More unemployment and lower wages to make European workers competitive?

Workers of PT Toshiba Consumer Products Ind. Assembling and manufacturing of electronic goods, such as television sets. Cikarang, Bekasi. Indonesia. (ILO photographic library, Mirza A.).

The statement that unemployment constantly increases in the European Union has become a banal observation during the past three crisis years. When however it comes to long-term unemployment, comprising workers without a job for more than one year, the end result can be that the labour force of this country or region is reduced by an equivalent percentage. People out of employment for more than one year, may for one thing have stopped looking for a job or feel redundant for life.

In crisis stricken countries, like Greece, Spain, Ireland, Portugal, Slovakia and elsewhere high overall unemployment rate might be drastically reduced after, say, three or four years. The problem is though what will become, during this hopefully good times, of this 10% or more of their labour force which is today out of employment for more than one year and will very probably continue to be like that in the foreseeable future. This is not a group of people who can be easily retrained or re-oriented in the labour market, because it contains people of very diverging backgrounds like age, education, qualifications, abilities, aspirations and more.

On top of that this part of the labour force, being around ten percent, they are numbered in millions! In Greece this group of people contains more than 14% of the labour force, in Spain it’s more that 10%, in Ireland and Slovakia close to 10% and in the Eurozone of 17 countries is close to 6%. Will these people be able ever to re-enter the labour market and find a job? Or they will become a permanent impediment to growth?

Long term unemployment

All those figures come from a very interesting study by Eurostat, the EU statistical service. According to this source, “Long-term unemployment is one of the main concerns of policymakers. Apart from its financial and social effects on personal life, long-term unemployment negatively affects social cohesion and, ultimately, may hinder economic growth. In total, 4.6 % of the labour force in the EU-27 in 2012 had been unemployed for more than one year; more than half of these, 2.5 % of the labour force, had been unemployed for more than two years. Both these figures mark a sizeable increase from 2011, when they were respectively 4.1 % and 2.2 %”.

                                             Unemployment rates by duration 2012 (%)

On the level of overall unemployment the situation is appalling. Eurostat estimates that 26.338 million men and women in the EU-27, of whom 19.071 million were in the euro area (EA-17), didn’t have a job in February 2013. Compared with January 2013, the number of persons unemployed increased by 76.000 in the EU-27 and by 33.000 in the euro area. Compared with February 2012, unemployment rose by 1 805 000 in the EU-27 and by 1 775 000 in the euro area. Among the Member States, the lowest unemployment rates were recorded in Austria (4.8%), Germany (5.4%), Luxembourg (5.5%) and the Netherlands (6.2%). The highest rates were observed in Greece (26.4 % in December 2012), Spain (26.3%) and Portugal (17.5%).

Wages

As it was only natural those appalling unemployment rates have drastically suppressed the level of real wages and salaries in many Eurozone countries. Unfortunately this was a clearly stated target by policy makers on EU and national levels. This policy target was the so-called ‘internal devaluation’, meaning that a large reduction of labour remuneration will restore the international competitiveness of the troubled Eurozone countries, as it was done at the time of the national currencies by an ‘external devaluation’. At that time a devaluation of the national currency automatically restored competitiveness, by making exports cheaper and imports dearer.The good thing however was that during this adjustment people didn’t lose their jobs, as it happens now with the internal devaluation.

Theoretically the Eurozone is an irreversible reality. Countries like Greece, Italy, Spain, Portugal and Ireland to mention only a few, have abandoned their national currencies and use the euro. So they have forsaken the tool of the currency devaluation, as a means to restore competitiveness. Today they can rely only on internal devaluation to restore competitiveness, with a large reduction of nominal and real wages. This cannot be realised however without a large, painful and socially very dangerous increase of unemployment. In short the policy target of internal devaluation, as a means to restore competitiveness, includes also a hideous increase of unemployment.

Europe’s third world

Then the question arises. How much unemployment and how deep a reduction of real wages and salaries is enough to restore competitiveness? Obviously this process has to continue up to the point where the foreign account of the country in question leaves a surplus. EU’s import duties though are reduced to negligible levels for the vast majority of products and services vis-à-vis the rest of the world. Consequently countries like Greece, Spain, Italy, Portugal and many more, in order to be competitive internationally, are presumably obliged to suppress their internal general level of wages and salaries down to levels compatible with the productivity of their fellow workers abroad. Abroad where? Probably all over the world.

That explains why Germany is competitive and productive. The secret is that around one-third of its labour force is not only completely impoverished but it is paid wages similar to third world regions. Summing up this little theory, it is possible that European decision makers, like the German government, have reached the conclusion that wages and salaries in Eurozone must be reduced to levels compatible with international competition. In short European workers should be paid according to their productivity, in comparison and close to that of their counterparts’ all over the world, Asia and Latin American included.

The ILO

Seemingly that is why the International Labour Office is examining the possibility, if wages around the world are converging. Philippe Egger, director of the ILO Bureau of Programming and Management wrote an article which was published in ILO’s internet site, (http://www.ilo.org/global/about-the-ilo/newsroom/comment-analysis/WCMS_210933/lang–en/index.htm?shared_from=media-mail), exploring the challenges of comparing wages across countries.

According to the ILO Global Wage Report 2012/2013, in the last decade, real wages – adjusted to reflect purchasing power – had doubled in Asia, almost tripled in Eastern Europe and Central Asia and increased by 15 per cent in Latin America. That compares with a rise of just five per cent in developed economies. These trends confirmed what we already know about the direction of the current changing regional dynamics, but do they tell us the extent to which wages around the world are converging?

In view of that Egger is very careful. His early conclusion is that “Answering the question is not straightforward. The prices of goods and services in each country tend to differ as do wages. And comparing them raises a number of difficulties”. At some point however he notes that, “If the trends in real wages mentioned earlier were to be sustained into the future – a questionable assumption – the wages of construction labourers in Asia and in developed economies would equalize by 2038”. Mind you, construction workers are the best paid labourers. In any case the ILO is not addressing this issue without a reason. Possibly some European decision makers, want to see it happen.

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