Global employment challenge

Both advanced and developing economies need to adjust to structural changes in world economy to ensure social stability

Over the past three decades, hundreds of millions of new workers have entered the global economy. This has brought a tremendous, and ongoing, growth in income levels, opportunities and the size of the global economy, but also more employment competition and significant shifts in relative wages and prices, which is having profound distributional effects.

These massive structural changes in the global economy present three great employment challenges worldwide, with different countries facing their own variants.

The first challenge is to generate enough jobs to accommodate the inflow of new entrants into the labor market, who have various levels of education and skill. Clearly, many advanced and developing countries are failing to do so. Youth unemployment is high and rising. Even in fast-growth developing countries, surplus labor is awaiting inclusion in the economy, and the pressure is on to sustain job creation.

The second challenge is to match skills and capabilities to the supply of jobs - an adjustment that takes time. It is also a moving target. Globalization and major labor-saving technologies have thrown labor markets in many countries into disequilibrium. Skills mismatches abound. Moreover, with continuing rapid growth in developing countries, the global economy's structure is far from static.

The third challenge is distributional. As global trade expands, competition for economic activity and jobs broadens. That affects the price of labor and the range of employment opportunities within globally integrated economies. Subsets of the population gain, and others lose, certainly relative to expectations - and often absolutely.

Many advanced countries, in fact, the majority of them, have experienced limited middle-income growth. In some European countries, where income inequality has remained in check, this has been part of a deliberate strategy to maintain employment growth and competitiveness in the tradable part of the economy, with wage restraint partly shared across the income distribution. In the United States, income inequality has risen as the upper end of the income and education spectrum benefits from globalization, while the rest experience declining employment opportunities in the tradable sector.

For two decades prior to the 2008 crisis, employment levels were maintained - and downward pressure on incomes mitigated - by creating jobs in non-tradable sectors. In some cases, this took the form of rapid growth in government; in others, like the US, a pattern of excessive, debt-fueled consumption underpinned a large shift in employment to the service industry and construction. Indeed, government and healthcare accounted for almost 40 percent of net employment growth in the US between 1990 and 2008.

That pattern came to a sudden stop with the financial crisis of 2008. Private-sector leverage declined and public-sector leverage reached - and exceeded - sustainable limits.

But the expectations created by pre-crisis growth patterns have adjusted slowly. Because the dominant narrative still maintains that the pre-crisis period was normal, at least in terms of the growth pattern in the real economy, the perceived challenge is to restore growth according to the pre-crisis pattern. Unfortunately, this narrative cannot explain why, particularly in the advanced countries, growth is faltering and the employment engines have largely shut down.

Part of the answer consists in the long, lingering impact of the financial crises and deleveraging. At the same time, the financial imbalances and distortions that precede a crisis delay appropriate and necessary responses to technological and global market forces in the real economy.

In short, economies and policies adjusted in an unsustainable fashion, to some extent obscure the need for a more sustainable pattern of adaptation.

What does it mean for individuals, businesses, and governments that structural adjustment is falling further and further behind the global forces that are pushing for structural change?

It means that expectations are broadly inconsistent with reality, and need to adjust, in some cases downward. But distributional effects need to be taken seriously and addressed. The burden of weak or non-existent recoveries should not be borne by the unemployed, including the young. In the interest of social cohesion, market outcomes need to be modified to create a more even distribution of incomes and benefits, both now and in inter-temporal terms. After all, under-investment now implies diminished opportunity in the future.

The imperative for structural adjustment also implies that individuals, governments, and other institutions, especially schools, need to focus on increasing the speed of adjustment to meet the rapidly shifting market conditions. Attention to both the demand and supply sides of job markets is required. This means not only matching skills to jobs, but also expanding the range of jobs to match skills.

Finally, global economic-management institutions need to address whether the pace of globalization, and its implied structural change, is faster than the capacity of individuals, economies, and societies to adjust can withstand. If so, the next challenge will be to find non-destructive ways to moderate the pace in order to bring the capacity to adjust and the need for adjustment into closer alignment.

None of this will be easy. We do not have well developed frameworks for understanding structural change. Nevertheless, the unemployed and underemployed, especially younger people, expect their leaders and institutions to try.

The author, a Nobel laureate in economics, is professor of economics at New York University's Stern School of Business and senior fellow at the Hoover Institution, Stanford University.

Project Syndicate.