Employment and Unemployment in Latin America : Stylized Facts and Some Explanatory Hypothesis Carmen Pagés Research Department, IADB

Labor Market related problems consistently rank first in people’s concerns

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

In many countries, participacion increased faster than population, in others employment/Pop rates declined

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 rural 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 many 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 AmericaDespite 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 increasedCountries 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 CYCLESIt is difficult to distinguish whether these developments are TRENDS or the results of BAD CYCLES

What does explain increase in U? Structural Reforms? Technological transformations? Bad Institutions? Shocks? Increased sensitivity to shocks?

Structural Reforms? employment demandAvailable research suggests that effect of reforms on employment demand is either small or zero. reallocation.No effect of reforms on labor market reallocation.

Technological Change? So far, not much evidence of labor-saving technological change Cardenas y Bernal, 2003 (Colombia); Martinez, Morales y Valdés (2000) y Cowan et al. (2003) (Chile) …but more research required

Poor Labor Market Regulations and Institutions? Dismissal Costs? Non Wage Labor Costs?

Latin America is highly regulated

And contrary to widespread belief in most countries, JS regulations increased…

lower employmenthigher unemploymentHowever research is not conclusive on whether high and increasing JS regulations are associated to lower employment and higher unemployment

Social Security contributions and other payroll taxes increased during the nineties Evidence for Latin America suggests that increase in SS taxes reduce labor demand and increases unemployment. It is unclear what percentage of increase in U can be explained by this fact.

Shocks? Employment & U moves with Shocks as expected However, Latin America had huge shocks in the eighties and U was lower. In fact, output volatility has not changed much across decades. One important shock that deserves more research is that growth of LF which is picking during the nineties in most countries But….. this explains response of E, not U!But….. this explains response of E, not U!

Low wage adjustment to shocks?

Although there are large differences across countries and co. with low elasticity tend to be countries with high unemployment

Higher elasticity to shocks? Inflation stabilization may have reduced wage adjustments Higher adjustment of employment for a given shock because: Less directed credit, low access to capital Lower rents in the product market

In summary Poor labor market outcomes in Latin America (poorer than growth outcomes) Research and policy makers have not paid enough attention to this topic while it is a high priority for the population Available research points to the effect of shocks not trends, however shocks alone cannot explain the difference between the eighties and the nineties.