How Labor Markets Can Support Workers, Economic Growth

Challenge for labor market institutions is to support growth while protecting workers

Labor markets need to show both micro and macro flexibility

IMF has advised on measures to lower unemployment, reestablish competitiveness, boost underlying growth

The unemployment rate in advanced economies exceeds 8 percent, with much higher unemployment rates among the young. A third of all young unemployed have been without work for six months or longer.

Countries face the challenge of putting these millions of people back to work and getting the young started in their careers. A new IMF Staff Discussion Note—Labor Market Policies and IMF Advice in Advanced Economies during the Great Recession—reviews IMF advice to help countries meet this challenge

The paper was written by Olivier Blanchard, the IMF’s Economic Counselor and Research Department Director, along with his colleagues Florence Jaumotte and Prakash Loungani.

Weak demand

The IMF has diagnosed high unemployment to be a result primarily of weak aggregate demand, the paper notes. Hence, it has advised that monetary and fiscal policies support demand to the extent possible, alongside generous unemployment insurance to help people cope with the human costs of being out of work.

At the onset of the crisis, the IMF called for a coordinated global fiscal stimulus, which prevented “a much worse collapse in demand than actually took place.” Along with fiscal stimulus, the paper mentions the role of policies to promote work-sharing programs, particularly in Germany, and concludes that the positive experience “has led to a reassessment of such policies at the IMF and elsewhere.”

While in a number of countries high debt has now made fiscal consolidation unavoidable, the paper recommends that such consolidation should proceed as gradually as possible and be accompanied by supportive monetary policy.

While supportive macro policies are a central part of the IMF’s advice, the paper’s focus is on the design of labor market policies and institutions to reduce average unemployment rates and boost medium-run growth.

Micro flexibility

Productivity growth—the ultimate source of gains in incomes—requires reallocation of resources from low to high productivity jobs and firms. Labor markets must permit this “micro flexibility.”

Research strongly suggests that micro flexibility is better achieved by protecting workers through unemployment insurance than employment protection. Unemployment insurance, combined...