The National Bank of Ukraine (NBU) and Narodowy Bank Polski hosted the annual research conference Labor Market and Monetary Policy last week, bringing together representatives of central banks and financial institutions, and leading economists from the U.S., Canada, and Europe.
The conference, organized with the support of the Canada-IMF Technical Assistance Project NBU Institutional Capacity Building and the Kyiv School of Economics, convened a total of about 300 people.
Out of an abundance of caution over the coronavirus pandemic, this year’s conference has – for the first time in its history – taken place online. However, this did not prevent experts from around the globe from discussing issues that are particularly relevant during the corona crisis: income inequality, unemployment, migration, demographic challenges, their impact on the economy, and the role of monetary policy in resolving labor market problems.
“Many countries have managed to rein in inflation and to attain low levels of unemployment over the past decades. However, economic inequality, population aging, migration… continue to threaten economic development,” said NBU Governor Yakiv Smolii as he opened the conference. “The corona crisis in most cases has only made things worse,” he said. In Q2 2020, the number of hours worked worldwide may decrease by 10.5% from the pre-crisis level. Approximately 1.6 billion people employed in the informal economy could suffer significantly, according to data compiled by the International Labor Organization.
The economic fallout from the pandemic is very uneven. In today’s world, the poorer the people, the simpler and lower-paid the jobs they hold, and the more that they rely on their jobs as the sole source of income, the more that they suffer. Can central banks prevent this? “No, I don’t think we can,” said the NBU Governor. “We should leave this up to national governments. In times such as these, central governments ought to prioritize fiscal incentives, including targeted measures to maintain consumption levels for those who have lost part or all of their income to the quarantine.” The task of a central bank is to strike a balance between keeping inflation at the target level and promoting economic growth. And as the current crisis has shown, it is possible and necessary to contribute to the simultaneous achievement of these goals. However, Yakiv Smolii is convinced that given the circumstances, it is necessary to act decisively and unconventionally.
The following summarizes the five major takeaways from the two-day conference.
Monetary policy has a limited impact on unemployment, but can mitigate the crisis and its effects on the labor market
Central bank policies and instruments can only stabilize unemployment around a certain long-term level. However, monetary policy is unable to reverse an unemployment trend itself, suggested Stefan Ingves, Governor of Sveriges Riksbank.
Central banks cannot eliminate the structural causes of unemployment, he said. This is the mandate of other government authorities. They need to retrain workers so that they can take jobs that are in high demand, and to provide young people with quality education that meets the needs of the labor market.
Central banks, for their part, can alleviate the crisis and its impact on the labor market by providing monetary policy stimulus and ensuring that credit is continually accessible. Another important element of success – which also has tangible benefits for the public – is the pursuit of low and stable inflation by central banks.
The problem for the central banks of developed economies is that today’s crisis has found them at the lower ends of their policy rate ranges, said Christopher Erceg, Deputy Director of the IMF’s Monetary Systems and Capital Markets Department. Thus, the monetary policies of these countries have little room for maneuver. As a result, their economies will recover more slowly, and there will be “scars” in their labor markets.
The scale of the corona crisis’s impact on the global economy is tremendously hard to predict, as it has no precedent in history.
What distinguishes the “Great Lockdown” from previous crises is elevated uncertainty, which will negatively affect investment activities within countries, said Christopher Erceg. Households will save more out of fear of losing jobs. This will affect consumption and thus national GDPs. As the crisis began, analysts predicted that economies would follow V-shaped recovery trajectories. Current projections suggest, however, that there will be no quick “rebound” to pre-crisis levels, and that the recovery will take longer than economists expected at the beginning of the crisis.
That unemployment rises in times of crises is obvious. Employers are more likely to lay off less skilled and less productive workers, said Federico Ravenna, head of research at Danmarks Nationalbank. What is not so obvious is that as a consequence, inequality grows even more, as unemployed individuals differ significantly in productivity and skill from employed workers. In effect, it will be more difficult for less skilled workers to find new jobs after the crisis.
The corona crisis also differs from conventional crises in that it leaves different groups of people jobless. Unemployment usually hits industrial workers the hardest. This time, however, those working in services and small and medium-sized businesses are much more vulnerable.
Layoffs significantly affect both the current and lifelong incomes of individuals
The lifetime income of a person left out of work may be up to 30% lower. Even 10 to 20 years after the layoff, this person may earn 10% less than individuals who have never been fired, according research presented by David Berger, Associate Professor of Economics at Duke University. At the same time, becoming jobless during a crisis leads to much greater losses than when the economy is growing.
“After a crisis, unemployment remains high due to the structural changes caused by the crisis itself. These changes significantly increase the cost of job creation,” said Robert Hall, Professor of Economics at Stanford.
“At the same time, people who have lost their jobs to a crisis are reluctant to return to the labor market when the crisis ends. In other words, crises give people an incentive to leave the workforce. Most workers in the U.S. who have become jobless because of the corona crisis are not trying to find work again. A lot of them have retired before reaching retirement age,” said Christopher Erceg.
In Sweden, laid-off workers are not too eager to find work either, pointed out Stefan Ingves. The number of clicks on vacancies on job sites has declined by 30%. People probably think that finding employment in today’s conditions is unrealistic.
Getting migrants to come home is no small task
People have been leaving Poland for two decades now, despite repeated improvements in the nation’s macroeconomic conditions. Citizens go abroad in search of higher quality of life and better self-fulfillment opportunities, said Andrzej Raczko, Adviser to the President of Narodowy Bank Polski.
In the early 2000s, the situation in Poland was dire, with unemployment in the double digits and with more than 40% of young people struggling to find work. This prompted the authorities to entice the public to migrate in order to reduce unemployment and to increase the flow of remittances to the country. Migrants were expected to return home after the economic situation stabilized. But many never did.
In 2019, Poland’s unemployment rate stood at 3%. The wage gap with the EU had narrowed, and living standards had risen. However, this was not enough. The government should have implemented more active programs to bring migrants home. More opportunities should have been created for starting a business. Domestic employment opportunities for foreign-educated people should have been made more accessible. More administrative barriers should have been lifted, including by ensuring that youngsters who studied abroad can reintegrate into the Polish economy more easily.
Crises and unemployment have a profound effect on the global political landscape
Unemployment caused by the current pandemic will redraw the world’s political landscape in the long run. High unemployment strongly correlates with rising populism, suggested Sergei Guriev, Professor of Economics at Sciences Po.
A one percentage point increase in unemployment raises the appeal of populist political forces by one percentage point, some studies have shown. And in some regions of the world, populist rhetoric increases in popularity by as much as two percentage points. People who lose their jobs tend to vote for populist ideas, putting a heavy drag on economic growth.
Key educational activities for students as part of the conference
The conference and Ukraine Economy Week offered a series of educational events for Ukrainian students, with a number of lectures delivered by prominent economists.
David Berger, Associate Professor of Economics at Duke University, talked about the impact of monetary policy on households.
Davide Furceri, Deputy Head of the IMF’s Research Department, discussed the Global Uncertainty Index.
Bart Hobijn, Professor of Economics at Arizona State University, spoke of wage fluctuations during the economic cycle.