17 December 2021
Published on 1 December 2021, the latest OECD Economic Outlook confirms that the global economy is in recovery, while the world enters the third year of COVID-19. Yet, the optimistic forecast seems somewhat more cautious than in previous editions, with more downside than upside risks to the OECD central growth scenario.
The economic rebound triggered by the restart of economic activity in most countries has lost momentum, due to supply chain bottlenecks, rising inflation and the emergence of new COVID-19 mutations. The OECD believes most advanced economies to return to 2019 GDP levels by 2023, but this trend is well below pre-pandemic growth projections, signifying a considerable loss in income for most households.
Most important, increasing inequality between and within countries is becoming an entrenched phenomenon in the current recovery. Countries with adequate health systems and access to COVID-19 vaccines are recovering faster than those without, particularly in the Global South (Figure 1). Sectoral differences play a role within single economies, with some sectors reopening or better adapting to the changing conditions imposed by COVID-19, whereas others, mostly contact-intensive sectors, are still facing difficulties in returning to pre-pandemic levels. While the degree of permanent structural change that COVID-19 will bring across sectors is hard to assess yet, negative long-term consequences will be considerable, particularly for workers in low-skilled jobs that the crisis will make redundant.
Figure 1 – A diverging economic recovery
By the third quarter of 2021, 7.5 million more workers were out of employment than in fourth quarter of 2019. Even where employment rates have recovered to pre-crisis level, the total number of hours worked is still below that of 2019 (Figure 2).
Figure 2 – The labour market lags behind GDP recovery in most OECD countries (percentage change between 2019Q4 and 2021Q2)
The OECD also notices an important drop in the size of the labour force, particularly in Latin American countries, the United States, Turkey and Israel, with many workers deciding to retire early. Yet, the most important phenomenon is that of long-term unemployed who stopped searching for jobs in the context of on-and-off restrictions to economic activity.
Currently, there is a rising labour shortage in some markets and sectors, particularly in the United States. This is due to halted migration workforce streams, due to barriers to physical cross-border movement amid the COVID-19 pandemic, and the lack of widespread firm-worker preservation mechanisms (a.k.a. job retention schemes) in the US, compared to many European countries for example. Yet, it is not enough to put pressure on real wages, which according to OECD data will remain stagnant in the coming period (Figures 3 and 4). Under the central growth scenario projected by the OECD, employment rates are expected to recover to pre-crisis levels by end of 2022.
Figure 3 – Aggregate wage pressures remain feeble despite rising labour demand
Figure 4 – Limited wage growth projections despite rising inflation expectations
Throughout this edition of the Economic Outlook, inflation returns as an important downside risk factor, if it proves stronger and longer lasting than the OECD expects. Factors that could lead to this include prolonged supply chain frictions (demand outpacing supply), entrenched higher inflation expectations, broad-based diffusion of price increases across services and products, increased housing prices and tight labour market conditions.
Focusing on the latter, the OECD recalls the 1970s scenario, in which sustained energy and product inflation triggered a constant demand for rising wages and price inflation for years. The Economic Outlook reassures the readers that this should not be the case today, because of «changes in labour market institutions since the 1970s», most notably a «decline in coverage of collective bargaining agreements, the removal of many automatic wage indexation mechanisms and a reduction in employees’ bargaining power due to lower union membership».
What the OECD fails to notice is that while the erosion of labour market institutions might indeed limit inflation spikes, it is not only a “neutralised risk”. It also represents a considerable issue in setting single economies back on track, by rebalancing bargaining power between workers and employers, securing higher real income, boosting aggregate demand and reducing spiking income inequality. Recent OECD evidence shows indeed that one third of overall wage inequality across firms is the result of excessive wage-setting power by the employers in existing conditions of labour market monopsony, rather than a reflection of labour productivity and skills. Addressing these problems, including through strengthening collective bargaining mechanisms to re-balance workers and employers wage-setting power, should represent a key policy priority for most OECD countries, rather than a footnote to inflation consideration issues.
To support the recovery, the OECD reiterates the policy mix presented in recent editions of the Economic Outlook: