IADB Dealing with risk: Implementing employment policies under fiscal constraints Milan, March 23, 2003 What went on in Latin America Labor Markets? Comments Stefano Scarpetta Labor Advisor, World Bank

Main findings of the paper  This is a comprehensive review of labor market conditions and developments in Latin America  It depicts a rather gloomy picture: –Increase in unemployment rates: often above 10% –All groups are facing a higher joblessness risk –Increase in female participation (from low levels) but falls in male employment rates –Stagnant and in some cases even falling real wages –Many workers earn “poverty wages”, with a rising share in some countries

Some issues on labor market developments in Latin America –Unemployment patterns: is the increase of LF participation the main driver? Was LF participation also driven, as argued in the paper, by the need to supplement household income affected by stagnant and more uncertain wages? –How can we explain the significant differences in LM patterns across countries in the region? The paper points at downward wage flexibility as one factor reducing unemployment pressures (e.g. Mexico CA compared to Chile and Brazil)… … and outward migration (Mexico) –Is low pay an absolute or a relative concept? The paper uses the $1/hour as a benchmark to define low pay and to assess size of the informal sector, but PPP GDP/capita are quite different across countries

What went wrong in Latin American labor markets?  The background: –Relatively strong growth, even if marked by some crises (Tequila crisis, Argentina crisis) –Significant efforts of structural adjustment Including privatization and regulatory reforms –But relatively low “employment content of growth”… –…increases in the “informalization” of the economy

Was the labor market at the center of the development agenda?  Probably the answer is “NO” –E.g. of the 183 structural adj. projects of WB over in 77 countries only 13 had at least one LM conditions  Labor market issues rank high amongst the concerns of enterprises: –e.g. WB surveys of business environment in more than 80 countries suggest that in many of them (Brazil, Chile, Colombia, Venezuela, Bolivia, Argentina etc.), LM is the first or second (out of 8) of the main obstacles for business activity and growth.  Labor market issues also of major concerns for households –Less surprising, household surveys reveal that concerns about job availability, wages and job security are at the top of concerns of households

What is the role of LM for development?  At the risk of oversimplifying, most of the effort in the LM area has been to protect social expenditures and improve their effectiveness in order to mitigate potential adverse effects of structural adjustments on the poor and other vulnerable groups  We should perhaps know more about how labor markets fit into a comprehensive development strategy: –Labor is the market where the employment shocks related to (and often required by) structural reforms must be handled –Labor is most often the only asset of poor people –A labor market that facilitates job creation and increases in productivity is a key ingredient in a business climate where new firms are created and private agents find the proper incentives to invest and innovate – Labor markets interact with product markets and such interactions affect firm creation and destruction, investment in physical and human capital, adoption of new technologies, and foreign direct investment. – Moreover, acting on one front (i.e. product and financial markets) but not on the other (labor market) may jeopardize the results reforms