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Hundreds of people line up outside a Kentucky career centre hoping to find help with their unemployment claim in Frankfort, Kentucky, on June 18. Worst-case scenario projections suggest unemployment could reach a peak of 12.5 per cent across the world’s most developed economies this year. Photo: Reuters
Opinion
David Brown
David Brown

Coronavirus recovery: Unemployment crisis calls for new policy focus

  • Previous fixations on deficit reduction and inflation targeting are no longer fit for purpose in a world of crumbling job prospects and rising unemployment
  • Governments must focus on job creation initiatives and look out for workers’ rights when firms attempt to cut labour costs and put profits above people
David Brown
David Brown
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The Covid-19 crisis has thrown the world economy into chaos, and global leaders need quick solutions to tackle the risks. Finding a viable vaccine to halt the pandemic is essential, as is discovering ways to insulate the global economy against its potential effects.

It is no surprise people are starting to wonder whether the pandemic could mean the end of post-war prosperity as we know it, damaging growth, job creation and living standards for years to come. Employment prospects are falling off a cliff, and health experts are warning the coronavirus could be with us for many years to come. It’s time for a radical change in global policy management with a new set of survival tactics to beat the crisis.
Inflation targeting has been the golden calf of central bank policymaking since the 1980s, but it is no longer fit for purpose. Despite endless tranches of policy super-stimulus for 12 years following the 2008 financial crisis, the major economies are still running close to the wind on zero inflation and risk slipping back into deflation.

Targeting job creation would be a better way to get the recovery moving again, especially in economies such as the United States where consumers are the main drivers of growth and stronger household confidence is vital for recovery.

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Despite governments’ best efforts to protect jobs in recent months, businesses are using the downturn as an excuse to rationalise labour and cut wage costs to increase productivity and boost profits. It is a short-sighted response that is taking a heavy toll on consumer confidence and wreaking havoc with hopes of early recovery.

Global job prospects have gone into meltdown with unemployment rates surging across the major economies in the last few months.

Under the Organisation for Economic Cooperation and Development’s worst-case, double-hit scenario, average unemployment in OECD economies could reach a peak of 12.5 per cent by the end of 2020 – more than double the jobless rate before the coronavirus crisis began. The world is heading into so much uncertainty that the eventual outcome could be even worse.

Persistent long-term unemployment would be a calamity for labour market participation, especially for women and younger and older workers who are discouraged from going back into the workforce.

Slack in the labour markets means more downward pressure on wage and income growth, delaying economic recovery even longer. A deeper collapse in labour market demand must be resisted at all costs.

More policy intervention is required on all fronts. Central banks need to keep global markets plied with plentiful cheap and easy money for years to come, ruling out any return to monetary policy normalisation until sustainable recovery has been safely secured. Inflation targets should be quietly overlooked.

Governments will need deep pockets to support long-term reflation initiatives in the public and private sectors. The global fiscal response so far has been good with tax cuts and deficit spending mitigating the short-term risks, but more stimulus is needed in the future, especially if health scientists’ warnings about a second wave of coronavirus infections prove correct.

Public must share blame for looming global debt crisis

Government deficits and public debt burdens can be expected to rise for many years to come. The age of austerity is quickly turning into an age of fiscal necessity.

Governments will feel particularly aggrieved to see any of their efforts to protect jobs go to waste. The authorities must take tougher action against companies using the recession as a cover to cut labour costs and reduce workers’ rights without good reason.

Globalisation has led to too many workers alienated in their workplaces, badly paid and in poor working conditions. The pandemic should not be an opportunity for overzealous corporations to exploit workers even more. Companies have a collective responsibility to help mend the world right now.

Governments must weigh the social impact of sharply higher unemployment and the damage it’s doing to future growth prospects and public sector finances. Companies unduly dumping labour should be penalised through the loss of tax breaks and government subsidies.

New job-creation initiatives must be devised, but they need to be meaningful, accountable and positive for growth in the long run. Ideally, better international cooperation will ensure the benefits are universally shared across nations.

A new beginning is needed. It's only through nations, governments, companies and workers acting together that the world can return to 5 per cent-plus global GDP growth in the next 10 years.

David Brown is the chief executive of New View Economics

This article appeared in the South China Morning Post print edition as: Amid the chaos, governments need to focus on job creation
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