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This article was first published 11 years ago

Plight of the unemployed around the world

Last updated on: May 23, 2013 12:27 IST

Image: A man, with a sign strapped to his back, uses a megaphone to attract the attention of potential employers as he hands out resumes on Bay Street in the financial district in Toronto, Canada.
Photographs: Mark Blinch/Reuters Chrystia Freeland in San Jose, California

One of the most urgent questions in economics today is the connection between inequality and growth. That is because one of the big economic facts of our time is the surge in income disparity, particularly between those at the very top and everyone else.

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Plight of the unemployed around the world

Image: A person dressed as a bunny walks down the street with a sign in New York City.
Photographs: Shannon Stapleton/Reuters

The other big fact is the recession set off by the financial crisis and the consequent imperative to jump-start economic growth. Figuring out the relationship between these two tent-pole issues is therefore a good way for economists to spend their time.

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Plight of the unemployed around the world

Image: A man holds a paper with a job offer which reads, 'You might want to', as he waits in line to enter a government job centre in Malaga, southern Spain.
Photographs: Jon Nazca/Reuters

There are two main and contradictory ideas about how that relationship might work. One is that inequality is the price of robust economic growth. If the private sector is thriving, the most successful capitalists will be getting very rich.

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Plight of the unemployed around the world

Image: A woman points to a job listing on an employment website at her residence in Sewell, New Jersey, United States.
Photographs: Tim Shaffer/Reuters

Creating a system that allows - indeed, encourages - the best and the brightest to pull away from everyone else is how you shift your economy into its highest gear.

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Plight of the unemployed around the world

Image: Mehdi Kaveh, left, a candidate for casino dealer position at Golden Casino Group has his picture taken by Jef Bauer, Vice-President and General Manager, during a job fair in the Spot tavern in Golden, Colorado, United States.
Photographs: Rick Wilking/Reuters

There is, however, another theory, and it has been winning adherents in the aftermath of the financial crisis. In this view, rising inequality is not a symptom of a fast-growing economy or an incentive that will help create one.

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Plight of the unemployed around the world

Image: Charles Gates gestures while speaking with a potential employer during the Dr Martin Luther King Jr career fair held by the New York State Department of Labor in New York City.
Photographs: Lucas Jackson/Reuters

Instead, too much income inequality crushes economic growth. There are different arguments for why that might happen. One is that high income inequality creates an unstable system that is vulnerable to costly booms and busts.

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Plight of the unemployed around the world

Image: A man wearing a US flag necktie stands in line to talk to prospective employers at the National Capital Region Job Fair sponsored by Virginia Tech University at their branch campus in Falls Church, Virginia, United States.
Photographs: Jonathan Ernst/Reuters

Another is that when too much of the income goes to the very top and not enough goes to the middle, spending slumps - how many yachts does a plutocrat need? - putting a brake on growth.

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Plight of the unemployed around the world

Image: A job seeker looks for work at the near deserted Xintiandi employment centre, in Songgang town, Shenzhen, China.
Photographs: James Pomfret/Reuters

David Howell, a professor of economics at The New School in New York, has written a draft paper for the Center for American Progress, a progressive research group, that investigates the first argument.

Howell argues that the United States and Britain have acted over the past three decades on what he calls the laissez-faire theory, that the equation of rising inequality and increasing gross domestic product is correct.

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Plight of the unemployed around the world

Image: A champagne bucket for members to drop off business cards is displayed as a group of laid-off workers meet during a recruitment event at a pub in New York City.
Photographs: Eric Thayer/Reuters

As Howell puts it, "the laissez-faire case for high inequality is grounded in the belief that growth in output and employment depends mainly on strong incentives to work and invest."

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Plight of the unemployed around the world

Image: Student Miles Spencer, 17, receives feedback on his resume during an interview as part of work readiness training at the Los Angeles Area Chamber of Commerce in California.
Photographs: Patrick T Fallon/Reuters

Howell tested that view by comparing the United States and Britain to their peers. He asked whether "compared to other rich countries, US income inequality has paid off in relatively high growth."

His answer: not particularly. He finds that "there is no simple correlation between our measures of growth and income inequality."

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Plight of the unemployed around the world

Image: A man walks past an employment agency in Nice, France.
Photographs: Eric Gaillard/Reuters

That may come as a surprise to many Americans, who are accustomed to hearing, as Howell explained, "that the US middle class is doing relatively well, at least compared to Europe, because of productivity growth and because we allow higher inequality."

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Plight of the unemployed around the world

Image: Job offers are seen in this illustration in Milan, Italy.
Photographs: Alessandro Garofalo/Reuters

But the reality is that at least some of those allegedly sclerotic European economies, dragged down by their highly redistributive welfare states, have outperformed the United States.

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Plight of the unemployed around the world

Image: Job-hunting students dressed in suits practice swapping business cards during a business manners seminar at a placement centre in Tokyo, Japan.
Photographs: Toru Hanai/Reuters

"What we see is Sweden having really good productivity growth by all measures, despite much more modest increases in inequality and starting at a much lower level," he said.

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Plight of the unemployed around the world

Image: Thousands of job seekers flock to a fair in Chongqing municipality, China.
Photographs: Stringer/Reuters

"The US is anywhere from an OK to middling performer in the Age of Inequality," Howell said, using his term for our era. But while his work suggests inequality is not needed to get growth, he does not show that inequality actually hurts growth either: "I don't show a strong measurable inverse effect."

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Plight of the unemployed around the world

Image: People are seen in a government job centre in Bollullos Mitacion, near Seville, Spain.
Photographs: Marcelo del Pozo/Reuters

Lars Osberg, an economist at Dalhousie University in Nova Scotia, takes on this second argument the case that inequality, at least beyond a certain point, can stifle growth.

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Plight of the unemployed around the world

Image: Pedestrians read recruitment announcements in central London.
Photographs: Alessia Pierdomenico/Reuters

He, too, adopts a comparative lens, looking at Canada, the United States and Mexico. Osberg argues that a growing chasm between those at the very top and everyone else imperils the overall economy.

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Plight of the unemployed around the world

Image: Job seekers prepare for career fair to open at Rutgers University in New Brunswick, New Jersey, United States.
Photographs: Mike Segar/Reuters

His worry is financial instability. "The added savings of the increasingly affluent must be loaned to balance total current expenditure," he writes, "but increasing indebtedness implies financial fragility, periodic financial crises, greater volatility of aggregate income and, as governments respond to mass unemployment with countercyclical fiscal policies, a compounding instability of public finances."

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Plight of the unemployed around the world

Image: People wait in line looking for jobs during a Job Fair at the Miami Dade College in Miami, Florida, United States.
Photographs: Carlos Barria/Reuters

This is a variation of an argument by Raghuram Rajan, a politically center-right professor at the University of Chicago, who has suggested that rising income inequality was one of the drivers of the financial crisis.

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Plight of the unemployed around the world

Image: A placement counsellor gestures to job-seekers at a fair in Nanjing, Jiangsu province, China.
Photographs: Stringer/Reuters

As income inequality increased, and the incomes of the middle class stagnated, the US government responded by increasing the consumer credit available to the middle class.

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Plight of the unemployed around the world

Image: LaShawn McCoy fills out an application for employment as a waitress during a job fair in San Francisco, California, United States.
Photographs: Robert Galbraith/Reuters

In the short term, that was a win-win solution: consumption, and therefore the economy, grew, and the middle class was quiescent because stagnating incomes were masked by increasing consumer debt.

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Plight of the unemployed around the world

Image: A woman holds a door as she waits in line to enter a government job centre in Marbella, southern Spain.
Photographs: Jon Nazca/Reuters

But in the medium term that Goldilocks scenario broke down - the middle class consumption bubble, and the Wall Street bubble it helped finance, popped with devastating consequences.

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Plight of the unemployed around the world

Image: People march in the Charlotte Labor Day Parade in Charlotte, North Carolina, United States.
Photographs: Eric Thayer/Reuters

Both Howell and Osberg are skeptical, at best, of the value of rising income inequality as a driver of economic growth. When you put that conclusion together with the arithmetic of democracy - rising income inequality means a majority of voters are on the losing end of the deal - a political backlash seems inevitable.

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Tags: Osberg , Howell

Plight of the unemployed around the world

Image: Chamika Chandler, left, waits to be interviewed for a waitress or bartender position at a job fair at the Foxy Lady Gentleman's Club in Providence, Rhode Island, United States.
Photographs: Brian Snyder/Reuters

"Go back to the 1920s or the 1870s and economists were worried about the stability of the capitalist system," Osberg said.

"One of the things the 1930s experience teaches us is there are some catastrophic outcomes which can happen."

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Plight of the unemployed around the world

Image: A jobless mother holds her child as she offers to be a 'car jockey' in a main street in Jakarta. Many unemployed Indonesians find work as 'car jockeys', for which they are paid around $1.50 to be car passengers, allowing the driver to use a lane dedicated to cars carrying three or more passengers.
Photographs: Beawiharta/Reuters

The investing class and the academic world are focused on those dangers. "Can capitalism survive?" is one of the trendiest conference topics among red-blooded capitalists and left-leaning professors alike.

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Plight of the unemployed around the world

Image: Women apply make-up as they wait during the job fair for China Eastern Airlines flight attendants in Shanghai, China.
Photographs: Aly Song/Reuters

So far, at the ballot box and on the street, this question has not been as salient. That does not mean it will not be in the future - and in ways we cannot predict.

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Source: REUTERS
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