Q&A: Global unemployment prospects

Although the global economy is recovering slowly, the depth of the recession in 2008-2009 has left it in a very fragile state and unemployment is expected to be high for some years to come.

Unemployment levels vary not only between advanced and developing economies, but also within advanced economies as a result of various measures adopted by governments to curb rising unemployment. It will be one of the biggest challenges faced by governments and consumers in 2010.

• What are the global prospects for unemployment in 2010?
• How has the global economic crisis of 2008-2009 impacted youth unemployment?
• What is the difference between cyclical and structural unemployment?
• Why have some countries seen unemployment shoot up whereas others appear to hardly have suffered so far?
• How does unemployment impact consumers?

What are the global prospects for unemployment in 2010?

Unemployment is what’s known as the third wave crisis, after the financial and economic crisis in 2008-2009. It will continue to climb in 2010 and Euromonitor International forecasts that unemployment levels in many economies like the eurozone, Turkey and Russia are expected to be in double-digits in 2010.

This is because unemployment is a lagging indicator – an economic indicator that is based on past occurrences rather than ones predicting future economic scenarios. In this case, unemployment rates change after changes in real GDP growth.

Employers generally try to avoid making redundancies – they cut overtime or reduce working hours before they make people redundant. Therefore, unemployment is not expected to stop growing until after 2010. It is also slow to recover for the same reason. Before braving taking on new employees, employers tend to use overtime to make up for any shortfall in labour.

• For advanced economies, unemployment will rise to 9.3% in 2010 from 8.2% in 2009 according to the IMF. Although trade levels and industrial production have risen in Q1 2010, bringing about a return to profitability in many companies, the levels achieved for both indicators remain below pre-crisis levels. In addition, with low domestic demand, large excess capacity and tight credit conditions, companies in advanced economies have put a freeze on hiring and might even continue to lay off workers. In 2010, high levels of unemployment will remain in Spain (20.2%), Ireland (15.5%) and other European countries;
• Labour markets in emerging market economies have proved to be more resilient than advanced economies and this pattern is expected to continue in 2010. However, there is a high share of the informal sector which contributes significantly towards annual output each year. As a result, changes in unemployment are not as visible as they would be in advanced economies. Data availability is still limited for many emerging and developing economies making it difficult to monitor the impact on labour markets;
• Nonetheless, there have been exceptions for emerging market economies. In emerging Europe, employment adjustments have been severe. In Russia and Hungary, unemployment will reach 11.0% and 10.4% respectively in 2010 from 8.3% and 9.6% correspondingly in 2009. Labour market flexibility will be the key to the necessary reallocation and future job creation. Unemployment rates in South Africa and Turkey will also be in double-digits in 2010 and reach 24.9% and 15.7% respectively.

How has the global economic crisis impacted youth employment?

Since the advent of the crisis, youth participation rates have been on a downward trend in almost all countries and concerns over youth unemployment are elevating. In 2009, youth unemployment – defined as people between the ages of 15 to 24 – stood at 13.4% globally, according to the International Labour Organisation.

The youth are in a disadvantageous position in labour markets. Discouragement regarding current job opportunities result in decisions to postpone labour market entry, which has a negative effect on the labour force participation rate for youth.

The largest increase in youth unemployment is seen in advanced economies, especially across Europe. Inadequate training and wide-spread use of short term contracts during the global economic crisis have resulted in high levels of youth unemployment.

By the end of 2009, the unemployment rate amongst those under the age of 25 in the EU-27 rose to 21.4% from 16.9% during the same period of 2008. Nonetheless, the jobless rate among youths varied greatly across the European Union, from a low of 7.6% in the Netherlands to a high of 44.5% in Spain in December 2009.

What is the difference between structural and cyclical unemployment?

Cyclical unemployment occurs when unemployment rises as a result of falling aggregate demand. It arises during economic downturns like the Great Depression or the global economic crisis of 2008-2009 and is likely to fall as economic activity picks up.

Structural unemployment, on the other hand, occurs when the number of jobs in the labour market cannot provide employment for all who want to be employed. It arises from a mismatch between the sufficiently skilled workers seeking employment and demand in the labour market. Even though the number of vacancies may be equal to the number of the unemployed, the unemployed workers may lack the skills needed for the jobs — or may not live in the part of the country or world where the jobs are available.

Persistent cyclical unemployment may cause structural unemployment. Many believe that long-term unemployment in the USA might transform into structural unemployment. As the economy emerges out of recession and job creation begins, given excess capacity and inventory build-ups it is possible that new jobs created will not necessarily be in industries which have seen mass-layoffs, hence creating a skills mismatch.

Why have some countries seen unemployment shoot up whereas others appear to hardly have suffered so far?

Labour markets have weathered the crisis differently due to existing underlying problems in some economies. For example, the USA, the United Kingdom, Spain and Ireland have seen unemployment shoot up significantly compared to Germany which appears to have hardly suffered so far.

• Many call the recovery in the USA and the United Kingdom a ‘jobless recovery’. Within these economies employment losses were not only due to the recessions prevalent in these countries but also due to the housing busts and systemic financial crisis. This combination led to large drops in output and delays in recovery suggesting a very slow pick up in job creation;
• Germany, on the other hand, has seen few job losses in this downturn compared to previous recessions and also compared to other advanced economies. In January 2010, the unemployment rate in Germany stood at 7.5% compared to 10.1% in France or 9.7% in the USA. This is primarily because the government follows a policy of work-sharing like reducing hours worked per employee, which helps retain the workforce. Yet, the effectiveness of such measures slows down within 2 years and will result in significantly lower levels of job creation. As a result, unemployment in Germany is also expected to increase;
• Other countries like Spain and Ireland that experienced particularly large real-estate-related shocks have seen much larger increases in unemployment because of the sharp contraction in construction jobs. In Spain the unemployment rate will rise to 20.2% in 2010 from 11.3% in 2008 and in Ireland it is forecast to reach 15.5% from only 6.1% in 2008.

How does unemployment impact consumers?

The rise in unemployment has a dampening impact on economic growth, particularly during a recovery after a recession. It stifles economic growth by weakening consumer demand, thus lengthening the recovery process.

With growing job losses, consumer spending remains low. Even those in employment are uncertain about what the future holds for them and hold back spending. As a result, overall consumer morale remains low and consumer confidence in many economies was still below pre-crisis levels by the end of the first quarter of 2010.

Euromonitor International forecasts that consumer expenditure in the EU will reach its 2008 level only by 2012.

Among advanced economies, while Germany and Ireland will see a marginal decline in 2010 before growing in 2011 and consumer spending in Spain is expected to start rising in 2012, Canada and the USA are expected to see spending rise by 2.1% and 1.9% respectively in real terms in 2010. Despite the likelihood of suffering from high rates of unemployment in 2010, emerging market economies such as Russia, South Africa and Turkey will all see a rebound in consumer expenditure in 2010.