Equitable and Sustainable Social Protection Systems highlight the roles played by such systems and the need to align them with wage policies to promote sustainable growth in incomes, employment and labour force participation.
There is concern about cost, but social protection is an investment. It supports individuals throughout the life cycle, from birth through childhood into productive employment and then retirement.
Conversely, a lack of access to social protection obstructs economic and social development. It is also associated with high and persistent levels of poverty, economic insecurity and growing inequality. Poverty destroys individuals and communities and creates economic waste. Women and men who are hungry, ill and poorly educated are unproductive. Their children will likely be, too.
Building social protection systems takes time. It depends on the state’s capacity to distribute benefits and tax incomes adequately and fairly. Many developing countries are now expanding their social protection systems. The G20 can play an important role in supporting them by building social protection floors, as called for in Sustainable Development Goal 1 and ILO Recommendation 202. Promoting decent work in all its dimensions is vital to maximising the benefits of globalisation, technological changes and transitions to greener economies.
Social and political tensions rooted in rising inequality and a shortage of decent jobs could threaten open economies and societies that respect and value diversity. The G20 leaders in Hangzhou may well have such concerns on their mind. They will find their labour and employment ministers’ declaration very useful. Its balanced approach is integral to reversing a slide into a global slow growth trap.