GOOD JOBS WANTEDGOOD JOBS WANTED: : Labor Markets in Latin AmericaLabor Markets in Latin America

Inter-American Development Bank

Washington DC. October 2004Washington DC. October 2004Economic and Social Progress Report 2004Economic and Social Progress Report 2004Inter American Development BankInter American Development Bank

Unemployment, low wages, and employment instability Unemployment, low wages, and employment instability are the main labor problems in Latin America.are the main labor problems in Latin America.

Most important problem in your country

0% 5% 10% 15% 20% 25%

Discriminación racial

Medio ambiente

Transporte

Problemas de vivienda

Tráfico de drogas

Problemas de salud

Violaciones derechos humanoa

Consumo de drogas

Falta de oportunidades para jóvenes

Inflación

Baja calidad en la educación

Terrorismo/ violencia política

Bajos salarios

Inestabilidad laboral

Delincuencia /Insecuridad

Pobreza

Corrupción

Desempleo

What is going on?What is going on?

The usual suspects Labor supply

The increase in labor supply is not the root of The increase in labor supply is not the root of the problem. In fact, it is a source of economic the problem. In fact, it is a source of economic growth.growth.

Structural reforms Did not have the expected resultsDid not have the expected results

External shocks The labor market in the region has mostly The labor market in the region has mostly

adjusted through wage variation with little adjusted through wage variation with little unemployment, but this seems to be changing. unemployment, but this seems to be changing.

The usual suspects

Technology The problem is not technology, but the lack of The problem is not technology, but the lack of

it.it.

Inequality Income inequality reflects education Income inequality reflects education

inequality, but education in and by itself will inequality, but education in and by itself will not eliminate poverty. not eliminate poverty.

… and some new.

Labor reallocation

Regulations

6. Labor reallocation is very high in 6. Labor reallocation is very high in the regionthe region

Job turnover is very high and comparable to the Job turnover is very high and comparable to the one observed in other parts of the worldone observed in other parts of the world

Average Annual Gross Job Flows (% of employment)

1.5

-3.2

-1.6

1.5

1.2

0.7

2.6

-4.1

2.2

1.1

6.0

-25 -20 -15 -10 -5 0 5 10 15 20 25

Germany (1983-1990)

Estonia (1992-1994)

Finland (1986-1991)

U.S.A. (1979-1983)

Italy (1984-1992)

France (1984-1992)

Canada (1983-1991)

Sweden (1985-1992)

New Zealand (1987-1992)

Denmark (1983-1989)

Brazil (1991-2000)

Mexico (1994-2000)

Gross Job CreationEntryGross Job Destruction Exit Avg. Net Change in Employment

-0.1

Across the world, job turnover is an important Across the world, job turnover is an important engine of productivity growthengine of productivity growth

Labor Productivity Growth DecompositionAnnual Growth

Rate

Within-firm productivity growth

Output reallocation amongst existing firms

Entry of firms Exit of firms

5.3

4.1

4.33.9

2.1

2.3

5.25.0

4.7

2.53.1

1.63.0

3.0

5.3

2.3

-75 -25 25 75 125 175

1987-92Finland 1989-94

France 1987-92

Germany 1992-97

1987-92Italy 1992-97

1987-92Netherlands 1992-97

1987-1992Portugal 1992-1997

1987-92UK 1992-97

1987-92United States 1992-97

Chile 1992-97

Colombia 1992-97

But rellocation flows impose costs But rellocation flows impose costs on workerson workers

During the 90’s, employment unemployment flows in América Latina were twice those of the US (and workers do not have protection in developing countries).

The likelihood was higher for women, youth, unskilled and workers without social security.

Workers that are involuntarily separated suffer Workers that are involuntarily separated suffer wage losses after reemploymentwage losses after reemployment

Involuntary unemployed in t+1

-20% -18% -16% -14% -12% -10% -8% -6% -4% -2% 0%

Change in monthly wage

Mexico

Argentina

Change in hourly wage

7. Regulations generate costs7. Regulations generate costs........

América Latina is highly regulated on paper, but…América Latina is highly regulated on paper, but…

Employment conditions index (0-1)

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Jamaica

Uruguay

Chile

Ecuador

Argentina

Perú

Rep. Dominicana

México

Colombia

Panamá

Brasil

Venezuela

Bolivia

Anglosajones industriales

Sur de Asia

Africa Sub-Sahariana

Medio oriente y norte de Africa

Europa oriental y Asia central

América Latina y el Caribe

Industrializados Europa continental

Este de Asia y Pacífico

… … a large fraction of workers are not covered.a large fraction of workers are not covered.

Percentage of wage workers without social security benefits, late 90’s

0 10 20 30 40 50 60 70 80

Costa Rica 2000

Chile1998

Colombia1999

México 1999

Brasil 1999

Argentina 2001

Venezuela 1998

El Salvador 1998

Rep. Dominicana 1998

Bolivia 1999

Perú 2000

Nicaragua 2001

There is abundant evidence about the There is abundant evidence about the costs of regulation.costs of regulation.

Social security contributions and other non wage costs reduce employment and increase unemployment.

Mico and Pagés (2004) point that job security regulation reduce reallocaction and the ability of firms to adjust. These effects seem to be more pronounced in sectors with volatile demand or subject to frequent technological shocks.

Job security regulations reduce youth and unskilled employment.

Job security may increase wage rigidity.

What can we do ?What can we do ?

Labor policies and the social contract Labor and Social policies:

- Differences in focalization, nature and purpose

Without adequate registries and enforcement capacity there are no labor policies:

It’s impossible to create UI when the labor authority doesn’t know whether or where a beneficiary works

The region spends very little in labor policies

The dilemma of labor policies

Worker reallocation is a powerful motor of growth 30% of workers change jobs every year Many lose income in the process

Income protection is not a free good. It has efficiency and equity costs. The ability to induce compliance with labor

regulations is crucial to sustain the social contract.

Labor policies in a dynamic world

Reduce macro volatility

Ease the reallocation process with LIS

Provide feasible and adequate level of income protection

Increase the population marketable skills

Improve the labor administration capacity to register, enforce and evaluate labor laws and regulations

Labor intermediation

A permanent function

Implemented through a complex network of public and private providers, with lots of referral capabilities.

Inclusive to improve the opportunities for poor workers.

Income protection

Set of systems adapted to the variety of labor insertions of the population.

3 fundamental criteria Do not create incentives against work or production. Coverage as wide as possible, including workers in

non regulated contracts. With counter-cyclical funding.

Training systems

The priority is to increase the attrative, relevance, and pertinence of basic education.

The State can help being the strong and transparente regulator of a variety of public and private suppliers.

Local experimentarion can help meaningful participation of the social partners.

The labor authority

The labor authority needs to increase its capability to The labor authority needs to increase its capability to register, enforce, and evaluate the impact of policies register, enforce, and evaluate the impact of policies and regulations.and regulations.

A good design of collective bargaining rules helps to A good design of collective bargaining rules helps to improve productivity.improve productivity.

Innovation in enforcement should involve the State Innovation in enforcement should involve the State and private agents.and private agents.