The challenge of creating good jobs

in Latin America: Recent trends & policy

optionsCarmen Pagés

Chief of Labor Markets UnitInter-American Development Bank

This presentation:

Unemployment & Underemployment in

LAC

Explaining the good jobs deficit in LAC

Addressing the good job deficit in LAC

1. Unemployment and underemployment in LAC

On average, unemployment in LAC is lower than in OECD countries, but not much lower…

Average LAC: 7.5%Average OECD: 8.5%

Source: Own elaboration from LAC household surveys and OECD data; OCDE 2010, LAC Circa 2009

Youth unemployment is also below, but close to OECD levels…

Source: Own elaboration from LAC household surveys and OECD data; OCDE 2010, LAC Circa 2009

and underemployment is much higher…

Underemployment: Share of workers that work less than 30 hours but willing to work longer

Source: Own elaboration from LAC household surveys and OECD data; OCDE 2010, LAC Circa 2009

Share of total Employment Underemployed

And most jobs are created in the informal sector…

Composition of new job creation

And within the formal sector, half or more of the jobs are temporary…

Composition of new job creation

32%

33%

21%

21%

12%

9%

2. Explaining the good jobs deficit…

GDP growth is the engine of job creation, and productivity growth is the engine of GDP growth.

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

0.60

0.70

0.80

0.90

1.00

1.10

1.20

0.69

0.76

1

0.91

GDP pc LAC/ GDP pc US TFP LAC/ TFP USFactor Accumulation LAC vs. US

Inde

x 19

60=1

Loss of factor accumu-lation

Loss of productiv-ity

Evolution of relative GDPpc, TFP, and Factor accumulation, vs US

11

Productivity growth in LAC lags other parts of the world

( Index1960=1)

Evolution of TFP

Developed Countries

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

South East Asia

LAC

US

Productivity growth lags in manufacturing, and more importantly in

services

1951─75 1975─90 1990─2005 1951--75 1975─90 1990─2005 1951─75 1975─90 1990─2005Agriculture Industry Services

2.8%

1.8%

3.5%

1.8%

-0.9%

2.0%

1.3%

-1.8%

0.1%

3.8%

2.5%

3.2%3.5%

2.4% 2.5%

5.0%

3.6%

2.6%2.2%

1.3% 1.4%

Latin America East Asia High Income Countries

Average Annual Labor Productivity GrowthAgriculture, Industry, and Services, 1951–2005

Source: Authors' calculations based on Timmer and de Vries (2007).

Productivity gaps are highest in the service sector…

13

Agric

ultu

re

Indu

stry

Serv

ices

010203040506070

L abo r P rod uctivi ty by Se ctor, re la tiv e to US =1 00

2002 197 3

Sou

rce:

Dua

rte

and

Res

tucc

ia (

2009

).N

ote:

Lab

or p

rodu

ctiv

ity r

elat

ive

to th

e U

nite

d S

tate

s.D

evel

oped

Cou

ntrie

s ar

e ire

land

, Can

ada,

Uni

ted

Kin

gdom

, Aus

tral

ia, N

ew Z

eala

nd, B

elgi

um, S

wed

en, N

orw

ay, I

taly

, Spa

in, D

enm

ark,

Por

tuga

l, A

ustr

ia, N

ethe

rland

s, F

ranc

e (2

002)

, Fin

land

, Gre

ece,

Tur

key

(200

2).

Services have grown to be 60% of employment but most jobs in this sector are of low productivity informal

14

38.8

23.2

38.1

1970

AgricultureIndustryServices

18.4

20.760.

9

2005

AgricultureIndustryServices

Productivity is higher in larger firms…

Chile 2006 Uruguay 2005

Colombia, 1988

El Salvador 2005

Venezuela, 2001

Bolivia 2000

0

60

120

18020-49 50-99 100-249

Firm size (number of employees)

Perc

enta

ge in

crea

se in

Pro

duct

ivit

y

Source: Pagés (2010) based on individual countries, firm-level manufacturing surveys.

Productivity (TFP) by firm size, relative to firms with 10–19 workers, Manufacturing Firms

and there is a strong association between productivity and informality

C. Colombia: TPFQ computed as in Hsieh-Klenow, 2009

Counterfactual: Increasing share of medium and large firms, would increase productivity by..

• 90% in El Salvador

• 120% in Mexico

In sum, low productivity growth hampers the creation of good quality jobs…Most jobs created in micro firms of low

productivity that survive being informal.

Need to discern whether:• Insufficient supply of good firms that can

grow and create good jobs in the process.

• Insufficient creation of large, productive companies.

3. Addressing the good jobs deficit.

How to improve productivity?• A number of policies can help improve

productivity & good job creation in the region:

– Reducing transportation costs that prevent productive firms from growing

– Improving tax regimes that prevent productive firms from growing

– Promoting innovation that prevent firms from growing in productivity

• But also, need to improve labor policy

- 20 -

Labor policy• In the face of precariousness, informality and

temporality many labor authorities resort to tighten (or attempt to tighten) their labor laws…

• But on paper, restrictions to temporary employment, informality and other forms of precarious work are already very high..

• Although often not well enforced…

• And for a reason… with low productivity compliance is not an option, the choice is between precariousness or unemployment.

Instead labor policy should go to the root of the problem and foster productivity growth:

• Improving training systems

• Redesigning social insurance

The % of LF that benefits from training is low

Republica ChecaLuxemburgo

SueciaBelgica

EslovaquiaDinamarca

Reino UnidoEspaña

NoruegaPortugal

GreciaChile

Colombia

0 10 20 30 40 50 60 70

LF share that receives on the job training (%)

Training systems suffer from:

• Low quality

• Low pertinence & relation to needs of firms

• Information problems

Improving training systems:

• Increase quality control: (M&E, follow up graduates, skill certification, accreditation).

• Improve information about the system: Who is doing well, who is not?. What professions pay more?

• Increase pertinence: Increase involvement of private sector to define training contents.

• Increase competition or improve regulation.

• Co-financing

Social insurance systems:• Finance health & pensions with high taxes

on labor.• Mandate very high employment

protection, but in most countries no UI.• Reach only a minority.

– New wave of non-contributory programs for informal.

• Reduce incentives to hire in the formal sector & increases informality.

• Reduce productivity

Improving SI

Universal Coverage funded with broader base taxes– Advantages: (specially in health)

• It covers everyone, all the time, with the same benefits

• It reduces distortions in the labor market• It allows for an integrated health system

– Disadvantages:• It is fiscally costly, but due to reduction in

distortions could be affordable. Levy et al, 2011

Improving SI

• Subsidizing SS for low wage workers – Advantages:

• It reduces distortions in the labor market• It allows to keep contributory system

– Disadvantages:• It may lead to underreporting of wages

Improving SI

• Reforming EPL to become more like UI. – Pre-financing:

• Individual accounts or contributions to a fund.

– Improving ALMP (so workers find jobs faster)• Better Intermediation systems• Better job insertion programs

Conclusions

• In order to create higher quality jobs, Latin America needs to increase the growth of productivity…

• …particularly in the fast growing service sector.

• Improving training

• Modernizing social insurance schemes(pension, health, , EPL and UI) –which prevent companies from hiring, particularly low skilled labor.