Austerity & tough labour market reforms have 'devastating' economic consequences, says ILO

Many countries (the UK included) are currently engaged in pursuing a combination of extensive economic austerity measures and "tough" labour market reforms with the aim of enabling economic recovery. But rather than achieving their professed aim of promoting renewed growth and job creation, these policies are having "devastating consequences" on many economies around the world, according to the International Labour Organization (ILO).

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."