Chief of Labor Markets Unit The challenge of creating good jobs in Latin America: Recent trends & policy options Carmen Pagés Chief of Labor Markets Unit Inter-American Development Bank

This presentation: Unemployment & Underemployment in LAC Explaining the good jobs deficit in LAC Addressing the good job deficit in LAC

1. Unemployment and underemployment in LAC

On average, unemployment in LAC is lower than in OECD countries, but not much lower… Average OECD: 8.5% Average LAC: 7.5% Source: Own elaboration from LAC household surveys and OECD data; OCDE 2010, LAC Circa 2009

Youth unemployment is also below, but close to OECD levels… Source: Own elaboration from LAC household surveys and OECD data; OCDE 2010, LAC Circa 2009

and underemployment is much higher… Share of total Employment Underemployed Underemployment: Share of workers that work less than 30 hours but willing to work longer Source: Own elaboration from LAC household surveys and OECD data; OCDE 2010, LAC Circa 2009

And most jobs are created in the informal sector… Composition of new job creation

And within the formal sector, half or more of the jobs are temporary… Composition of new job creation 9% 21% 32% 12% 21% 33%

2. Explaining the good jobs deficit…

GDP growth is the engine of job creation, and productivity growth is the engine of GDP growth. Evolution of relative GDPpc, TFP, and Factor accumulation, vs US It is clear that GDP pc follows TPF.

Productivity growth in LAC lags other parts of the world Evolution of TFP ( Index1960=1) Developed Countries 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 South East Asia LAC US

Productivity growth lags in manufacturing, and more importantly in services

Productivity gaps are highest in the service sector…

Services have grown to be 60% of employment but most jobs in this sector are of low productivity  informal

Productivity is higher in larger firms…

and there is a strong association between productivity and informality

90% in El Salvador 120% in Mexico Counterfactual: Increasing share of medium and large firms, would increase productivity by.. 90% in El Salvador 120% in Mexico

In sum, low productivity growth hampers the creation of good quality jobs… Most jobs created in micro firms of low productivity that survive being informal. Need to discern whether: Insufficient supply of good firms that can grow and create good jobs in the process. Insufficient creation of large, productive companies.

3. Addressing the good jobs deficit.

How to improve productivity? A number of policies can help improve productivity & good job creation in the region: Reducing transportation costs that prevent productive firms from growing Improving tax regimes that prevent productive firms from growing Promoting innovation that prevent firms from growing in productivity But also, need to improve labor policy

Labor policy In the face of precariousness, informality and temporality many labor authorities resort to tighten (or attempt to tighten) their labor laws… But on paper, restrictions to temporary employment, informality and other forms of precarious work are already very high.. Although often not well enforced… And for a reason… with low productivity compliance is not an option, the choice is between precariousness or unemployment.

Instead labor policy should go to the root of the problem and foster productivity growth: Improving training systems Redesigning social insurance

The % of LF that benefits from training is low

Training systems suffer from: Low quality Low pertinence & relation to needs of firms Information problems

Improving training systems: Increase quality control: (M&E, follow up graduates, skill certification, accreditation). Improve information about the system: Who is doing well, who is not?. What professions pay more? Increase pertinence: Increase involvement of private sector to define training contents. Increase competition or improve regulation. Co-financing

Social insurance systems: Finance health & pensions with high taxes on labor. Mandate very high employment protection, but in most countries no UI. Reach only a minority. New wave of non-contributory programs for informal. Reduce incentives to hire in the formal sector & increases informality. Reduce productivity

Improving SI Universal Coverage funded with broader base taxes Advantages: (specially in health) It covers everyone, all the time, with the same benefits It reduces distortions in the labor market It allows for an integrated health system Disadvantages: It is fiscally costly, but due to reduction in distortions could be affordable. Levy et al, 2011

Improving SI Subsidizing SS for low wage workers Advantages: It reduces distortions in the labor market It allows to keep contributory system Disadvantages: It may lead to underreporting of wages

Improving SI Reforming EPL to become more like UI. Pre-financing: Individual accounts or contributions to a fund. Improving ALMP (so workers find jobs faster) Better Intermediation systems Better job insertion programs

Conclusions In order to create higher quality jobs, Latin America needs to increase the growth of productivity… …particularly in the fast growing service sector. Improving training Modernizing social insurance schemes(pension, health, , EPL and UI) –which prevent companies from hiring, particularly low skilled labor.