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Wednesday, March 25, 2009

Wrestling with job losses as the recession deepens


In Britain the number of unemployed has reached over 2 million (6.5 percent) and there are fears that the number will rise to over 3 million before the recession ends. In America the rate of unemployment is reported to have risen to 8.1 percent. In European countries that have adopted the euro as their currency, the rate was 8.2 percent. In China many millions have been thrown out of work in the cities as factories close following drastic falls in overseas demand for Chinese exports.

In Japan the rate has been consistently lower than in other advanced countries, but the statistics everywhere are unreliable and the method of counting and registering the unemployed varies considerably from country to country. The impact of unemployment also varies depending on the extent of public assistance for those out of work, on the level of savings that can be drawn down and on the extent of support from family members in work.

Anglo-Saxon politicians and businessmen argue that the relative flexibility of the American and to a lesser extent the British labor market makes it easier to lay off labor in a downturn, but does not act as a deterrent to rehiring when demand revives. Europeans counter this by asserting that the greater protection for workers provided under their laws acts as a valuable cushion in a downturn. They do not accept that labor-market rigidity necessarily means that unemployment is kept high by the way in which rules designed to keep people in work effectively deters employers from taking on more workers when demand revives.

It is unlikely that these two approaches can be reconciled during the next few years. But the extent of unemployment insurance and welfare benefits clearly does lessen the immediate impact of unemployment on individuals and families.

The current recession began in the financial sector, but has spread to manufacturing and, to a lesser extent, to other service industries. The public sector has so far been largely immune, but as tax revenues decline there will inevitably at some stage be a squeeze on public expenditure, which will affect public-sector employment.

In Britain the attractions of work in the financial sector have dissipated and increasing numbers of white-collar staff are losing their jobs. But, perhaps because they have had more of a cushion against adversity, the recession has not yet had such a pronounced effect on consumption in middle-class districts as it has had in industrial areas. In industrial towns there is a dearth of job opportunities and much competition for any vacant post.

In concentrating on the impact of unemployment on consumption and life styles we must not overlook the psychological effects on those who lose their jobs. These effects inevitably vary from person to person, and the amount of moral and financial support given by families and communities. But the psychological damage of unemployment is less in countries where people change jobs fairly frequently than it is in countries like Japan, where continuity of employment is more the norm.

A long period of unemployment can make people fear that they will never get another job. It can also make it more difficult for them to return to work on a regular basis even when opportunities recur. While there are real dangers of extending the dependency culture, which can be created by welfare support, there is no case for a return to 19th-century penalties and degradation for those who are out of work.

Welfare reforms have been implemented in the United States and elsewhere, but it is doubtful whether any country has yet found the right balance between helping those in need and yet not fostering a dependency culture. Entitlements based on insurance are better than hand-outs that are means-tested. Means-testing inevitably discourages saving.

Unemployment inevitably leads to further unemployment. Family tensions rise when expenditure has to be cut. Mental breakdowns and divorce may increase. There is also a danger that increased unemployment will lead to social unrest. The danger is perhaps greatest in China, but no community is likely to be immune from the danger.

The anger in the U.S. and in Britain against the corporate bankers, who by their greed and incompetence are the prime cause of the financial crisis that led to the present recession, has not been dissipated. Indeed it has been stoked in the U.S. by the revelations of obscenely inflated bonuses for staff, who at AIG were responsible for taking many of the risks which lie at the basis of this crisis.

In Britain it has been aggravated by the grossly inflated pension given to the CEO of Royal Bank of Scotland, in which the British government has had to take a 70 percent stake. People who have lost their jobs and their livelihood as a result of actions and failings by greedy bankers want action taken to recover such over- payments. It remains to be seen how far such action can be taken within the law, but every legal effort should be made to bring home to those responsible the enormity of their behavior and force them to repay a major part of their ill-gotten gains.

But we must remember that not all bank staff are fat-cat corporate bankers and in our anger we must not take steps that are outside the legal process. If we do we shall end up with mob rule.

There are already threats of demonstrations against the G20 meeting due to take place in London in early April. These could, if not carefully handled, lead to violence. Protests against globalization are wrong-headed. All economies are increasingly interwoven. It is important that this meeting should be a success in ensuring that the economic crisis is recognized as a global one that requires international action.

This must include continuing measures to deal with failing banks and to stimulate economies so that the financial system starts to move again. More effective international machinery is needed to regulate the way in which banks are run and to protect depositors and borrowers.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.


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