1. Sher Verick EMP/ANALYSIS International Labour Organization (ILO)

2. Outline of presentation How did the global financial crisis happen? What has been the macroeconomic impact? What is the impact on the labour market? What has been the policy response? What has been ILO’s role during the crisis?

3. How did the crisis happen? Causes Low interest rates (and yields) Misperception and mismanagement of risk (sub-prime mortgages) Inadequate regulation of financial system 2006 – defaults on mortgages started increasing August 2007 - Credit markets froze December 2007 – US recession started September 2008 - Lehman Brothers goes bankrupt

4. Macroeconomic impact of the crisis

5. Impact on the labour market Impact on labour market depends Size of economic contraction (direct and indirect impact of crisis) Sectoral composition of the collapse in aggregate demand Vulnerabilities of particular population groups Existing labour market institutions Policy response

6. Impact on the labour market Three main labour market channels for firms to adjust labour in response to a major economic shock: Working time – firms adjust hours of work more rapidly than the number of workers due to cost considerations and the need to retain workers Employment – a sharp drop in economic activity leads to dismissals, mass layoffs, plant closures, and hiring freezes, which all contribute to rising unemployment Wages – adverse social impact but firms do it less than expected

7. Impact on the labour market Crises also result in Flows between sectors In developing countries, laid-off workers don’t stay unemployed Informal and agricultural sectors Changes in household labour supply Wife/children increase labour supply to compensate for loss of jobs in household Underemployment and unemployment result in a fall in household incomes and rise in poverty

8. Unemployment in Europe and the US

9. Impact in developing countries Due to lack of data, it is difficult to provide figures for many developing countries Anecdotal figures 63,000 garment jobs lost in Cambodia ¼ of workers (8,100) in the mining sector in Zambia have lost their jobs Unemployment rate has increased in Argentina, Brazil, Colombia, Mexico, Peru, Thailand But the unemployment rate has fallen in Mauritius, Indonesia, Philippines!

10. What’s been happening in Colombia? Slight contraction at the end of 2008, but has returned to growth Foreign investment, government spending on public works, lower interest rates (4%, down 6 ppts) But recovery will not be as strong as in Brazil Colombia relies more on the US market Unemployment and poverty remain a challenge What has happened during the crisis? Unemployment rate: 9.5% (2007) and 10.5% (2008)

11. South Africa

13. What has been the policy response? The policy response has consisted of Easing of monetary policy Fiscal stimulus packages – Keynes is back In the G20 – average aggregate discretionary stimulus amounts to 2% of GDP in 2009 and 1.6% in 2010 ¾ of packages go to spending (infrastructure), rest on tax cuts But fiscal deficits are rising fast

14. LMPs in times of crisis Labour market policies aim to influence labour demand and supply and to improve the match between the two along with providing income support during periods out of employment LMP measures can help mitigate the impact of the crisis on workers and reduce the lag But will not be effective unless other policies are in place (stimulus, etc)

15. LMPs in times of crisis During a downturn, LMPs can Support labour demand by keeping people in jobs and creating new jobs Improve the employability of unemployed Provide income support (passive policies) Target the most vulnerable

16. LMPs in times of crisis

17. ILO’s role in the response Global Job Pact – adopted by member States and endorsed by heads of State including President Lula of Brazil at ILC in June 2009 Publications – reports, guides, studies, data Country assistance