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“Heightened policy activism” is needed to address a global unemployment crisis

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Yesterday new forecasts showed unemployment rising by 13 million across so-called advanced economies and by 1.2 million in the UK. The OECD calls for “heightened policy activism” to address this challenge: this must mean a renewed emphasis on spending to get us out of recession and deliver decent work.

In their December Economic Outlook, the OECD outlines the economic damage of the pandemic, and calls on governments to keep supporting the economy.  

As the pandemic is global, the economic effects are common to most countries. For example, on GDP growth for 2020 across 49 countries, the average decline is 5.5 per cent - and 80 per cent of countries have declines between 3 and 10 per cent.  

The UK stands out among advanced economies with a decline of 11.2%, the third largest decline (only ahead of Spain and Argentina).  

But it is on unemployment that the damage is most obvious.  

Wrongly downplaying the situation, the OECD states that “labour market conditions are expected to remain subdued”.  

In 2019 the OECD unemployment rate was 5.4%; it is now expected to rise to 7.2% at the end of this year and to have improved only to 6.6% by the end of 2022. 

But these rates disguise the scale of the crisis.  

In terms of people, unemployment will rise by 13 million from 2019 to an anticipated peak of nearly 50 million (48.9) in 2021, only slightly lower than the levels seen during the global financial crisis a decade ago.  

And the figures of course exclude countries not defined as advanced economies, where the crisis is likely to be even more serious - and from a worse starting point. 

For the UK, the OECD believes the unemployment rate will peak in 2021 at 7.4% - equivalent to 2.5 million people and a rise of 1.2 million since 2019.  

OECD unemployment 


A decade ago the OECD called for a “fiscal consolidation that is substantial in most cases and drastic in some”.  

It is a great relief that some lessons have been learned:  

"The fact that vaccines are in sight suggests that this is not the time to reduce support, as was done too early in the aftermath of the Global Financial Crisis … It is also crucial that policymakers ensure continuous fiscal support to keep sectors, firms and the associated jobs alive."

There is sound advice for support to be targeted to the hardest hit sectors and to facilitate reallocation of workers where structural change is most likely. They note that cutting spending “could undermine growth excessively”, and may be a false economy by reducing tax revenues and increasing social security spending.  

But preventing wrong policy is not enough.  

The key question for the OECD and for the UK government is whether spending is sufficient to support the economy and hold off an unemployment crisis.  

Jobs crisis, not debt crisis 

Ahead of the spending review the TUC called for action to protect workers and create work. We noted calls by the Resolution Foundation for spending of £220bn, and separately, the IPPR reckoned a total stimulus of £164 billion would be needed to fully stabilise and restore the economy.  

In spite of all last week’s eye-catching announcements, the Chancellor did very little beyond confirming already announced protections. 

There was almost no new spending to create work.  

Moving £4billion from aid to the global south to aid to regions of the UK is not only morally wrong but economically insignificant in terms of the scale of support needed.  

After the event, Carsten Jung of the IPPR warned spending “may be *way too small* to get us out of this crisis”. 

And although the consensus view has shifted on fiscal consolidation – moving away from the need for spending cuts – the UK government's approach is still viewed from a perspective of a debt, rather than a jobs crisis.  

So much so that the IPPR coordinated a letter from 24 professors of economics rebuking the BBC about their coverage of the spending review.  

They warn commentators against using “household budget” analogies (for instance ‘maxing out on credit cards’) that “exert a great influence on the public’s understanding of economics, even though they do not represent economic reality”. 

The key point of the household fallacy is that a household can cut spending to reduce its own reliance on borrowing, but the government’s actions affect the economy as a whole.

As we saw with austerity policies over the past decade, coalition and conservative government spending cuts not only led to the worst recovery in terms of GDP for a century, they meant the worst outcome for public debt for a century.  

The OECD is cautious but makes the key point: “Heightened policy activism need not be a concern if deployed to deliver higher and fairer growth”.  

This policy proposal fits the bill:  

First, investing in essential goods and services such as education, health, physical and digital infrastructure. Second, decisive actions to reverse durably the rise in poverty and income inequality. Third, international cooperation: the world cannot solve a global crisis through single-country and inward-looking actions. 

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