Labour day: High unemployment challenges economic policy-makers

1^st of May – a historic holiday

One look at the history of labour relations shows the reason why 1 May was chosen for this holiday. Labour Day dates back to the 19^th century in the USA. Industrial workers had to contend with dismal working conditions and low wages back then. Therefore, in 1886 the trade and worker unions declared a general strike that would last several days, and they did so on 1^st of May. The main goal was to cut the daily work schedule to eight hours.

1^st of May had been chosen because in those days, the old labour contracts would expire on that day in the USA, and new ones had to be signed. That’s why 1^st of May was also referred to as “Moving Day”. About 400,000 employees from 11,000 companies participated on the first day of the general strike, among them workers from the industrial town of Chicago. Chicago experienced a violent clash between demonstrators and the police on the third day during a protest. It was triggered by a fragmentation bomb that had been thrown at the police. Numerous people died or were injured. In the end, the unions managed to assert their demands. On 1^st of May 1890, the 8-hour working day came into effect in the USA.

On this year’s Labour Day, there is not much to celebrate. The number of unemployed could grow to 50 million due to the global pandemic. However, there is still the chance that we may recover from the economic standstill and cut the unemployment rates.

Sharp decline in employment in the short term

Several indicators suggest a drastic decline in employment and a significant increase in unemployment, respectively, across many countries (e.g. the number of applications for unemployment benefits). The International Monetary Fund (IMF) estimates the unemployment rate for 2019 at 4.8% in terms of working population, and it expects it to rise to 8.2% this year. For 2021, the IMF envisages a decline to 7.2%. For 2020, this means an increase in unemployment of 70%. Even in 2021, unemployment will still be 30% above the original level. The World Bank puts the size of the working population at 616 million in the high-income countries. This translates into about 30 million unemployed last year. This number could rise by 20 million to 50 million in 2020.

As if that had not been bad enough, the entire damage to the labour market is substantially bigger. The International Labour Organization (ILO) estimates that the number of hours worked by globally employed people declined by 10.5% in Q2 2020 relative to Q4 2019. This seems easily absorbable only at first glance. Total hours worked are calculated by multiplying the number of people employed by weekly work hours. On the basis of a 48h work week, this translates into a loss of 305mn full-time equivalents.

Shadow economy particularly hard hit

This situation has the most severe impact on the weakest members of society, as it affects in particular the shadow economy (also referred to as informal sector). ILO estimates that about 1.6 billion shadow economy workers could lose their livelihood. This is almost half of the global workforce (3.3 billion people). In the first month of the crisis, informal workers may have lost some 60% of their income.

Giant leap in unemployment in Germany

Note: Past performance is not indicative of future development.

Unemployment rate will decrease – permanent effects to be expected

The announcements of a gradual loosening of containment measures have become more plentiful in the second half of April. The catastrophic economic indicators for the month of April will improve a bit in May. However, the damage will be sustainable. In some European countries, reduced-hours work schemes have been implemented to help the situation, but income has been lost all the same. In addition, unemployment rates will not have fully fallen back to the initial level even by the end of 2021, and the global income gap between “poor” and “rich” countries will widen further.

Policy-makers challenged

In the coming quarters, the economic framework for the coming ten years will be set. Option no.1: public austerity schemes in order to reduce the increased debt. This would probably lead to sustainably low economic growth amid increased unemployment (secular stagnation). Option no.2: stimulus packages after the bailout-schemes. This would come with the chance of recovering lost GDP and cutting unemployment to the original level.

Coordinated action important

But that is not all. The individual countries have to act in a coordinated fashion in order to maximise the overall stimulus effect. Also, the stimulus programmes would have to be symmetrical. Their size should not be based on the rating of the respective country, but on the economic necessity. This does not only refer to the tense relationship between the various EU states. Rather, it refers not the least to the emerging and low-income countries, which have significant capital needs (USD 2,500bn, according to a recent estimate by the IMF).

Conclusion:

Improved economic indicators will help calm the situation on the labour market. The emergency stop of the economy has hit the shadow economy hardest. What long-term effects are to be expected depends on the economic policies in the coming quarters. Internationally coordinated stimulus programmes and the support of low-income countries would help.

^{Legal note:
Prognoses are no reliable indicator for future performance.}