Over the past three decades, hundreds of millions of new workers have entered the global economy. They arrived with various levels of education and skill, and over time have generally gained in terms of “human capital” – and in terms of value added and income. This has brought a tremendous, and ongoing, growth in income levels, opportunities, and the size of the global economy. But these new workers have also brought more employment competition and significant shifts in relative wages and prices, which is having profound distributional effects.
These massive structural changes in the global economy present three great employment challenges worldwide, with different countries facing their own variants. The first challenge is to generate enough jobs to accommodate the inflow of new entrants into the labor market. Clearly, a wide range of advanced and developing countries is failing to do so. Youth unemployment is high and rising. Even in fast-growth developing countries, surplus labor is awaiting inclusion.
The second challenge is to match skills and capabilities to the supply of jobs – an adjustment that takes time. It is also a moving target. Globalization and major labor-saving technologies have thrown labor markets in many countries into disequilibrium. Skills mismatches abound.
The third challenge is distributional. As the tradable part of the global economy (goods and services that can be produced in one country and consumed in another) expands, competition for economic activity and jobs broadens. That affects the price of labor and the range of employment opportunities within all globally integrated economies. For two decades prior to the 2008 crisis, employment levels were maintained – and downward pressure on incomes mitigated – by creating jobs in non-tradable sectors. In some cases, this took the form of rapid growth in government; in others, like the US, a pattern of excessive, debt-fueled consumption underpinned a large shift in employment to (non-tradable) services and construction. Indeed, government and health care (both largely non-tradable) accounted for almost 40% of net employment growth in the US between 1990 and 2008. That pattern came to a sudden stop in the financial crisis of 2008. Private-sector leverage declined and public-sector leverage reached – and exceeded – sustainable limits, with Greece being only the most extreme example.
But expectations created by pre-crisis growth patterns adjust slowly. Because the dominant narrative still maintains that the pre-crisis period was normal, at least in terms of the growth pattern in the real economy, the perceived challenge is to restore growth according to the pre-crisis pattern. Unfortunately, this narrative cannot explain why, particularly in the advanced countries, growth is faltering and the employment engines have largely shut down.
The imperative of structural adjustment also implies that individuals, governments, and other institutions (especially schools) need to focus on increasing the speed of adjustment to meet rapidly shifting market conditions. Attention to both the demand and supply sides of job markets is required. This means not only matching skills to jobs, but also expanding the range of jobs to match skills.
Finally, global economic-management institutions need to address whether the pace of globalization, and its implied structural change, is faster than the capacity of individuals, economies, and societies to adjust can withstand. If so, the next challenge will be to find non-destructive ways to moderate the pace in order to bring capacity to adjust and the need for adjustment into closer alignment.
None of this will be easy. We do not now have well developed frameworks for understanding structural change. Nevertheless, the unemployed and underemployed, especially younger people, expect their leaders and institutions to try.
Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business. A version of this article was first published in project syndicate.
