The ILO's World of Work Report 2012 says:
These steps are being taken in the hope that financial markets will react positively, thereby boosting confidence, growth and job creation. However, these expectations have not been met.Neither renewed economic growth nor reinvigorated jobs markets has materialised in many countries enacting austerity measures, particularly those in Southern Europe, says the ILO.
The ILO argues that this represents clear evidence of an "austerity trap."
Caught in the austerity trap?
The ILO defines the "austerity trap" as a vicious circle in which austerity and tough labour market reforms hinder growth while weakening the labour market, resulting in a perceived need for further austerity measures, in turn exacerbating these problems.
The ILO says:
The fundamental reason for these failures is that these policies [...] are unable to stimulate private investment. The austerity trap has sprung. Austerity has, in fact, resulted in weaker economic growth, increased volatility and a worsening of banks' balance sheets leading to a further contraction of credit, lower investment and, consequently, more job losses. Ironically, this has adversely affected government budgets, thus increasing the demands for further austerity.Harsh economic conditions, elevated unemployment and rising income inequality also mean that "the risk of social unrest" has increased in "a majority of countries," separate ILO research suggests.
Strengthen labour market institutions to escape austerity trap, says ILO
The ILO also identifies a number of suggested strategies to help avoid or escape the so-called austerity trap.
One of these is the suggestion that "labour market institutions should be strengthened so that wages grow in line with productivity."
The ILO says that one such measure would be to ensure "a careful and coordinated increase in the minimum wage." It also sets out recommended measures "to promote employment while meeting fiscal goals."
There are signs that European governments could now be reconsidering their approach to austerity measures.
For example, the May 2012 Eurogroup Working Group (EWG) meeting of EU leaders "marked a shift from collective austerity to pro-growth measures following the election of the Socialist François Hollande as French President," the Independent reports.
- Is the Coalition Government waging a 'war on how we work'? Sunday Telegraph Business Editor Kamal Ahmed argues that the Coalition Government's approach to employment law reform could also be viewed as a "war on how we work." Ahmed says that these reforms are ultimately intended to enshrine a view that - at its simplest - "employers should be allowed to get on with managing their companies." In this post on XpertHR Employment Intelligence, I take a look at recent employment law reform proposals and consider how they relate to Ahmed's theory and assess the potential impact of some of these proposals on economic growth.
- XpertHR economic commentary June 2012: The austerity trap XpertHR's June 2012 economic commentary looks at the ILO's "austerity trap" theory, and considers the nature of labour market reforms proposed by the UK Coalition Government. This article also includes latest data relating to pay awards, inflation and unemployment, and consider how UK HR departments are coping with the ongoing challenges of the harsh economic climate.
- The image used on this page was sourced from Wikimedia Commons.