Sher VerickEMP/ANALYSIS

International Labour Organization (ILO)

Outline of presentationHow did the global financial crisis happen?What has been the macroeconomic impact?What is the impact on the labour market?What has been the policy response?What has been ILO’s role during the crisis?

How did the crisis happen?Causes

Low interest rates (and yields)Misperception and mismanagement of risk (sub-

prime mortgages)Inadequate regulation of financial system

2006 – defaults on mortgages started increasingAugust 2007 - Credit markets frozeDecember 2007 – US recession startedSeptember 2008 - Lehman Brothers goes

bankrupt

Macroeconomic impact of the crisis

Impact on the labour marketImpact on labour market depends

Size of economic contraction (direct and indirect impact of crisis)

Sectoral composition of the collapse in aggregate demand

Vulnerabilities of particular population groupsExisting labour market institutions Policy response

Impact on the labour marketThree main labour market channels for firms to

adjust labour in response to a major economic shock:Working time – firms adjust hours of work more

rapidly than the number of workers due to cost considerations and the need to retain workers

Employment – a sharp drop in economic activity leads to dismissals, mass layoffs, plant closures, and hiring freezes, which all contribute to rising unemployment

Wages – adverse social impact but firms do it less than expected

Impact on the labour marketCrises also result in

Flows between sectorsIn developing countries, laid-off workers don’t

stay unemployed Informal and agricultural sectors

Changes in household labour supply Wife/children increase labour supply to compensate

for loss of jobs in household

Underemployment and unemployment result in a fall in household incomes and rise in poverty

Unemployment in Europe and the US

Impact in developing countriesDue to lack of data, it is difficult to provide

figures for many developing countriesAnecdotal figures

63,000 garment jobs lost in Cambodia ¼ of workers (8,100) in the mining sector in Zambia

have lost their jobsUnemployment rate has increased in

Argentina, Brazil, Colombia, Mexico, Peru, Thailand

But the unemployment rate has fallen in Mauritius, Indonesia, Philippines!

What’s been happening in Colombia?Slight contraction at the end of 2008, but has

returned to growthForeign investment, government spending on

public works, lower interest rates (4%, down 6 ppts)

But recovery will not be as strong as in BrazilColombia relies more on the US market

Unemployment and poverty remain a challengeWhat has happened during the crisis?

Unemployment rate: 9.5% (2007) and 10.5% (2008)

South Africa

South Africa

What has been the policy response?The policy response has consisted of

Easing of monetary policyFiscal stimulus packages – Keynes is back

In the G20 – average aggregate discretionary stimulus amounts to 2% of GDP in 2009 and 1.6% in 2010

¾ of packages go to spending (infrastructure), rest on tax cuts

But fiscal deficits are rising fast

LMPs in times of crisisLabour market policies aim to influence

labour demand and supply and to improve the match between the two along with providing income support during periods out of employment

LMP measures can help mitigate the impact of the crisis on workers and reduce the lag But will not be effective unless other policies

are in place (stimulus, etc)

LMPs in times of crisis During a downturn, LMPs can

Support labour demand by keeping people in jobs and creating new jobs

Improve the employability of unemployed Provide income support (passive policies) Target the most vulnerable

LMPs in times of crisis

ILO’s role in the responseGlobal Job Pact – adopted by member States

and endorsed by heads of State including President Lula of Brazil at ILC in June 2009

Publications – reports, guides, studies, dataCountry assistance