GOOD JOBS WANTED Labor Markets in Latin America

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

Unemployment, low wages and employment instability are the main sources of concern for Latin Americans Most pressing problem in your country Unemployment Corruption Poverty Delinquence /Insecurity Employment Instability Low wages Terrorism/Political Violence Low quality of Education Inflation Lack of opportunities for youth Drug Consumption Human Rights Violations Health Problems Drug traffic Housing problems Transport Environment Racial Discrimination 0% 5% 10% 15% 20% 25%

WHAT IS GOING ON?

1. Labor Supply: The increasing supply of labor is not the root of the problem. . . it is a source of economic growth - Structural Reforms: Did not have the expected effects - External Shocks: Labor markets in the region adjust to shocks mostly through wages. . . but this appears to be changing

- Technology: The problem is not the technology. . . but the lack of it - Education: Inequality in earnings reflects inequality in education. . but education, alone, will not get individuals out of poverty

Some new issues: - Job and Worker turnover - Regulations

The dilemma of the labor policies: - Job and Worker turnover is powerful engine of growth - 30% of workers change job each year - Many lose income in the process - Income protection is not a free good - Protection has equity and efficiency costs - Enforcing labor laws is crucial to uphold the social contract.

Job and Worker turnover is very high:

Job turnover is very high and comparable to the one observed in other parts of the world Average Annual Gross Job Flows (% of employment) Gross Job Destruction Exit Entry Gross Job Creation Avg. Net Change in Employment Mexico (1994 -2000) 6. 0 Brazil (1991 -2000) 1. 1 Denmark (1983 -1989) 2. 2 New Zealand (1987 -1992) -0. 1 Sweden (1985 -1992) -4. 1 Canada (1983 -1991) 2. 6 France (1984 -1992) 0. 7 Italy (1984 -1992) 1. 2 U. S. A. (1979 -1983) 1. 5 Finland (1986 -1991) -1. 6 Estonia (1992 -1994) -3. 2 Germany (1983 -1990) 1. 5 -20 -15 -10 -5 0 5 10 15 20 25

Job turnover is similarly high in manufacturing Average Annual Gross Job Flows in Manufacturing (Percentage of employment) Gross Job Destruction Gross Job Creation Avg. Net Change Morocco (1984 -1989) 6. 5 Mexico (1994 -2000) 7. 9 Chile (1980 -1999) 0. 4 Canada (1979 -1984) 0. 6 UK (1981 -1991) -3. 5 Israel (1970 -1994) 1. 5 Colombia (1980 -1999) -0. 8 USA (1973 -1988) -1. 1 Norway (1976 -1986) -1. 2 -20 -15 -10 -5 0 5 10 15 20 25

And it is not driven by aggregate shocks Job Reallocation By Type of Shock Idiosyncratic (Within Sectors) Sectoral (Between Sectors) Aggregate USA (1973 -1988) Morocco (1984 -1989) Mexico (1994 -2000) Chile (1980 -1999) Colombia (1981 -1999) 0 5 10 15 20 25 30 35

Across the world, job turnover is an important engine of productivity growth Labor Productivity Growth Decomposition 5. 3 Colombia 1992 -97 Chile 1992 -97 3. 0 United States 1992 -97 1987 -92 1. 6 3. 1 UK 1992 -97 1987 -92 2. 5 4. 7 Portugal 1992 -1997 1987 -1992 5. 3 4. 1 2. 3 Netherlands 1992 -97 1987 -92 4. 3 3. 9 Italy 1992 -97 1987 -92 2. 1 Germany 1992 -97 2. 3 France 1987 -92 5. 0 Finland 1989 -94 1987 -92 -75 Annual Growth Rate -25 Within-firm productivity growth 25 75 Output reallocation amongst existing firms 125 Entry of firms 175 Exit of firms

Workers that are involuntarily separated suffer wage losses after reemployment Involuntary unemployed in t+1 Mexico Change in monthly wage Argentina Change in hourly wage -20% -18% -16% -14% -12% -10% -8% -6% -4% -2% 0%

However, labor flows imply costs in the welfare of the workers. - During the 90’s, employment flows (E) towards unemployment (U) in Latin-America were two times bigger than those of US (and unemployment is a problem in developing countries). - Women, youths, unskilled workers and workers without social security have the highest probability of transitioning to unemployment

Time spent searching can be beneficial. - Women, youth, and skilled workers have a smaller chance of leaving unemployment during the first six month than men, adult, and unskilled. - However, women, youth, and skilled workers have the highest probability of finding a registered, fullbenefit wage job in a big firm.

Labor market regulation has significative costs:

Latin America is highly regulated Conditions of Employment Index (0 -1) Eastern Europe and Central Asia Latin America and Caribbean Sub-Saharan Africa South Asian Region Middle East and North Africa Industrial Continental Europe East Asia and Pacific Islands Industrial Anglosaxon Bolivia Venezuela Brasil Panamá Colombia México Rep. Dominicana Perú Argentina Ecuador Chile Uruguay Jamaica 0 0. 1 0. 2 0. 3 0. 4 0. 5 0. 6 0. 7 0. 8 0. 9 1

Job security in Latin America is the highest in the world The Cost of Job Securities End of Eighties relative to end of Nineties Venezuela Colombia Ecuador Peru Brazil Panama Bolivia Costa Rica Honduras Chile Mexico El Salvador Argentina Dominican Rep. Nicaragua Uruguay Paraguay 1999 1988 Industrial countries average, 1999 Latin America average, 1999 Caribbean average, 1999 0 5 10 15 Cost of benefits measured in multiple of wages 20 25

Collective bargaining is also is highly regulated Industrial (collective) relations laws index East Asia and Pacific Islands Industrial Continental Europe Latin America and Caribbean Eastern Europe and Central Asia Middle East and North Africa Sub-Saharan Africa South Asian Region Industrial Anglosaxon Peru Argentina Brazil Colombia Mexico Venezuela Panamá Collective bargaining Chile Worker participation in management Bolivia Uruguay Collective disputes Dominican Rep. Jamaica 0. 0 0. 5 1. 0 1. 5 2. 0 2. 5

A large percentage of workers are not covered Percentage of Wage Employees without Social Security benefits, End of Nineties Nicaragua 2001 Peru 2000 Bolivia 1999 Dominican Rep. 1998 El Salvador 1998 Venezuela 1998 Argentina 2001 Brazil 1999 Mexico 1999 Colombia 1999 Chile 1998 Costa Rica 2000 0 10 20 30 40 50 60 70 80

However, there is plenty of evidence on the costs of the regulation. - Labor stability decrease turn-over and the flexibility of firms’ adjustments - Social security contributions and other non-wage costs decrease employment and increase unemployment Labor stability regulations decrease the employment of youths and unskilled workers. - Labor stability can increase wage rigidities

WHAT CAN WE DO?

Labor policies and social contract - Labor and Social policies: - Differences in focalization, nature and purpose - Without adequate registries and enforcement capacity there are no labor policies: - It’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

• 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 - Enforce labor laws and regulations

Labor intermediation systems - A permanent function - Implemented through a complex network of public and private providers, with lots of referral capability - Inclusive to improve the employment opportunities of the poor

Income Protection - Set of systems adapted to the variety of labor insertions of the population - 3 basic criteria: - Do not generate incentives against production or work - Coverage as wide as possible, including workers in non-regulated contracts - Budgetary allocations should be counter-cyclical

Training Systems - Priority is to increase attractiveness, relevance, and pertinence of basic education - The State can help: strong regulator and a variety of public and private providers - Local level experimentation 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.