Global Demand Dearth Costs $1.2 Trillion In Lost Wages, $3.7 Trillion In GDP

Recently we’ve seen quite a bit of evidence to support the notion that global demand has never recovered from the 2008 crisis and further, that central banks’ collective efforts to create demand via ‘the wealth effect’ and other similarly elusive concepts have failed. This is apparent virtually everywhere you look, from depressed global trade, to a sharply decelerating China, to flatlining US economic output, to a worldwide deflationary supply glut

Needless to say, lackluster global demand has a negative impact on employment opportunities. Employment is of course an important factor in explaining economic growth. When jobs are being created at a healthy clip, there is a multiplicative effect on the borader economy as more jobs equals more spending which in turn boosts profits and drives investment in a virutous economic circle. Of course when the jobs gap grows, this circle reverses itself and becomes a self-feeding downward spiral. By studying the global jobs gap and comparing pre-crisis conditions to post-crisis conditions, The International Labor Organization has been able to quantify the economic impact of subpar global demand and it is astonishing.

 Here's more from the new ILO study:

Nearly eight years have passed since the first signs of crisis emerged in the global economy. Despite encouraging signs of recovery in 2010–11, the more recent period has seen global unemployment march higher, to an estimated 201 million in 2014…

 

At the global level, employment growth has stalled at a rate of around 1.4 per cent per year since 2011. This compares favourably with the crisis period (2008–10) when employment growth averaged just 0.9 per cent, but remains significantly below the 1.7 per cent annual rate achieved between 2000 and 2007…

 

The global jobs gap, which the ILO estimated by comparing pre-crisis trends in employment-to-population ratios (accounting for demographic change) with actual, observed trends since the onset of the crisis, stood at 61 million in 2014. That is, there were 61 million fewer people in employment globally in 2014 than there would have been had pre-crisis employment growth trends continued…

 

 

Looking at trends in employment elasticities over three historical periods (1991 to 1999, 1999 to 2007 and 2007 to 2014), the global employment intensity of growth has not varied significantly, declining slightly from an average of 0.35 during the period from 1991 to 1999 to 0.33 between 1999 and 2007, and then to 0.32 during the crisis and recovery period from 2007 to 2014.3 Thus, over these periods, each percentage point of global GDP growth has been associated with an increase in employment of between 0.32 and 0.35 per cent. Viewed in this context, the weak global employment performance during the post-crisis period has not been due to a marked decline in the employment intensity per se. Rather, weaker employment performance seems to reflect the fact that global economic growth has been far weaker than during the pre-crisis period…

 

A potentially key factor explaining the slow recent growth performance is a shortage in global aggregate demand. In particular, the growing disconnect between labour incomes and productivity may have affected private consumption and global demand, thereby also reducing private investment. A vicious circle may be at work, with lower demand affecting output and employment, thereby further depressing demand.

 

The global jobs gap corresponded to an estimated $1.218 trillion in lost wages around the world. This is equivalent to approximately 1.2 per cent of total annual global output and approximately 2 per cent of total global consumption.

 

What are the effects of this shortfall in wage incomes in terms of global GDP reduction? In the absence of the current global jobs gap, aggregate global wages in 2013 would have been $1.218 trillion above the actual, observed level. Because workers typically spend a significant share of wages earned, there are important multiplier effects to consider when estimating the impact of wages on overall GDP. 

 

As a result of multiplier effects and the virtuous circle of increased wages, higher consumption, increased profits and investment levels resulting from closing the global jobs gap, an estimated $3.7 trillion would be added to global GDP – equivalent to a one-time, 3.6 per cent boost to global output.

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In sum, there are 61 million fewer people employed globally than would have been employed under pre-crisis conditions and this is not only a direct result of, but in fact perpetuates, subpar global demand. So to those who steadfastly contend that the increasingly deflationary global economic environment is solely attributable to oversupply, we would encourage you to consult with a few of these 61 million jobless individuals who, were they employed, would have generated $1.2 trillion in wages that would have likely added $3.7 trillion to global GDP.