As bankers, business leaders and politicians descend on Davos to ponder the future of the world economy, one issue should be top of mind – the world economy is not creating enough jobs, particularly for young people.
Unemployment is one of the biggest issues facing us today, and we can’t rely on growth alone to fix it.
In developed countries, sluggish recovery in the wake of the crisis has left employment well below 2007 levels, with 6 to 7 million fewer jobs in the US, UK and euro area alone, according to a Standard Chartered Global Research report, ‘Making economies work’. Youth unemployment has gone up, and more unemployed people are out of work long term.
Emerging markets have coped better, shrugging off the Great Recession, with China alone adding 60 million non-agricultural jobs since 2007. Yet, even these markets are not creating the right jobs sufficiently fast. As growth slows, there is concern that job creation will slow, too.
Unemployment locks people in poverty. It makes us less able to generate economic growth in future, as people lose skills and become unemployable. It perpetuates inequality, with a disproportionate amount of wealth owned by a small minority of the population. And it affects social stability: the Arab Spring is a potent reminder of the wider stress in society that can be caused by high youth unemployment.
How do we create more jobs? Clearly, stronger economic growth is part of the answer, and the good news is that 2014 promises to be a better year for the global economy. Europe is pulling out of recession and the US economy is accelerating.
Meanwhile, the cyclical factors that have hampered job creation since 2007 – such as the economic fall-out from the financial crisis and fiscal tightening – are dissipating. This includes the legacy of uncertainty which has seen companies shy away from investing and hiring.
Growth, however, is unlikely to be enough. More direct policy measures are needed to address the underlying structural and demographic issues stalking the world’s labour markets.
In the last couple of decades, developed economies have suffered from a succession of ‘jobless recoveries’. Unlike before 1990, layoffs during recessions are no longer reversed so quickly when growth picks up again.
An ageing population is part of the problem, as is the fact that – as economies have evolved – large groups of workers have become stranded with the wrong skills, or in the wrong place. Though likely to increase overall employment in the long term, technological innovation, in particular, has driven out routine, middle-skilled jobs in developed economies, leading to a ‘polarisation’ of jobs.
In these markets, more work now needs to be done to retrain workers who were previously employed in sectors that have lost jobs, such as construction. Governments have to encourage people to work until they are older and – even more urgently – reduce long-term unemployment among the young to prevent young people from dropping out of the labour market altogether.
More flexible labour markets would help, as would policies aimed at raising university-level education. A 2012 study by McKinsey Global Institute predicted that advanced economies would have to raise the number of young people finishing university by two and half times to fill the projected gap in demand for high-skilled workers.
Emerging markets face their own challenges. By 2030, 95 per cent of the world’s additional work force – or around 550 million people – will come from these economies. But after years of strong growth, the pace of job creation is slowing and not enough of the new jobs are good, well-paid ones.
Part of the reason why emerging markets are set to dominate the world economy over the next few decades is their so-called ‘demographic dividend’ – the huge projected increase in their populations of working age. But in order to tap into this demographic boom, emerging markets must create a sufficient number of productive jobs, and ensure that the workforce has the skills needed for those jobs. Clearly, there is still some way to go.
In fact – according to research by the International Labour Organization – most of the jobs created in emerging markets over the past few years have been in the informal sector, with low pay and a lack of adequate employment rights and benefits. The challenge to educate and train people, as well as to create enough good jobs to absorb labour from the land and from unemployment, remains huge.
Emerging markets urgently need to raise productivity and the quality of jobs, but this will only be possible with greater investment in education alongside market reforms that encourage businesses to take on more workers. Education levels remain abysmally low – especially in south Asia and Africa where the labour force is growing the fastest. More worryingly, public spending on education has fallen in many markets, including in India – a trend which must be reversed.
As in the developed world, youth unemployment is an urgent and growing problem – more than 85 per cent of the world’s young people live in emerging markets.
Every country in the world shares the job creation challenge and it is one we cannot afford to ignore. The World Economic Forum at Davos provides a timely opportunity for global policy makers, regulators and businesses to ask ourselves what we are going to do about it.
Group Executive Director and CEO
Standard Chartered Bank January 2014