10 Long-term unemployment has indeed risen significantly, which is concerning as long spells of unemployment contribute to skills erosion and prevent building experience on the job. Apart from its financial and social effects on the unemployed, long-term unemployment affects social cohesion, with consequences for economic and social stability. Some 35 percent of all young unemployed have been out of a job for at least six months in advanced economies, compared with 28.5 percent in 2007,<sup>25</sup> and the rate has been rising markedly since 2008—particularly in the peripheral European countries, the United Kingdom, and the United States (figure 4).

There has also been a significant rise in vulnerable employment across regions since the start of the crisis (an additional 21 million people), according to the International Labor Organization. The rise was particularly marked during 2010-11, as some of the unemployed moved to poorly paid jobs in the informal sector that offers little or no unemployment insurance or compensation. About 49 percent of world workers were in vulnerable employment in 2012 (77 percent in South Asia and Sub-Saharan Africa). The number of working poor earning less than US$2 a day increased by 15 million in the Middle East North Africa and Sub-Saharan Africa.

# **3.2  Financial market channel**

The financial market channel has also been at work in transmitting the financial shocks to economic and social indicators (figure 5). There has been a marked decline in cross-border financial flows since the onset of the crisis. After rising spectacularly during the mid-2000s, foreign claims of cross-border banks (particularly of Europe) dropped sharply following the financial crisis and have remained subdued since early 2011. The flow of migrant remittances, which in normal times help reduce vulnerability to domestic shocks and provide a vital protection against poverty (e.g., as in Bangladesh) followed a similar pattern: the rate of growth of remittances dropped sharply in Europe, Latin America and the Caribbean, reflecting the deterioration of economic conditions in Europe and the United States, while remaining strong since 2010 in some regions (South Asia, Middle East and North Africa). Reduced flow of remittances can hurt economies highly dependent on such flows (such as Tajikistan and Kyrgyz Republic, where over 30-40 percent of GDP comes from citizens abroad).<sup>26</sup> Moreover, the ongoing crisis has led several governments to tighten their aid budgets, resulting in a decline in development aid by 2 percent in 2011 and 4 percent in 2012. There has also been a shift in aid allocations away from the poorest countries toward middle-income countries.<sup>27</sup> The reduced availability of financial and aid flows, combined with financial institutions’ continued process of deleveraging, had a dampening effect on the amount of credit extended to the private sector. To adjust to tighter funding conditions and to strengthen their balance sheets, financial institutions, particularly in Europe, reduced lending to the private sector, as well as retrenching from foreign markets.<sup>28</sup> Data also point to an erosion of savings as national authorities have maintained easy monetary conditions since the start of the global financial crisis, with the rate on deposits—a key savings vehicle in developing countries—falling more than the lending rates. The sharp falls in equity prices from early 2008 also had a negative impact on household wealth.

> 25 International Labor Organization 2013. 26 World Bank 2013. 27 OECD 2013.

> 28 Feyen, Ötker-Robe, and Kibuuka 2012 and Feyen and Gonzalez del Mezo 2013.