IMF’s labour pains

26 June 2013

Two April IMF reports purport to present a new view on labour market policy, however, they have attracted heavy criticism from trade unions as inaccurate and flawed.

In April the IMF published its first policy paper on labour. The paper, representing the IMF’s institutional view though not signed off by the board, analyses the Fund’s role “in helping countries devise strategies to meet labour market challenges”. In a May interview with the IMF’s Survey magazine Min Zhu, the IMF’s deputy managing director, acknowledged that global “megatrends” “have an impact on jobs, growth, and inequality”. The paper also appeared to endorse the Bank’s centrepiece on jobs, the World Development Report, (see Update 84), by backing jobs strategies to accompany growth strategies in certain circumstances and including significant analysis of “inclusive development”. The policy paper signalled that there is no “silver bullet” and it needs to tailor its “evidence based” advice to countries’ specific circumstances.

For developing countries, the paper repeats the findings of the international Growth Commission (see Update 61): (i) openness to the global economy; (ii) macroeconomic stability; (iii) high rates of private and public investment; (iv) respect for market signals but not absolute deference to markets; (v) trying out country-specific growth strategies; and (vi) government provision of public goods. It advocated that advanced economies apply structural reforms to labour markets for “their significant positive impact on growth” though acknowledged that these reforms’ benefits “often take time to materialise” and, moreover,“certain labour market reforms (such as reductions in unemployment benefits and employment protection) could temporarily have a negative impact on growth”. Whilst acknowledging that there is scope for “greater collaboration with international instituitons such as … the International Labour Organisation on the impact of these policies on growth, productivity, job creation and inclusion”, it provides no details of how it proposes to achieve this.

An April staff discussion note co-authored by the Fund’s research director, Olivier Blanchard, examined the Fund’s own advice on labour market policies and reforms for advanced economies from 2007 to 2010, against theoretical and empirical literature. Reflecting on its advice on unemployment, the paper concluded that high unemployment “was and remains largely cyclical,” which therefore led it to recommend &ldquo a strong fiscal stimulus early in the crisis” which it believed &ldquoprevented a much worse decrease in demand that actually took place”. On competitiveness, based on evidence that “the best way for periphery countries to achieve wage reductions is by common assent, such as through a national tripartite agreement among social partners” the discussion note recommended agreements either informally or formally, in a number of euro area countries, “but that they were difficult to achieve or did not take place.” Based on evidence that labour market reforms “increase productivity growth” the discussion note recommended “institutional changes”. Assessing the appropriateness of the Fund’s advice overall, the paper concluded that although the Fund’s recommendations proved “controversial” the “logic” of its advice was justified. IMF’s recommendations proved “controversial”, the “logic of its advice was justified.”

Rigid labour market “fixation”

The International Trade Union Confederation (ITUC) criticised the Fund’s “fixation” with labour market rigidities. According to an April article on the ITUC’s Equal Times website the IMF policy paper’s emphasis on “macroeconomic stability” has been “generally used by IMF staff as an alibi to push for fiscal discipline and monetary policy that prioritise low inflation above job creation”. Fund managing director Lagarde’s embrace of “anything that works to create jobs” at the April spring meetings was qualified by recommending “a set of policies that will include fiscal consolidation at the right pace, structural reforms …. and monetary policy, which provides the breathing space.” However a March working paper from the Initiative for Policy Dialogue (IPD) at Columbia University and the South Centre, an intergovernmental developing country think tank, using IMF data to highlight a series of labour flexibilisation reforms 2010-12, challenged the IMF and concluded that “flexibilisation policies do not lead to higher income and employment.”

Despite the staff discussion note endorsing “a combination of national and firm-level bargaining”, and acknowledging that the Fund needed to “tread carefully” on collective bargaining, ITUC general secretary Sharan Burrow wrote in April “nothing we have seen in recent IMF reports for European countries indicates that this is being put into practice”. The ITUC’s Peter Bakvis said that the discussion note contained “several misleading observations and conclusions unsupported by economic literature [and] inaccuracies about the reality of IMF loan conditions and country-level advice concerning labour market policy”.

The ITUC’s April Frontlines report, disagreed with the IMF policy paper’s conclusions, saying that “relative to firm-level bargaining, centralised bargaining also increases the bargaining power of unions, and is likely to lead to higher wages, and thus to higher unemployment”.

Citing the cases of Greece, Romania, Spain and Portugal, it argued that “the economic advantages that accrue to countries with highly centralised and coor­dinated bargaining do not result from excessive wage restraint”, but from “taking labour out of competition”. The ITUC report said the IMF’s reforms are based on a “failed ideology” and instead called for a “new reform agenda” in which collective and industry-level bargaining feature prominently along with legal protection for trade unions.

In an April blog, Mathew Dalton of the Wall Street Journal also found a “few problems” in the IMF’s approach. On national bargaining, the Fund’s discussion note singled out Greece, Spain, Italy and Portugal for their lack of competitiveness due to expensive labour reforms born out of national agreements. However Dalton cited countries such as Austria, the Netherlands and Germany, where unions play a strong role in negotiating and which “have also experienced the lowest wage growth in the euro zone”. Nor has the IMF been proved right in its insistence that wage reduction leads to greater competitiveness, according to Dalton, as Greece demonstrates. Wage reduction has accompanied by only slight price decreases “saddling people with huge increases in the cost of living”.

Learning its own “lessons”?

In Romania the ITUC observed that the IMF recommended abolishing national bargaining in 2011, and also advised the new government “to weaken sector-level bargaining to the point that no more sector agreements were concluded; firm-level bargaining also diminished sharply.” Petru Sorin Dandea, vice president of the Confederation National Sindicala, a Romanian trade union confederation reflected: “At the branch level just two agreements were concluded last year (compared to 21 in 2010) in the education and public services sector. This led many big companies, especially those active on the industrial, transport and, construction sectors to freeze, or in some cases to reduce wages.”

The April statement by the ITUC to the 2013 spring meetings instead recommends that the IMF would be better to put “greater emphasis on job-rich growth, improved social protection and respect of workers’ rights [which] would enhance the credibility of its advice and lending programmes.” Burrow saw a glimmer of light in the IMF’s commitments to international labour standards. She concludes that “time will tell if this commitment will change IMF conditionality”.