Labour Markets, Institutions and Inequality

Labour Markets, Institutions and Inequality

Building Just Societies in the 21st Century

Edited by Janine Berg

Labour market institutions, including collective bargaining, the regulation of employment contracts and social protection policies, are instrumental for improving the well-being of workers, their families and society. In many countries, these institutions have been eroded, whilst in other countries they do not exist at all.

Chapter 3: Renewing the full employment compact: issues, evidence and policy implications

Iyanatul Islam and Martina Hengge

Subjects: development studies, development economics, economics and finance, development economics, labour economics, social policy and sociology, labour policy


The basic premise of this chapter is that governments across the world have a responsibility to ensure that all those willing and able to work have ample opportunities to do so at living wages and under safe and secure working conditions. This might be called the ‘full employment compact’. It bears the intellectual imprint of Keynesian economics. The compact was ushered in in the wake of the Beveridge Report in the UK just after World War II (Abel-Smith, 1992). It also inspired the United States government to adopt the notion of ‘maximum employment’ as a key policy goal. In the mid-1960s, the International Labour Organization (ILO) enshrined the notion of ‘full, productive and freely chosen employment’ in one of its key conventions. The chapter argues that the full employment compact that held sway from the end of World War II to the early 1970s coincided with a golden era of equitable growth in the developed world. The oil price shock-induced ‘stagflation’ of the 1970s eventually led to the emergence of a conservative strain of macroeconomics that displaced full employment as a core policy goal. Ironically, this displacement also coincided with an increase in inequality in most OECD countries between the mid-1980s and the late 2000s, insufficient supply of good jobs as well as the steady erosion of the bargaining power of workers.

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