2ND MEETING OF THE WORKING GROUPS

1
2ND MEETING OF THE WORKING GROUPS OF THE XV
INTER-AMERICAN CONFERENCE OF MINISTERS OF LABOR
(IACML) May 20, 2009
Dr. Jacqueline Mazza, Chief, a.i. Labor
Markets Unit/Social Sector Inter-American
Development Bank
2
Outline

• 1. The global macroeconomic crisis in phases
• 2. Main transmission channels to LAC
• 3. Trends for 2009 and 2010
• 4. Labor Market Policy Responses

3

• Global macroeconomic crisis
• Phase 1 - Phase 2 - Phase 3 (?)

4
Development of the global financial crisis in
phases
Phase 1
Interbank Interest Rate

• A panic-driven US financial crisis.
• Belief that growth would decelerate, but
  recession unclear.

(Libor spread over 3-month T-bill, )
Phase 2
Phase 1
5.0
JPMorgan Acquires Bear Stearns

• Phase 2
• Major capital losses in the financial system.
• High unemployment in industrialized and some
  developing countries, decreasing demand for
  developing country goods
• Developing countries growth rate would
  decelerate, but some could escape recession

4.5
Beginning del
Banking Problems
4.0
3.5
3.0
Average 1.33
2.5
2.0
1.5
Average 0.38
1.0
0.5
0.49

• Phase 3 (?)
• Longer world recession scarcity of credit,
  potential for protectionism
• Large sectoral unemployment in key countries
• Slow to no employment growth, duration unclear

0.0
Jul-07
Jul-08
Oct-07
Jan-07
Apr-07
Jun-07
Jan-08
Apr-08
Jun-08
Nov-08
Jan-09
Mar-07
Mar-08
Aug-08
Oct-08
Feb-07
May-07
Aug-07
Sep-07
Nov-07
Feb-08
May-08
Sep-08
Feb-09
Dec-07
Dec-08
Source Based on Bloomberg.
5

• 2. Transmission channels to LAC How are
  regional labor markets affected?
• Financial markets
• World growth
• Commodity prices and trade

6
External factors Investment Capital Falling to
LAC
Capital Inflows
(LAC-7 last 12 months, billions of US dollars of
2007)
Phase 2
Phase 1
241
Own estimates based on official capital inflows,
trade balance and international reserves.
7
World growth rates declining
(Real GDP growth, yoy)
US
2008
2009
(Light) (Darker)
Forecasts in May-08
May-09e
Forecasts in May-09
May-08e
May-09e
May-08e
Japan
EU-15
2008
2009
2008
2009
China
2008
2009
India
2008
2009
SourceEIU.
8
External factors commodity prices falling, hits
key LAC countries
Metals
Oil
Food
(1991-1997 Average 100)
(1991-1997 Average 100)
(1991-1997 Average 100)
US Financial Crisis
US Financial Crisis
US Financial Crisis
725
313
177
Change Dec.01 Jul.08 616
Change Dec.01 Jun.08 133
Change Dec.01 Mar.08 282
373
-46
-30
123
-68
123
158
91-97 Average
228
91-97 Average
91-97 Average
9
Worsening of credit conditions for LAC
Sovereign and Corporate Bonds Yields Spreads
Source Bloomberg.
10
Hypotheses of the global economy
11
Latin America and the Caribbean Trade Forecast
Annual Percent Change Annual Percent Change Annual Percent Change Annual Percent Change Annual Percent Change Annual Percent Change Annual Percent Change Annual Percent Change
1991-2000 2005 2006 2007 2008e 2009f 2010f
Exports, GNFSd 8.1 8.1 7.7 5.0 1.7 -2.1 2.4
Imports, GNFSd 10.9 11.9 14.3 11.9 12.3 -3.9 6.9
Source World Bank, Global Economic Prospects
2009 d Exports and imports of goods and
nonfactor services e estimated f forecast
12
LAC regions will be affected in different ways
through financial, growth and commodities
channels
Caribbean lower oil prices (positive), lower
remittances and weak tourism.
Mexico and Central America Strong commercial
ties with the US. Heavily dependent on
remittances from the US. Benefit from oil shock
(except Mexico).
Andean region lower energy and commodity prices
higher financial costs, lower exports.
Southern cone commodity exporters, affected by
world demand slowdown, tight financial
conditions.
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• 3. Implications for LAC in 2009 10
• Phase III
• Growth
• Employment
• Remittances
• Poverty and social risks

14
Growth 2009 slowdown forecast
(LAC-7 real GDP, annual variation)
Beginning of the Current Boom
7
Russian Crisis
6
5
4
Average 71-06 3.4
3
2
1
0
-1
US Financial Crisis
-2
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008E
2009F
LAC-7 is the simple average of the seven major
Latin American countries. Source JPMorgan
15
Growth projections in 2009
Gross Domestic Product (annual change in ). 2009
Source Latin Focus Consensus Forecast
16
Economic activity in LAC according to two
hypotheses of the global economy
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Employment

• Some Effects
• Reduced demand reduced credit greater firm
  failures, particularly SMEs.
• Absence of sharp increases in inflation avoids
  lower real wages this cushions impact on those
  holding jobs, but implies larger employment
  effects.
• Layoffs/job loss resulting in increases in open
  unemployment (not mitigated by unemployment
  insurance)
• Higher informal employment.
• Reduced opportunities leading to discouraged
  workers dropping out of labor force.
• Scope for impact
• Labor income comprises 80 of household income in
  LAC.

18
Projected Unemployment Rates(annual change in ,
forecasts in April and May of 2009)
20.0
20.0
18.0
18.0
16.0
16.0
2009, 14.8
14.0
14.0
2008,
2009, 12.6
2004-07
11.3
12.0
12.0
2004-07
2004-07
2009,
2004-07
2009,9.7
9.3
10.0
2008,
10.0
2008,
2008,
2009, 8.5
2008,
7.9
2004-07
7.88
7.7
7.50
8.0
2009,
8.0
2004-07
2008,
5.8
6.0
6.0
4.9
4.0
4.0
2.0
2.0
0.0
0.0
Argentina
Bolivia
Brazil
Chile
Colombia
Costa Rica
2009,
20.0
Source EIU, based on official data
18.7
2004-07
18.0
2008,
2009,
15.5
16.0
14.5
14.0
2008,
12.0
2004-07
11.0
10.0
2009,
2008,
8.0
6.8
2004-07
6.3
6.0
4.0
2.0
0.0
Dominican Republic
El Salvador
Jamaica
Informal employment not captured by these figures.
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Latin American unemployment expected to grow to
at least 14 million people in 2009 for the 12
largest countries
Country 2009 Unemployment rate Labor Force 2009 Unemployed people
Argentina 11.4 12,215,112 1,392,523
Brazil 8.5 67,137,840 5,706,716
Chile 10.5 3,909,630 410,511
Colombia 14.4 16,318,300 2,349,835
Costa Rica 6 1,346,933 80,816
Dominican Republic 17.8 2,363,000 420,614
Jamaica 14.5 792,152 114,862
Mexico 4.8 29,124,279 1,397,965
Panamá 6.2 989,209 61,331
Peru 8.4 10,835,550 910,186
Uruguay 8.4 1,105,580 92,869
Venezuela 11.4 9,736,818 1,109,997
Total     14,048,226
20
Latin American unemployed expected to exceed US
unemployed
Sources US projection IDB calculations using
projections from Federal Reserve of the United
States (13 million) Latin America projection
from International Labor Organization (17
million).
21
More than half of U.S. unemployed will be covered
by unemployment insurance, with benefits recently
extended
Source IDB calculations using projections from
Federal Reserve, data from Bureau of Labor
Statistics, 56 of unemployed covered by UI
program
22
Most Latin American countries do not have UI, the
few that do have low coverage
  UI Coverage ( unemployed) 1 2009 projections of Unemployed covered by UI 2
Argentina 4.1 57,093
Brazil 4.0 228,269
Chile 7.5 30,788
Uruguay 8.7 8,080
Total   324,230
(1) 2004 data. Source Bertranou (2004) (2) Own calculations based on UR projections (1) 2004 data. Source Bertranou (2004) (2) Own calculations based on UR projections (1) 2004 data. Source Bertranou (2004) (2) Own calculations based on UR projections
23
Gender and Unemployment Dimension United States
In the US, 82 of those laid off have been male
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But the situation in LAC appears to be different

• LAC may experience the largest impact in terms of
  unemployment among women. This is because of the
  sharp slowdown in growth, concentration in key
  sectors, and the disadvantaged position of women
  in labor markets in the region
• Unemployment among women in the region could
  reach 9.8 to 11 in 2009, which represents 11 to
  13 million women (ILO).

Source Global Employment Trends for Women 2009.
ILO
25
Women in LAC are more affected by unemployment
Source Global Employment Trends for Women 2009.
ILO
26
Gender and the financial crisis in the region

• Mexico
• According to 2008 data from INEGI, 71 of all
  layoffs were of women, representing 1,364,000
  women who lost their jobs.

• Honduras
• Female employment is highly concentrated in the
  textile manufacturing industry and maquilas in
  general, formal commerce, financial services,
  tourism, and restaurants.
• Through mid-February 2009, the maquila sector
  reported a loss of 29,000 jobs, of which 70
  belonged to women.

• Nicaragua
• In the maquila sector, mostly dedicated to
  garment and accessories production, 19,000 people
  were laid off this represents a 21 drop in jobs
  in the free trade zones relative to the beginning
  of 2009.

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Remittances A slowdown in 2008 will become a
decrease in 2009

• After years of double-digit growth rates,
  remittances to the region increased just 0.9
  between 2007 and 2008.
• Remittances are projected to decrease in 2009,
  the first downturn since the IDB started tracking
  flows in 2000

Source Multilateral Investment Fund
28
Remittances to the region, 2008
LAC top 10 receivers of remittances in 2008
Mexico Brazil Colombia Guatemala El Salvador Dominican Republic Peru Ecuador Honduras Jamaica
Source Multilateral Investment Fund
29
How will the remittance slowdown affect the
region?

• Diverse impact expected by country/region
• Exchange rates key
• Remittance values in local currencies up in
  Mexico, Brazil and Colombia because of dollar
• Central America and Ecuador dollarized or
  largely pegged to dollar, 4 decline in values in
  Central America
• Southern Cone Ecuador remittances in falling
  Euro, Ecuador 22 decline in value of remittances.

30
Poverty Slowdown in decreasing trend of poverty
rates in LAC and possible reversals during 2009

Source ECLAC, 2008.
31
Poverty

• Effects
• Wage declines and job loss cause poverty
  deepening for the chronically poor
• Labor market adjustment creates new poor
  (transitory)
• Declines in remittances
• Declines in consumption
• Higher chronic malnutrition
• Scope for impact
• Substantial risk of higher poverty levels and
  decreases in consumption.
• Substantial risk for irreversible health and
  productivity effects among chronically poor.

32

• 4. Labor market policies to address the crisis

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The Policy Context for this Crisis

• High levels of uncertainty regarding
• Growth rates
• Duration/nature of crisis
• Fiscal space
• Policy responses adapted to very different LAC
  circumstances

34
A framework for labor policies

• a) Short-term measures
• Programs or policies to mitigate the largest and
  most immediate impacts of the crisis (e.g.,
  unemployment) and/or protect income or social
  conditions
• b) Systematic measures
• Structural reforms that transform the basic
  nature of policies, and which are necessary to
  ensure that the country emerges from the crisis
  in a competitive position

35
Labor Policy Two Levels Operating Simultaneously

• Level 1 Mitigating the worst short-term effects
  of the crisis
• Large scale unemployment
• Particularly when concentrated (regionally) with
  potential ripple effects on local demand,
  consumer spending
• Affects vulnerable groups with poorer
  reemployment prospects
• Danger of losing formal jobs

36
Labor Policy Two Levels Operating Simultaneously

• Level 2 Advancing systematic (medium-term)
  policies to emerge from crisis in better
  competitive position
• Labor markets with better functioning in
• Effective allocation and re-allocation of workers
  in jobs
• Productivity with complementary SME policies
• Improvement in the quality of employment

37

• Level 2
• Systematic policy measures needed because, on
  average, Latin America and the Caribbean have not
  made the systematic labor market reforms or put
  in place labor market stabilizing policies that
  other regions have
• Post-crisis LAC could be in a less competitive
  position relative to other regions that are
  developing proactive policies

38
Country-Level Considerations Short-Term Policies

• Dimension/duration of short-term impacts
• Existing Institutional Capacity
• Best case modification of existing labor market
  programs
• Ability to rely on social programs for the most
  important social impacts
• Who is most affected
• formal employment new poor not eligible for
  CCTs
• poor, informal workers potential poverty crisis
• women, excluded groups
• Make sure temporary policies really temporary
• Avoid perverse effects that increase informality,
  decrease productivity

39
Short-Term Policy Measures

• Short-term measures to retain or absorb workers
  in jobs
• On-the-job training (OJT)
• Used to both retain workers and employ the
  unemployed
• Good re-employment and retention record with
  short-term training, if done in the workplace and
  related to improving skills for a specific job
• Examples BECATE, Mexico

40
Short-Term Policy Measures

• Adapting Youth Training Models
• Mix of OJT with classroom-based skills training
• Successful at getting at-risk youth into new
  employment
• Utility in crisis? Dependent on firms
  potential to hire new employees
• Examples Juventud y Empleo (Dominican Republic)
  Procajoven (Panama)

41
Short-Term Policy Measures

• Temporary Employment
• Target very poor, largely informal workforce
• Designed to keep very poor, unemployed workers
  earning a basic income in their home region
• Emphasis on labor-intensive projects
• PET (Mexico), Programa de Empleo Mínimo (Chile),
  Construyendo Peru

42
Short-Term Policy Measures

• Temporary Employment Key Lessons
• Fix salary levels below minimum wage
• Wage costs should comprise the large majority of
  total program costs
• Rapid execution is key utilize existing
  institutional frameworks

43
Short-Term Policy Measures

• Public Works
• Alternative to temporary employment, with higher
  value on public work, less employment impact
• Range of salary levels, not just poor
• Can be tied to needed social investments

44
Short-Term Policy Measures

• Extend workers benefits/contract adjustments
• May consider extensions of short-term health
  benefits, social security payments, catastrophic
  medical coverage
• Include short work furloughs, unpaid vacations,
  part-time employment, job sharing
• Can be initiated by firms without government
  subsidy or support, union-firm accords
• Issues fiscal implications, targeting and
  eligibility challenges, temporariness, incentives
  to informality

45
Systematic Policy Measures

• Two principal objectives of systematic policy
  measures
• Increase the competitiveness of firms
• Support and better allocate human capital

46
Systematic Policy Measures Measures to increase
firm competitiveness

• On the job training and human resource
  restructuring for greater productivity
• Economic restructuring (e.g. products, new
  markets, new lines of production)
• Changes in human resource organization (internal
  processes, job organization)

47
Systematic Policy MeasuresMeasures to support
and better allocate human capital

• Improving human capital formation through
  technical education reform
• Key for LAC reforms in technical education
• Better links to/management of private sector
• Role of community colleges
• Strengthen teachers capacities

48
Systematic Policy MeasuresMeasures to support
and better allocate human capital

• Restructuring labor benefit system to alleviate
  future crises
• Severance pay
• Unemployment insurance
• Pension systems

49
Systematic Policy MeasuresMeasures to support
and better allocate human capital

• Building the infrastructure to help workers get
  jobs
• Reforms and improvements to labor intermediation
  systems, including
• Links to the private sector
• Improvement in the quality of jobs and the
  quality of job placement services
• Attention to special needs groups in the labor
  market

50
Thank You