IFIs labour approach “will get us in trouble”

5 April 2012

With global unemployment at record high levels, the IFIs’ approach to employment is being criticised for still encouraging countries to lower labour protections.

The IMF issued two working papers in March which analyse labour market flexibility and unemployment. The first, Crises, Labor Market Policy, and Unemployment, finds that “in countries with more flexible labour markets, the impact of financial crises is sharper but short-lived. Conversely, in countries with more rigid labour markets, the effect of financial crises appears to be initially more subdued, but highly persistent.” In a second paper, the same authors suggest that “policies aimed at increasing labour market flexibility may have an important effect in reducing unemployment.”

Beyond the central conclusion on how labour market flexibility can reduce unemployment, both papers say properly designed policies can “minimise possible negative short-term effects … on inequality and job destruction”. They endorse previous studies that argue that it “is important to protect workers, rather than jobs, by coupling unemployment benefits with pressure on the unemployed to take jobs and measures to help them.” Further, they argue that “artificial restrictions on individual employment contracts should also be avoided”, though do not define “artificial”.

Conor Cradden of UK NGO Public World commented that “the IMF researchers are right that labour market policies have to be ‘designed to also improve the quality of employment and to minimise possible negative short-term effects’. Yet their definition of ‘reform’ includes cutting minimum wages, removing restrictions on firing, reducing paid holidays and maternity leave, and getting rid of collective bargaining. They argue that reducing youth unemployment means increasing flexibility, but what their policy amounts to is forcing young people into low paid insecure work. Will this labour market policy eradicate poverty?”

In March at the high-level meeting of the United Nations Economic and Social Council with the World Bank, the IMF and the World Trade Organisation, Heiner Flassbeck, from the UN Conference on Trade and Development, explained that the acute unemployment crisis today exists despite the fact that the wage share of national income has been falling across the world over the last 20 to 30 years. Flassbeck pointed at the paradox of the current unemployment crisis where productivity rises consistently over time, but there is no concomitant rise in wages. He also argued that, because companies are investing in labour and capital simultaneously in the good times, and divesting from both in the bad times, the whole theory of the labour market as an isolated factor of supply and demand is no longer true. “The traditional recipes to fix high unemployment via the flexibilities of the labour market will not work but in fact get us into new trouble,” he said.

Shifting approach at the Bank?

Martin Rama, lead author of the World Bank’s 2013 World Development Report (WDR), which this year will focus on employment, was also present at the meeting. He said the WDR will need to “address the question of why there are not more good jobs for development, and identify the underlying constraints.”

Commenting on an outline of the WDR, Duncan Green of UK NGO Oxfam, welcomed that the report will discuss how jobs affect subjective wellbeing and not just income and that there will be a link to the rights agenda. However, he expressed concern that there is “not much sign of links to the unpaid/care economy or to planetary boundaries/green economy agendas. Nor much discussion on the power relationships/political economy issues that determine what kinds of jobs are created. I’m also a bit worried that the discussion on social cohesion, while welcome, could become a substitute for talking about inequality.” The full WDR will be launched in October.

The Bank will launch the Social Protection and Labour Strategy for 2012-2022 at its spring meetings in April. A draft of the strategy, was published in mid-March. Peter Bakvis, from the International Trade Union Confederation, commented that the new strategy “presents advances in some areas for engaging the Bank in the implementation of a social protection floor and for improving respect of fundamental workers’ rights.” but urged the Bank to develop specific action plans to make operational its new approach (see Update 78).

Complaints at the IFC

The International Trade Union Confederation and a group of Colombian trade unions have filed a complaint at the Compliance Advisor/Ombudsman, the accountability mechanism of the International Finance Corporation (IFC), the Bank’s private sector arm. They claim workers’ rights were violated by Colombia-based commercial airline Avianca, which will receive an IFC $50 million corporate loan. The complaint also points to violations surrounding the right of free association and questions IFC’s due diligence on the project, particularly as it pertains to performance standards on labour and working conditions.