The privilege of unemployment : THE ECONOMY : Analysis

THERE is, according to the International Labour Organisation, a higher proportion of people unemployed in the world than at any time since the 1930s. Some 30 per cent of the world's workforce, or 820 million people, are either unemployed or underemployed. It is, of course, a profoundly disturbing figure, and the ILO is doing the world a service by drawing attention to the fact that while most discussion of unemployment focuses on the problem in developed countries, it is in many ways even more of a problem for the less developed ones.

The ILO, a UN agency based in Geneva, does not frequently attract the attention of the world's media, and it may have felt galled by the way the debate about the causes of unemployment has been orchestrated by such organisations as the OECD, the IMF and the World Bank. So it has decided to publish a new annual report, World Employment 1995, which gives a different perspective both on the problem and on ways in which it might be tackled. The first such report appeared last Wednesday.

The report brings two new things to the debate. The first is its discussion of unemployment in the developing world. Thus it looks at the very different experiences of South and East Asia, of Africa and of Latin America. Naturally there has been plenty of discussion about the reasons for the astonishing economic success of East Asia over the last two decades, and a fair deal of hand-wringing about the failures of sub-Saharan Africa. But most of this has been in terms of general economic growth, incomes and investment, rather than focusing specifically on the consequences of economic growth on employment and unemployment. What emerges here is the contrast between the great job-creating machines of the economies of Singapore, Hong Kong and China, and the fall in what the ILO describes as modern-sector employment in much of sub- Saharan Africa.

In China, non-agricultural employment rose by 58 per cent between 1977 and 1990. In Ghana, in the 1980s, paid employment in manufacturing halved.

The other interesting element in the ILO report is the challenge it makes to the new orthodoxy, articulated by the IMF and OECD, that the best way to cut unemployment in the industrial world is to free job markets. It argues that there has been inadequate demand, particularly in the European economy, for the last 20 years. Policy has been biased against growth. Freeing labour markets and cutting European wage levels would only have a marginal impact on unemployment; and the imposition of a minimum wage has an insignificant effect on total employment in the industrialised countries.

In this sense, the ILO is reflecting a continental European view of the causes of unemployment, rather than an Anglo-Saxon (or for that matter East Asian) view. It is useful to have the arguments set out, though anyone doing so has to explain why high unemployment in the developed world is largely a European phenomenon if it is not - in part, at least - the result of European labour market policies. And saying that the real problem is lack of growth is only helpful if one has ideas as to how that might be increased.

The ILO does have some views on this - it calls for co-ordinated expansionary policies by the main developed countries - but it does not really answer the charge that faster growth would merely lead to higher inflation, which would soon choke off that growth.

Part of the problem within the industrial countries is that their economies are being forced by international pressures to make a rapid change in their structure, moving out of producing low-valued-added goods and services and into high-technology manufacturing and high-quality service industries. In the United States, where this trend is most evident, one effect has been to displace low-skill workers, and increase the demand for highly skilled ones. Because the US has a flexible labour market, this has also affected differentials: unlike Europe, the US has managed to carry on creating jobs through the 1980s and early 1990s, but at the cost of cutting the real wages of the unskilled, while the wages of the most skilled have risen sharply.

This phenomenon was the subject of a conference at the Federal Reserve Bank in New York late last year, and the results have just been published in the NY Fed's Economic Policy Review.

The changing pattern of demand for different skill levels is well illustrated in the first graph. For the 40 years between 1940 and 1980 - a period spanning a whole career - the demand for skills rose steadily with those skills. But between 1980 and 1990 something changed. Demand for the bottom 80 per cent (in terms of skills) fell, while demand for the top 10 per cent shot up. Demand for the very highest skills rose most of all.

One result was that while the earnings of people with a university degree (see the second chart) continued to rise through the 1980s, the earnings of people who had only graduated from US high school (roughly equivalent to our first year sixth form) tended to fall. That might be expected, but the figures seem to suggest that since 1990 having a university degree may not be enough to protect people from falling salaries. Look again at that graph: since 1990, real earnings of even university graduates seem to have fallen. It may not be enough just to have a first degree: perhaps in the US you now also need to have a higher degree or some professional qualification if you want to enjoy a real increase in your living standards.

If this trend is sustained and US experience is followed elsewhere in the industrial world, it has disturbing implications for the rest of us. One could reasonably expect to improve the general skill levels in any developed country by putting more resources into training, and of course that should be done. But if the sharpest rise in demand is for the top 1 or 2 per cent in skill terms, most of us will have to accept that we will not - over the next generation - get much richer. We cannot all be brain surgeons or pop stars.

That does not mean, however, that the rest of us need be unemployed. Reading the ILO report and the papers from the NY Fed's conference, three conclusions seem to emerge. The first is that the only way we can sustain, or even improve, the relatively high living standards that most people in the developed world enjoy is if we are educated, trained and motivated to produce the high-quality goods and services that justify such standards.

The second is that some people in the developed world, however hard they work, may not be able to earn enough to climb above the poverty level. The greater the premium on skills, the greater the case for highly skilled workers to accept a measure of redistribution of income to less-skilled ones.

And the third is that even the unemployed in the developed world are in a privileged position compared with the majority of people in the developing world, and that as a result we have an overriding obligation to open our markets to the developing countries - an obligation that we have not fulfilled.

Unemployment is Europe's problem (and some continental European countries seem to have devised policies that inevitably encourage the growth of unemployment). But the fact that it is a grave problem for Europe should never be used to keep out the exports of the less privileged world, for it suffers more than we do.