Employment, Wages and Exclusion IX Hemispheric Meeting Poverty and Social Protection Network Carmen Pagés September 2007 Inter-American Development Bank Research Department

In this presentation: 1.Job creation 2.Wages and low income jobs 3.Unstable jobs 4.Informal employment and lack of social protection 5.What factors influence the low quality of jobs in LAC? 6.How can job quality be improved in LAC? Many of the jobs created in LAC are of low quality (low wages, high turnover and lack of social security coverage.) Improving job quality requires working on many fronts

Job Creation Source: Pages, Pierre and Scarpetta, 2006

Job Creation: Country Data Jobs without productivity Jobs with productivity Growth without jobs Source: Pages, Pierre and Scarpetta, 2006

Compared to the rest of the world, countries in the region generate more jobs and have lower productivity growth. Source: Pages, Pierre and Scarpetta, 2006

That is to say… With the exception of a few countries (Argentina, Uruguay, Jamaica, Chile, Colombia), growth without jobs doesn’t exist In reality, for the amount of growth in the region, many jobs are generated This means that the jobs created are of low- quality and low-productivity

In many countries the proportion of low-income jobs grew Low-income jobs = jobs where workers with average hours and an average-sized family can afford less than $2 PPP per person per day. Source: Marquez and Prada, 2007

Many of these workers are poor, but not all.

However.... There is an extremely strong correlation between poverty and the proportion of low- income workers (more than 0.9 in half of the countries, and more than 0.7 in all but three cases) This means that the evolution of poverty in LAC is mostly determined by the evolution of the job market for low-income workers Source: Pagés and Prada, 2007

The probability of having a low-income job is greater for: Women Young people People with lower income People in rural areas and those that work in agriculture But this trend is growing faster for men, adults and workers with a higher level of education, i.e., the phenomenon is becoming more generalized. Source: Márquez and Prada, 2007

A large and often growing proportion of workers are not affiliated with social security Source: SEDLAC

Non-affliliation mainly affects workers who: are young are married women or single men have large families earn low wages work part time work in small companies work in agriculture or construction Source: Auerbach, Genoni, and Pages (2007)

However, lack of coverage is not always synonymous with exclusion: many workers choose not to be covered Variable Self- Employed Salaried worker in a small Salaried worker in a company with > 4 employees All Contributing to SS Not contributing to SS Rationed out* * Those who allege they don’t contribute because of the company’s financial problems or a condition imposed by the employer Source: Social Protection Survey (EPS), Chile company

Jobs are unstable In Peru, 26% of workers in the EPS experience a period of unemployment every year. Source: INEI, 2001 positions

And there is great mobility between the formal and informal sectors Source: Duryea, Márquez, Pagés and Scarpetta, 2006

Which affects the design of social policies High mobility is associated with a low density of contributions to social security Contribution density throughout labor history, Chile Source: Berstein, Larraín and Pino (2006)

In short: Low-quality of employment measured by wages, instability and social protection Although many workers seem to choose jobs where it is easier to avoid paying a high percentage of their salary into social security However, this is sub-optimal from the State’s point of view, and may be a cause of low productivity growth

Which factors determine the low quality of jobs in LAC? Low productivity growth slows down wage increases Commercial liberalization reduces the demand for less qualified workers Few incentives for companies and workers to establish a formal contract –Little capacity to enforce the law in small companies –The high cost of firing someone encourages temporary contracts –High cost of social security –Growing possibility of receiving some of these services for free or at a low cost if and only if the individual does not participate in social security

Difference in monitoring between small and large companies is greater in LAC than in other regions in the world Source: Pagés, Pierre and Scarpetta (2006 )

High costs of SS

High costs: lessons learned from Turkey’s experience lowering the SS contribution Turkey subsidized the contribution for companies in low-income provinces that registered a certain amount of workers. Observations: –Important increase in formal employment, with a registered employment elasticity of 0.5 (i.e., a 10-point decrease in the contribution would increase employment by 5%) –It is not clear whether total employment increased, but it is clear that informal employment decreased. –The affect of a contribution change in formal employment is greater for low-income workers, who tend to see social security more as a tax. –But, subsidizing the contribution is expensive, as it is difficult to target.

The preference for informal employment can reduce productive growth Companies remain small and informal to avoid costs –But informal companies have less access to capital, public goods and exporting, which is detrimental to investing, innovation and productivity growth

What can be done to improve the quality of generated jobs? Improve incentives for public and private investing, through policies to improve the business environment Create public policies that incentivize companies to create high-quality jobs. –Example: Policies that favor “self-discovery” and exporting, rather than a guarantee of high-quality job creation –Another example: Reducing the cost of firing when companies that generate permanent jobs are rewarded/subsidized

What can be done to improve the quality of generated jobs? (II) Find ways to reduce costs and increase the demand for social security –Simplify regulations and substantially improve monitoring. –Starting with general taxes, explore financing options for basic service provision to eliminate incentives for informal employment; For example, pay the contribution that corresponds to the minimum taxable income amount in full. –Improve information about pension and financial issues.

Promote labor policies that improve wages Minimum wage is an example of such a policy but only works in certain cases…in others it causes unemployment. Negative tax policies (i.e., when a poor worker’s earnings are supplemented) – subject to general income – less distorting than labor policies based on having formal employment, or social policies based on having informal employment

In conclusion: Low-quality jobs are a result of low growth in productivity and perverse incentives for informality for both companies and workers. To improve job quality we must incentivize greater productivity growth and correct incentives for informality, by simplifying regulations, improving control, and utilizing general taxes to finance social protection for all.

In conclusion: We must escape the dynamic of looking for alternative systems of social protection for “excluded people,” and consider systems of protection – financed by general taxes – that do not distinguish between formal and informal employment.