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.