Carmen Pagés Research Department, IDB Employment and Unemployment in Latin America: Stylized Facts and Implications for the Design of Employment Policies Carmen Pagés Research Department, IDB

The design of employment policies in the region cannot be made in a vacuum….

...To be effective, it needs to take into account recent trends in the labor market as well as the nature of adjustment to aggregate, sectorial and idiosyncratic shocks.

This presentation will review Developments in the labor market of the region during the nineties. II. Patterns of adjustment to cyclical shocks III. Patterns of reallocation of workers and jobs as a response to sectorial and idiosyncratic shocks

Developments during the nineties

In the nineties, higher average growth rates coexisted with rising unemployment rates

This effect was particularly acute in the Southern Cone…

and in the Andean Region

While no particular trend in unemployment was observed in the Mexican and CA region

Looking at individual countries, in at least 6 out of 16 countries, unemployment increased despite higher growth in the nineties

Unemp. increased for different reasons across regions: While most Southern Cone (SC) countries experienced lower employment rates, most Andean countries (AC) saw participation rates rise more than employment rates

Some of the groups with traditionally higher unemployment rates were proportionally less affected… The young to old unemployment ratio fell

Unemployment increased relatively more in the urban areas

While there was no particular trend in the ratio of female to male unemployment rates

Involuntary part-time work also increased during the nineties in most countries Definition: Involuntary part-time work is defined as the share of workers who work less than 30h and wish to work more hours. Source: IDB from household surveys

The share of workers not covered by social security increased

The percentage of self-employed increased in most countries

In short… Despite higher growth, labor markets slacked during the nineties particularly in South America Countries in the MCA region did better in terms of unemployment but the % of self-employment and uncovered workers also increased It is difficult to distinguish whether these developments are TRENDS or the results of BAD CYCLES

II. Adjustment to Aggregate Shocks

Despite the fact that Latin America is more than twice as volatile as the industrial countries, there are much fewer instruments in place to alleviate the welfare costs of fluctuations

How does the labor market adjust and how do workers cope with shocks? Different margins of adjustment: Hours versus employment Wages versus employment Self-employment, domestic service, small firms

The bulk of the adjustment is via workers not via hours worked Source: IDB from Household Surveys

Latin America tends to adjust more via wages and less via reducing employment than industrial regions

Although there are large differences across individual countries

The share of employment in large firms tends to decline in all countries in a negative shock…

Self-employment and domestic service are the buffer sectors Self-employment and domestic service are the buffer sectors. In some countries, the share of small firms is also a buffer, in others not.

…..But its importance as a stabilizer is declining over time The share of public employment is also counter-cyclical in most countries. …..But its importance as a stabilizer is declining over time

III. Adjustment to sectorial and idiosyncratic shocks Aggregate shocks account for only a small fraction of total reallocation in the labor market B. Reallocation is a powerful engine of growth C. However, reallocation can be costly for workers

Aggregate shocks account for a small fraction of total labor reallocation in the labor market

Source: Industrial countries: Scarpetta (2002) , Chile: IDB In many countries, productivity growth within existing firms explains only a fraction of total productivity growth Source: Industrial countries: Scarpetta (2002) , Chile: IDB

Involuntary reallocation can be costly for workers It may take workers a long time to find a new job (However, unemployment duration in LAC is short with the exception of Argentina) Displaced workers may have to accept larger wage cuts than non-reallocating workers Recent studies :Kaplan et al(2003, Mexico) and N. Menezes (2003, Brazil) find substantial wage losses among displaced workers

Implications for the design of employment policies The slackness of labor markets increases the urgency of dealing with employment problems. As unemployment becomes a more important issue, countries should devise policies that specifically target unemployment. The structure of the labor market and its way of adjustment is an important key element to consider. Similar shocks may produce different unemployment responses in different countries and place different demands on public policy.

Implications for the design of employment policies Workers cannot afford searching for productive jobs; this imposes an income cost and an efficiency cost to the economy. A large portion of adjustment in the large market seems to be done through self-employment. Employment policies should facilitate the transition from self-employment to wage employment. F. Preventing reallocation to protect workers may have detrimental effects on growth. Other mechanisms seem preferable.