Employment and Unemployment Employment and Unemployment in Latin America : in Latin America :

Stylized Facts and Some Stylized Facts and Some Explanatory HypothesisExplanatory Hypothesis

Carmen PagésCarmen Pagés

Research Department, IADBResearch Department, IADB

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

Most pressing problem (% of total of answers) Latinobarometer 2001

0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Environment

Transport

Housing

Drug traffi c

Health

Human Rights Abuses

Drug Consumption

Lack of opportunities for Youth

Inflation

Education

Terrorism/Violence

Low wages

employment Instability

Crime and Insecurity

Poverty

Corruption

Unemployment

In the nineties, higher average In the nineties, higher average growth rates coexisted with rising growth rates coexisted with rising

unemployment ratesunemployment rates AVERAGE AND MEDIAN UNEMPLOYMENT: 16 LA countries

LONG SERIES

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Unemployment rate

AVG_unemp

median_unemp

Source: Unemployment rate (ECLAC), GDP constant prices (National Currency, billions) WEOLA16: Arg,Bol, Bra,Ch,Col,Cri, Ecu, Gua, Hon, Mex, Nic, Pan, Per, Pry, Ury Ven

avg GDPg 90savg GDPg 80s

This effect was particularly acute in This effect was particularly acute in the Southern Cone…the Southern Cone…

AVERAGE AND MEDIAN UNEMPLOYMENT: SOUTH CONELONG SERIES

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Unemployment rate

AVG-unemp

Median-unemp

Source: Unemployment rate (ECLAC), GDP constant prices (National Currency, billions) WEOSC: Arg, Bra, Ch, Ury,Pry

avg GDPg 80s

avg GDPg 90s

and in the Andean Regionand in the Andean Region AVERAGE AND MEDIAN UNEMPLOYMENT: ANDEAN COUNTRIES

LONG SERIES

5.0

7.0

9.0

11.0

13.0

15.0

17.0

Unemployment rate

Avg-unemp

Median-unemp

Source: Unemployment rate (ECLAC), GDP constant prices (National Currency, billions) WEOAC: Bol, Ecu, Col, Per, Ven

avg GDPg 80savg GDPg 90s

While no particular trend in While no particular trend in unemployment was observed in unemployment was observed in

the Mexican and CA regionthe Mexican and CA regionAVERAGE AND MEDIAN UNEMPLOYMENT:

MEXICO-CENTRAL AMERICALONG SERIES

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Unemployment rate

Avg-unemp

Median-unemp

Source: Unemployment rate (ECLAC), GDP constant prices (National Currency, billions) WEOMx&CA: Mex, CR, Gua, Ho, Ni, Pan

avg GDPg 80s

avg GDPg 90s

Looking at individual countries, in at Looking at individual countries, in at least 6 out of 16 countries, least 6 out of 16 countries,

unemployment increased despite unemployment increased despite higher growth in the ninetieshigher growth in the nineties

VEN

URY

PRY

PERPAN

NIC

MEX

HND

GTM

ECU

CRI

COL

CHL

BRA

BOLARG

-2

-1

0

1

2

3

4

5

-8 -6 -4 -2 0 2 4 6 8 10

Diff. in (P.P.) in UNEMP between 80-89 and 90-01 periods

Diff

. (P

.P. )

GD

P g

row

th b

etw

een

80-8

9 an

d 9

0-01

Source:Eclac,Panorama Laboral 2001

Average GDP Growth and Unemployment in the eighties relative to the nineties

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

declineddeclined AVERAGE GROWTH 1990-01: EMPLOYMENT & ACTIVITY RATES

LAC

Caribbe

MCA

AC

SC

VEN

URY

TTO

SLVPRY

PER

PAN

NIC

MEX

JAM

HND

ECUDOMCRI

COL

CHL

BRB

BRA

BOL

ARG

-1.5

-1

-0.5

0

0.5

1

1.5

2

-1.5 -1 -0.5 0 0.5 1 1.5 2

Employment

Part

icip

atio

n

Source: Panorama Laboral

Some of the groups with traditionally Some of the groups with traditionally higher unemployment rates were higher unemployment rates were

proportionally less affected… The young to proportionally less affected… The young to old unemployment ratio fellold unemployment ratio fell

Relative unemployment rate(ratio youth unemployment/adult unemployment)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

PER COL CR HON MEX PAN VEN BRA CH URU NIC AVG

Ra

tio

Early 90's

Late 90's

Unemployment increased relatively Unemployment increased relatively more in the rural areasmore in the rural areas

Relative unemployment rateRatio urban unemployment/rural unemployment

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

COL CR HON MEX PAN BRA CH NIC AVG

Ra

tio

Early 90's

Late 90's

While there was no particular While there was no particular trend in the ratio of female to trend in the ratio of female to

male unemployment ratesmale unemployment ratesRelative unemployment rate

ratio female unemployment/male unemployment

-

0.50

1.00

1.50

2.00

2.50

3.00

PER COL CR HON MEX PAN VEN BRA CH URU NIC AVG

Ra

tio

Early 90's

Late 90's

Involuntary part-time work also increased during Involuntary part-time work also increased during the nineties in many countries the nineties in many countries

INVOLUNTARY UNDEREMPLOYMENT (% of employment)EARLY 90s vs. LATE 90's

VEN

URY

PER

PAN

HON

CRICOL

ARG

2

4

6

8

10

12

14

16

18

20

0 1 2 3 4 5 6 7 8early 90s

mid

90s

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 The share of workers not covered by social security increasedincreased

% of salaried workers without Social Security

LAMCA

NIC

MEX

CRI

AC

PER BOL

SC

CHL

BRAARG

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00

Early 90's

Lat

e 90

's

Source: IDB from household Survey data

The percentage of self-employed increased in The percentage of self-employed increased in

most countriesmost countries % of self-employment

LA MCA

PAN

MEX

HND

CRI

ACVEN

PER

ECUCOL

SCURY

CHL

BRA

ARG

15

20

25

30

35

40

15 20 25 30 35 40

Early nineties

Late

nin

etie

s

Source: OIT, Employment Outlook, 2002

In short…In short…

• Despite higher growth, labor markets Despite higher growth, labor markets slacked during the nineties slacked during the nineties particularly in South Americaparticularly in South America

• Countries in the MCA region did betterCountries in the MCA region did better in terms of unemployment but the % of in terms of unemployment but the % of self-employment and uncovered self-employment and uncovered workers also increasedworkers also increased

• It is difficult to distinguish whether It is difficult to distinguish whether these developments are TRENDS or these developments are TRENDS or the results of BAD CYCLESthe results of BAD CYCLES

What does explain increase in U?

• Structural Reforms?

• Technological transformations?

• Bad Institutions?

• Shocks?

• Increased sensitivity to shocks?

Structural Reforms?Structural Reforms?

• Available research suggests that effect of reforms on employment demandemployment demand is either small or zero.

• No effect of reforms on labor market reallocation. reallocation.

Technological Change?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 Poor Labor Market Regulations and Institutions? Regulations and Institutions?

• Dismissal Costs?

• Non Wage Labor Costs?

Latin America is highly Latin America is highly regulated regulated

Figure 3: The Cost of Job Security. End of the eighties relative to end of nineties

0 5 10 15 20 25

P ar aguay

Ur uguay

Nicar agua

Dominican Republ ic

Ar gentina

E l Salvador

Mexico

Chi le

Hondur as

Costa Rica

Bol ivia

P anama

Br azi l

P er u

E cuador

Colombia

Venezuela

Cost of benefits measured in multiples of wages

1999

1988

Latin American

Average, 1999

Industrial Countries

Average, 1999

Caribbean

Average, 1999

Source: Ministries of Labor LA Region and OECD dataIt includes advance notice+Indemnities +Severance Pay

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

increased… increased… % change in job security:

1999 relative to 1988

51.7

-17.2-9.3

-1.9

-57.2

-25.5 -21.8

19.429.2 31.9

152.9

334.5

-100

-50

0

50

100

150

200

% c

han

ge

Source: Authors's computations out of Labor Ministries and OECD data. It includes the cost of Advance notice and Compensation for dismissal

• However research is not conclusive on whether high and increasing JS regulations are associated to lowerlower employmentemployment and higher unemploymenthigher unemployment

Social Security contributions Social Security contributions and other payroll taxes and other payroll taxes

increased during the ninetiesincreased 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? 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 Low wage adjustment to shocks?shocks?

Effect of a 1 percent decrease in output on Wages and Employment

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Wages Employment

Industrialized Countries

Latin America

Although there are large differences Although there are large differences across countries and co. with low across countries and co. with low

elasticity tend to be countries with elasticity tend to be countries with high unemploymenthigh unemployment

Figure 8: Responses of Wages and Employment to a 1 percent change in Output

0 0.25 0.5 0.75 1 1.25 1.5 1.75 2

Argentina

Brazil

Chile

Colombia

Guatemala

Mexico

Trinidad and Tobago

Uruguay

VenezuelaWages

Employment

Higher elasticity to shocks? 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 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.