Unemployment rates in the world's developed economies likely will remain high through 2011, suggesting that central banks should keep interest rates low and that governments should be ready to spend on job creation, the International Monetary Fund says.
In an analysis of the global recession on labour markets, the IMF predicts that the average unemployment rate of a group of the 14 rich countries that includes Canada will be around 9 per cent at the end of 2011, compared with about 6 per cent at the end of 2008.
"One legacy of the Great Recession will likely be persistently high unemployment rates in several advanced economies," the IMF report said. "Because high unemployment can quickly become a structural problem, this could lead to serious political and social challenges."
The nature of the global recession explains the persistent unemployment rates.
Typically, it takes about five quarters for the unemployment rate to peak after economic output begins to rebound after a recession. However, hiring takes longer to recover after downturns associated with financial crises and housing busts. The latest global recession featured both.
The best way to combat persistently high unemployment rates is with monetary policy and fiscal policy that encourages output, the IMF said. It remains important to restore the strength of financial institutions because many labour intensive industries, such as construction, depend on credit, the IMF said.
The report, called "Unemployment Dynamics During Recessions and Recoveries: Okun's Law and Beyond," will be published as a chapter in the IMF's next economic update, which is set for release next week. The IMF released the chapter in advance on Wednesday.
The IMF's conclusions suggest central banks will be reluctant to lift interest rates from their current rock-bottom levels as quickly as they might under more normal conditions. Finance ministers, too, will face pressure to maintain stimulus spending to keep high unemployment rates from becoming entrenched.
"The gist of it is, yes, we need accommodative policies still," Jorg Decressin, the head of the IMF's world economic studies division, said at press conference.