The International Labour Organisation (ILO) is warning today that the world economy is slipping into a dangerous third phase of the global economic crisis, where austerity leads to further job losses and lower growth.

The ILO calls for stimulus measures based mostly on tax rises, to boost employment without raising public sector debt.

The ILO’s report paints a stark picture of a global economy beginning to fall off a cliff.

Things are already bad enough, it says, with global youth unemployment at 12.7%, three times the adult rate, 50% of women workers in vulnerable employment and 600 million new jobs needed over the next decade to meet growing populations.

But it predicts worse to come. Several indicators suggest capital is being eroded, and working people are disappearing from the labour market: 1% of the world’s 2.9 billion-strong workforce has simply dropped out of the figures during the crisis.

The historic convergence of living standards across countries is slowing as inequality increases, and “high unemployment and low wage growth are reducing demand for goods and services”.

The ILO identifies two phases of the crisis so far: in phase one,

“the initial shock of the crisis was met by co-ordinated fiscal and monetary stimulus, which led to recovery in growth and avoided further contraction and higher unemployment, but proved insufficient to bring about sustainable jobs recovery…

In the second stage, higher public deficits and sovereign debt problems led to increased austerity measures in an attempt to bring confidence to capital markets. The tightening of policies and the persistently high levels of unemployment have increased the potential for a dangerous third stage, characterised by increased risk of a second dip in growth and employment in some of the advanced economies, exacerbating the severe labour market distress tha has emerged since the onset of the crisis.”

The ILO proposes a response based on globally co-ordinated regulation of the financial system, targeted stimulus measures to boost employment and encourage investment, “without putting fiscal stability at risk”, by raising taxes to pay for increased public expenditure, using the balanced-budget multiplier.

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A longer version of this is on ToUCstone blog

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