Employment, Inequality and Globalization

A Continuous Concern

Rolph van der Hoeven

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781317985853
• Edition: 1
• Topic: Economics
• Subtopic: Economic Conditions
• Index: Economics

The nature of globalization and the fallout from the international financial crisis have brought profound changes to societies and economies around the world. This book documents that, over the last two decades, the growth of nonstandard and informal employment has led to greater inequalities. This is partly explained by the fact that adjustment policies in the 1980s, market liberalization policies in the 1990s and, more recently, globalization and anti-poverty policies did not pay sufficient attention to policies for employment and income redistribution. As a response to these trends, this book recommends the development of clearer policies for employment and income redistribution. These policies should now become an integral part of national and international economic policy making. This is even more relevant in the current context of the international financial crisis as:

• Several elements of globalization, especially the unfettered markets, and the growing inequality have given cause to the current crisis and,
• There is growing evidence that the employment, human and social effects of the financial crisis will be felt well after an economic recovery has taken place, especially if no corrective action is taken.

This volume will be of benefit to policymakers, scholars and practitioners alike.

This book was published as a special issue of the Journal of Human Development and Capabilities.

Introduction: Employment, Inequality and Globalization: A Continuous Concern

ROLPH VAN DER HOEVEN

Rolph van der Hoeven is Professor of Employment and Development Economics at the Institute of Social Studies in The Hague, The Netherlands

This book is based on a special issue of the JHDC, which grew out of a seminar on Work, Employment and Globalization at the Institute of Social Studies.¹ Through no intent of the organizers, this seminar coincided with a crash in the financial markets, turning the USA sub-prime mortgage crisis of 2007 into a financial crisis, an economic crisis and a social crisis. A major reason for organizing the seminar was that, over the past two decades, rising non-standard and informal employment has become an important factor of personal income (International Labour Organization, 2008) and factor inequality (van der Hoeven, chapter 5). This could be partly explained by a related observation that adjustment policies in the 1980s, market liberalization policies in the 1990s and, more recently, globalization and anti-poverty policies did not pay sufficient explicit attention to policies for employment and income redistribution (Jolly, Mkandawire, and Amsden, chapters 2, 3 and 4 respectively).² At the seminar, arguments were presented to explain why these policies as well as policies for human development should (again) become an integral part of national and international economic policy-making.

However, given the timing of the seminar, one of the major questions that also emerged was whether analyses on employment, inequality, human development and globalization are still relevant in the current context of a large financial crisis. Most participants argued that such analyses remained highly relevant for at least two reasons.

Firstly, several elements of globalization, especially the unfettered markets (including the labour market)³ and the growing inequality (resulting in many households having to indebt themselves in order keep up spending on basic needs),⁴ have given cause to the current crisis; therefore, policy recommendations pertaining to the analysis of the structure and nature of current globalization and its impact on employment and inequality become even more relevant in times of crisis.

Secondly, there is growing evidence that the employment, human and social effects of the financial crisis will last for a while, especially if no corrective action is taken. Reinhardt and Rogoff (2009), for example, foresee that a deceleration or decline in Gross Domestic Product growth will lead to rising unemployment with a much longer duration than the deceleration or decline in Gross Domestic Product itself. Based on a sample of past crises, in the north and the south, they observe an average slump in employment lasting 4.8 years, compared with a deceleration or decline in output growth of only 1.9 years. van der Hoeven and Luebker (2007) investigated the behaviour of labour shares in national incomes during recent periods of financial crises and observed a ratchet effect: labour shares decline during crises but in many cases do not return, once the economy has picked up, to their pre-crisis level. There is also evidence that indicators for human development exhibit a similar ratchet effect. Arbache and Page (2007), for example, show that in Africa child mortality increases during growth decelerations but hardly falls during growth accelerations. Further, primary school completion rates and life expectancy are and remain substantially lower in countries experiencing growth decelerations.

There are thus are strong reasons to include policies for employment, income inequality and human development as priority issues in designing short-term and longer policies to deal with the crisis. But, might there be trade-offs between policies for employment, income inequality and human development? A recent study on explanations for growing inequality over the past decade (Angeles-Castro, 2006) concludes that high employment levels reduce inequality and, especially for developing nations, high employment levels in the industrial sector reduce inequality. Targeting for employment and for reduction of income inequality can thus be combined objectives in policy-making. In a similar vein, Stewart and Ranis (2002) argued that human development and economic growth can be joint and reinforcing targets for policy-making. It thus seems more than appropriate to argue for greater attention to employment, income inequality and human development in times of crises.

Jolly (chapter 2) goes further and argues that a shift in international paradigm, or policy framework, if not a new one, is needed to meet the current crisis. For the past 30 years, the ruling paradigm has essentially been that of neo-liberal economics and the underlying philosophy has been that of neo-classical economics, directed to the goal of achieving greater economic efficiency in the allocation and use of resources on a global scale. Politically, it has been guided by the interests and priorities of the major western economic powers, with the purpose of extending markets and investment opportunities throughout the world. According to Jolly the current global economic crisis has brought home the inadequacies of this paradigm and its serious consequences for countries, rich and poor. Efficiency as the guiding principle has failed to ensure stability, and the untrammelled pursuit of market forces has allowed inequalities to increase to unprecedented levels. He calls for a framework that, in addition to economic efficiency, systematically includes objectives of sustainability, stability, equity and social justice, and human rights, and notes that many of these objectives were an integral part of the ‘human development paradigm’. Globalization has neglected these objectives, leading amongst others to the current crisis. Fukada-Parr, (2009) adds that, also in the run up to the crisis, the preoccupation with the Millennium Development Goals has resulted in a distorted concept of human development: the lost in translation aspect of the Millennium Development Goals.

Stiglitz (2009) in a similar vein argues that the dominant view during the current process of globalization was that unfettered markets were judged sufficient to ensure economic efficiency. The best role for government was a limited one, and somehow the benefits of the growth that this would engender would trickle down to everybody in society. Added to that was the view of a dominant strand of economists arguing that the problem in the market economy was rigid wages, and that if it was not for wage rigidities then the economy would work in the way that classical economics predicted. According to Stiglitz, the implication of the Keynesian rigid-wage theory was very invidious but very pervasive: get rid of the rigid wages, and let labour markets be more ‘flexible’. That has been the basis of a whole set of doctrines undermining job protections and labour rights. But, as he rightly observes, wages are not rigid — in the Great Depression wages fell by about one-third: the problem that Keynes recognized was that wages can be too flexible. Stiglitz observes that lack of aggregate demand was the problem with the Great Depression, just as lack of aggregate demand is the problem today. Accordingly, imposing more wage flexibility can result in exacerbating the underlying problem of lack of aggregate demand. He puts the nature of the problem that we face today as follows: ‘The people in the global economy have the same skills as before the crisis, and the machines and real resources are the same as before the crisis. The problem is that there is an organizational failure, a coordination failure, and a macroeconomic failure’ (Stiglitz, 2009, p. 12).

In reviewing some organizational and coordination failures, Mkandawire (chapter 3) analyses why social and employment concerns in Africa have been neglected in Africa. For Mkandawire, labour markets constitute an important arena for addressing issues of poverty and are not simply institutions for the static efficient allocation of existing labour resources; they are also sites for the realization of basic civil and social rights. Furthermore, they perform the developmental role that is often obscured by the preoccupation with market clearance. Also, labour market institutions can be sources of savings through contributory schemes such as pensions, and labour market policies cannot only ensure decent working conditions but can also create incentives for both employers and employees to improve ‘human capital’. He observes that one common feature of the ‘success stories’ was their extensive intervention in the labour markets but also that labour markets are probably among the most politically difficult markets to manage in the process of late industrialization. He recalls that during the so-called Golden Age of capitalism (1945–1975), under Keynesian influence, full employment was prioritized as a key objective of public policy. For ‘late industrializers’ such as the East Asian countries, employment creation was a central aspect of their social policy. He recalls that when poverty entered the policy agenda in the 1970s under the ‘Basic Needs’ and ‘Growth with Equity’ strategies, labour markets and employment immediately assumed a central role. Social development — in the form of full employment — was thereby embedded within both macroeconomic policy agenda and development. He deplores that much of the post-World War II consensus was to unravel by the end of the 1970s. The implementation of adjustment policies has led to a massive trend worldwide towards ‘flexibility’ of the labour force: trade unions have been sidelined and coerced to toe the line. In many cases, employment has been deliberately casualized through sub-contracting arrangements and the like. Although important exceptions can be cited — such as China and some other East Asian countries — the employment situation has been worsening in many other parts of the developing world. Mkandawire observes that in much of the developing world the working population is being increasingly crowded into the ubiquitous ‘informal economy’, which cannot be a sector pulling countries out of the crisis.

One reaction to the all invading adjustment policies in the 1980s and 1990s has been a greater concern for poverty alleviation, which has now become one of the major targets for international development cooperation. Amsden (chapter 4) warns that one-sided attention to poverty issues can however misguide national policies: ‘To slay the dragon of poverty, deliberate and determined investments in jobs above starvation wages must play a central role, whether for self-employment or paid-employment’. She fears that the grass roots approach to solving poverty does not go far enough, because it aims only at improving the supply side of the labour market, making job-seekers more capable, and not the demand side, making new jobs available for them. It acts as though new ways of earning a living emerge (at a positive wage) simply because the supply of job-seekers is better clothed, housed, and fed, or enjoys more human rights — which is the same fallacious reasoning behind Say’s Law, to the effect that the supply of whatever an economy produces creates the demand to buy it (at a positive price). She observes that, by not strengthening the demand side, 25 years of supply-side poverty alleviation has left poverty rates for the poorest people unchanged. She argues that employment generation is different from poverty alleviation, because it has a concept behind it, ‘capital’. This means that the labour market is influenced by, and influences, all flows through the savings–investment nexus, including accumulation, distribution, and innovation. This she sees at the heart of political conflict. Multifaceted policies, therefore, are required to promote employment growth, from fiscal and monetary to industrial and trade.

In reviewing some of these political issues and the need for policy change, van der Hoeven (chapter 5) wonders why the growing income inequalities within and between countries, as well as the recent spurge of international reports on this issue, have in general not led to many changes in international development policies. One reason might be that a new strand of analysis emphasizes what it calls unashamedly ‘deserved and undeserved inequalities’ (Fereira, 2007, p. 20). For example, in reviewing the phenomenon of declining labour shares over the past two decades, some argue that the decline in labour share after financial crisis was, in effect, the consequence of a too high labour share before the crisis, thus partly blaming malfunctioning labour for the buildup of the crisis. However, only in a minority of cases have financial crises been caused by bidding up wages and labour shares. In most cases the crisis was caused by external events or rent-seeking behaviour of capital owners.⁵ He therefore calls for a review of labour market institutions and argues that these should include explicit concern for redistribution of value added. He bases his arguments an a recent findings by Freeman (2007) that the most effective and observable function of labour market institutions is, when successful, a reduction of inequality, and that labour market institutions have varied effects on growth and employment. van der Hoeven gives a number of examples demonstrating that it is possible for economic policies to target better towards goals of employment creation and reduction of income inequality but questions whether there is yet the political will to do so. He argues that such will was present in not too remote times; for example, both in Western Europe after the Second World War and in Eastern Asian countries during the so-called Asian miracle, low levels of income inequality were combined with rapid growth. Although these two examples may at first instance look very different, they have at least one element in common: both are examples of restrained capitalism. In Europe the restraints came from social pacts and the functioning of the labour markets, while government bureaucrats and political elites provided the restraint in the East Asian countries. The current crisis and the increasing public concern for improved income equality can well provide the basis for a renewed political will to make employment creation and reasonable income distribution again major objectives for economic policy-making.

Some argue that such a change in attitudes might be in the making. Stewart (2009) reviews Polanyi’s work and argues that, as was the case after the great depression in the 1930s, the pendulum is swinging again to a situation where market forces might be restrained by regulation, state takeover social protections and Keynesian macro-economics. Cornia’s analysis (chapter 6) might provide some support to this. He reviews the decline in income inequality that has taken place over 2002–2007 in most Latin American countries in contrast to a steady increase between 1980 and 2002. He analyses the factors that could explain this decline in inequality, and that might raise it again during the current crisis, focusing in particular on favourable external conditions, cyclical factors, improvements in the distribution of educational achievements, the subsequent drop in skill-premiums, and changes in macroeconomic and social policies. The latter have been introduced in several countries, particularly in the increasing number of left-of-centre governments that came to power during the past decade. His results (based on an econometric test for the years 1990–2007 that included nearly all countries of the region) indicate that, in addition to a favourable business cycle and external conditions, a decline in skill premium and the new policy model of fiscally prudent social-democracy had a favourable impact on the distribution of income. He suggests that if such a policy approach will survive the current crisis, part of the recent inequality decline will be permanent rather than temporary.

However, there remain huge international challenges for countries wishing to embark on a more egalitarian and human development focused growth path. The opening of product and financial markets has made economies more integrated and, even with huge barriers to migration, labour markets have also become more integrated. As a consequence the number of workers that are now part of the global labour market has hugely increased. For various reasons this is, under the current model of globalization, leading to greater stratification and a growing inequality, which national and international policies have to face up to. Izuerta and Singh (chapter 7) discuss a hotly debated policy question; namely, whether globalization of the world’s labour, capital and product markets, together with rapid economic growth in India and China, will have an adverse effect on workers in the USA and other advanced countries. In essence, they pose the question whether fast growth in developing countries needs to be at the expense of growth in advanced countries. Projections in their article indicate that, at a disaggregated regional and country level, there exist supply-side constraints that may thwart the expansionary demand effects of fast growth in India and China. These supply constraints relate to natural resources (energy and raw materials). Scenario simulations suggest that if these resource bottlenecks can be overcome by technical progress, both advanced and developing countries may continue to grow and achieve high employment. These challenges are currently exacerbated by the current crisis where the need for increase in demand has only become too obvious, but they reject the thesis that the labour market would become a binding constraint for future world growth.

In the final chapter, Vos dis...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• Notes on Contributors
• 1. Introduction: Employment, Inequality and Globalization: A Continuous Concern
• 2. Employment, Basic Needs and Human Development: Elements for a New International Paradigm in Response to Crisis
• 3. How the New Poverty Agenda Neglected Social and Employment Policies in Africa
• 4. Say’s Law, Poverty Persistence, and Employment Neglect
• 5. Income Inequality and Employment Revisited: Can One Make Sense of Economic Policy?
• 6. Income Distribution under Latin America’s New Left Regimes
• 7. Does Fast Growth in India and China Help or Harm US Workers?
• 8. The Crisis of Globalization as an Opportunity to Create a Fairer World
• Index