The imprudence of labour market flexibilization in a fiscally austere world


  • A preliminary version of this article was presented at the UN/DESA/DPAD Seminar held in New York, NY, on 16 March 2012. The authors greatly appreciate suggestions and comments on earlier drafts by Jane D'Arista, Francis Cripps, Alberto Gabriele, James K. Galbraith, Jayati Ghosh, George Irvin, Marc Lavoie, Malcolm Sawyer, Servaas Storm, Lance Taylor and Matías Vernengo, as well as the editorial revisions by Laura Dix. The authors take full responsibility for any shortcomings that may remain. The views expressed herein are those of the authors and do not necessarily reflect those of the United Nations Secretariat.

  • Responsibility for opinions expressed in signed articles rests solely with their authors, and publication does not constitute an endorsement by the ILO.


This article assesses the effects of combining fiscal austerity with policies aimed at reducing labour costs and, in doing so, sheds new light on current policy debates. Taking a global perspective, the authors explore the aggregation problem by proposing a stylized analytical macro-model with explicit distribution dynamics. In this framework, flexibilization policies that suppress the labour share trigger global feedbacks that result in a downward spiral, with contraction even in export-led economies. The initial gains of more competitive economies are shown to be ephemeral. In the long term, the world economy is essentially wage-led and responds positively to coordinated Keynesian stimuli.