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May 2, 2012

Jobs and Growth: Can’t Have One Without the Other?

By Min Zhu (via iMFDirect)

As Frank Sinatra crooned about love and marriage, so it seems about jobs and growth:
“This I tell ya, brother, you can’t have one without the other.”

The IMF’s latest World Economic Outlook projects global growth of 3 ½ percent this year. To the person on the street, what matters is how this growth translates into jobs and wages. The news on the jobs  front, unfortunately, remains grim.

Five years after the onset of the Great Recession, 16 million more people are likely to remain unemployed this year than in 2007. This estimate is for a set of countries for which the IMF forecasts unemployment rates; adding in some countries for which the International Labour Organization provides forecasts only boosts the number.
The bulk of this increase in unemployed people has been in the so-called advanced economies (the IMF’s term for countries with high per capita incomes), as shown in the chart below.

Why isn’t the jobs picture better?  Quite simply, it’s because the growth picture isn’t very good.
Consider Chart 2, which shows how for advanced economies the change in unemployment rates expected between 2011 and 2012 correlates with the IMF’s forecasts for growth this year.

Countries such as Cyprus, Greece, Italy, the Netherlands, and Spain, where GDP is expected to decline in 2012 are the ones where unemployment is expected to increase this year.

In Iceland, New Zealand, and the United States, where GDP is expected to grow, unemployment rates are expected to decline.

While these declines are welcome, unemployment rates are still expected to remain high in most advanced economies this year.

The average unemployment rate in these economies is expected to 7 ¾ percent, with several populous economies such as the United States, France, the United Kingdom at or above this average.

Policy response

The need to bring down these high unemployment rates is paramount.

That’s why the IMF stated in its recent World Economic Outlook that “the highest priority, but also the most difficult to achieve, is to durably increase growth in advanced economies, and especially in Europe.”

Specifically, policies must be strengthened to solidify the weak recovery and contain the many downside risks.
In the short term this will require:
  •  more efforts to address the euro crisis;
  • temperate approach to fiscal restraint in response to weaker activity;
  • a continuation of the very accommodative monetary policies; and
  • ample liquidity to the financial sector.
About The Author - iMFdirect is a weblog covering the global economy and policy issues, posted by the International Monetary Fund (IMF) headquartered in Washington D.C., United States. iMFdirect posts content related to the IMF’s work in economics and finance at global or national level, and posts currently highlight the debate over policy responses to the biggest global recession since the Great Depression. The IMF is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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