GOOD JOBS WANTED : Labor Markets in Latin America GOOD JOBS WANTED : Labor Markets in Latin America Inter-American Development Bank Washington DC. October 2004 Economic and Social Progress Report 2004 Inter American Development Bank

Unemployment, low wages, and employment instability 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?

The usual suspects <Labor supply äThe increase in labor supply is not the root of the problem. In fact, it is a source of economic growth. <Structural reforms äDid not have the expected results <External shocks äThe labor market in the region has mostly adjusted through wage variation with little unemployment, but this seems to be changing.

The usual suspects <Technology äThe problem is not technology, but the lack of it. <Inequality äIncome inequality reflects education inequality, but education in and by itself will not eliminate poverty.

… and some new. < Labor reallocation < Regulations

6. Labor reallocation is very high in the region

Job turnover is very high and comparable to the one observed in other parts of the world Average Annual Gross Job Flows (% of employment) Germany ( ) Estonia ( ) Finland ( ) U.S.A. ( ) Italy ( ) France ( ) Canada ( ) Sweden ( ) New Zealand ( ) Denmark ( ) Brazil ( ) Mexico ( ) Gross Job CreationEntryGross Job DestructionExit Avg. Net Change in Employment -0.1

Across the world, job turnover is an important engine of productivity growth Labor Productivity Growth Decomposition Annual Growth Rate Within-firm productivity growth Output reallocation amongst existing firms Entry of firms Exit of firms Finland France Germany Italy Netherlands Portugal UK United States Chile Colombia

But rellocation flows impose costs on 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 wage 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 costs....

América Latina is highly regulated on paper, but… Employment conditions index (0-1) 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. Percentage of wage workers without social security benefits, late 90’s 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 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 ?

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: äIt’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 ä30% of workers change jobs every year äMany lose income in the process <Income protection is not a free good. äIt has efficiency and equity costs. äThe 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 äDo not create incentives against work or production. äCoverage as wide as possible, including workers in non regulated contracts. äWith 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 register, enforce, and evaluate the impact of policies and regulations. <A good design of collective bargaining rules helps to improve productivity. <Innovation in enforcement should involve the State and private agents.