how to make the recovery sustainable?

Regulating for a fair recovery, July 8th 2011

HOW TO MAKE THE RECOVERY SUSTAINABLE?Ekkehard ERNST

OVERVIEW

How inequality threatens the recovery

• The two-speed recovery is giving way to global coolingLoss in income (growth) has lowered disposable revenues and

aggregate demand around the globe

• Recovery remains protracted in advanced economiesOnly few advanced economies have managed to take

advantage of the global recovery

• Tightening speed limits in emerging countriesCommodity prices on the rise again Wages and disposable incomes have still not recovered Domestic demand falters in the absence of stronger world

trade

Global cooling is underway....partly due to lack of income generation

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2

3

4

5

6

7

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Arab countries

Advanced economies

Latin America Africa Emerging Asia Emerging Europe

Real

dis

posa

ble

inco

me

grow

th(p

.a.,

in %

)

Pre-crisis growth (2002-2007)

Post-crisis growth (2008-2010)

Structural change starts to bite

• Global rebalancing has led to structural changeThe slowdown in activity has further exacerbated labour market

inequalities

• Restructuring is particularly severe in countries with large imbalances

Earlier housing booms give rise to sharp sectoral adjustments Often, structural change comes with long-lasting and high

structural unemployment

• Demand-led policies can help speed up internal restructuring

New job demands in service-related sectors (e.g. health care, personal services) can mitigate the impact, in particular for young people

New jobs are needed as job reallocation has accelerated

Q1-2001 Q1-2002 Q2-2003 Q3-2004 Q4-2005 Q1-2007 Q2-2008 Q3-2009 Q4-2010

TurkeyD enmark

U nited KingdomI reland

Slov ak R epublicSlov enia

EstoniaH ungary

SpainGreece

N ew Z ealandPoland

C zech R epublicPortugal

U nited StatesAustra lia

F ranceN orwayC anada

N etherlandsI ta ly

KoreaAustria

BelgiumC hile

F inlandSweden

SwitzerlandJapan

Housingdepression

Housingbubble

Inequality lowers policy effectiveness

• Policy space becomes more limitedRising inequalities limit policy effectiveness

• Traditional macroeconomic policies need to be replaced

But even activation policies work less effectively when structural unemployment is high

Early action is necessary, but the window of opportunity might have gone already

Emerging structural challenges complicate labour market interventions-20

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01

02

03

0C

oe

ffic

ien

t e

stim

ate

Low Intermediate HighStructural unemployment rate

Note: Iterated estimates

Government consumption

01

02

03

04

0

Co

eff

icie

nt

estim

ate


Median of coefficient

5% confidence interval


Non-wage government consumption

-50

05

01

00

15

0C

oe

ffic

ien

t e

stim

ate



Hiring incentives

-20

02

04

06

0

Co

eff

icie

nt

estim

ate



Training expenditures

-20

-10

01

02

03

0C

oe

ffic

ien

t e

stim

ate



Government consumption

01

02

03

04

0C

oe

ffic

ien

t e

stim

ate


Median of coefficient

5% confidence interval


Non-wage government consumption

-50

05

01

00

15

0C

oe

ffic

ien

t e

stim

ate



Hiring incentives

-20

02

04

06

0C

oe

ffic

ien

t e

stim

ate



Training expenditures

Equality-enhancing fiscal measures work

• Income-led recovery possibleAn income-led fiscal stimulus can still help Use spending measures with the largest multiplier attached,

such as social spending (e.g. unemployment benefits)

• Tightening of social spending is likely to worsen both the economic and the fiscal situation

Austerity measures fall heavily on low-income earners The demand-depressing effects cause second-round

deflationary effects that further worsens fiscal positions

Coordinated stimulus would still help

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-0.2

0.0

0.2

Em

ploy

men

t gr

owth

(in

% p

.a.)

2005 2010 2015 2020

Baseline scenario Early withdrawal

Additional spending for3 years (3% of GDP)

Additional tax reductionsfor 3 years (3% of GDP)

Employment recovery in G20 countries

how to make the recovery sustainable?

Technology