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Some Reflections on the Job Scene

Danny LeipzigerProfessor of Int’l Business, George Washington University

NYU Jobs Conference, Sept. 25-26, 2011

Basic Themes

What do we learn from the Latin American experience? And from Chile in particular?

What is there in the advanced countries’ experience that should raise cautionary flags for middle income countries in Latin America and beyond?

How do we connect the dots on the Great Recession and the longer run in terms of jobs and economic growth?

Latin Lessons

Maintenance of fiscal space, a new development for many countries in the region, has served them well

Jobs, even if lower paying, provide an entry point into the formal or quasi-formal sector and are the only way to deal with persistent income inequality

Some hybrid between the US labor model that was associated with rapid job creation and the Euro-model that protects more in the downturn is probably best course

Poor educational outcomes and weak innovation systems separate the region from the best performers in East Asia

Latin American Concerns

All Latin Am. countries are well below average in the OECD PISA scores, with Chile ranked the highest at #43, despite expenditure levels that are not markedly low

Most countries participating in PISA are in the 5th or 6th decile of respondents. Same is true for science & mathematics rankings

Regional labor productivity 1990-2005 was 1.5% on average, well below advance countries and far behind East Asia’s 4 percent

Youth unemployment is three-times the overall average

Issues Most Relevant to Chile

Chile’s U-rate rose 2% in 2009 but reverted close to its 2008 level by 2010; still U-rate for the age cohort 24-29 tended to average 12% over the past decade

Female labor force participation rates lag those in Brazil, Argentina and Uruguay ( Growth Commission Special Report) and part-time employment impediments are a problem and this may worsen the income distribution

Income distribution is stubbornly unequal as seen in Gini coefficients above .5 despite low absolute poverty rates

The innovation system, including links between business and government, has been difficult to remedy despite efforts

Some OECD Lessons

OECD Jobs Strategy speaks of innovation and technology diffusion policies to accompany education and training

Most countries now embrace knowledge-based industries

The externalities from major university centers is apparent

Governments have a fundamental role to play in coordination, management of science, functioning of financial and labor markets, and increasingly in providing signals if not a clear vision

Once jobs are lost, they are not likely to be regained

Long Run Implications of Factors Affecting Labor

Market

Education has longest term effect in terms of skills enhancement and adaptability of the labor force

Innovation policy has a strong effect via TFP

Infrastructure investments influence efficiency and labor productivity

Those with better education, innovation record and infrastructure, ceteris paribus, survived the crisis better—Australia, Canada, Finland (OECD)

During prolonged recessions, hh expenditures on education slip (WB evidence for Eastern Europe) and firm R&D expenditures on innovation fall (OECD evidence) with long-term effects on potential growth rates. Infrastructure evidence uncertain.

Existing trends that the Great Recession

exacerbated

In the US, poor distribution of income, got worse, and real wage declines of blue collar workers was extended to others

Incidence of shorter work weeks (Kurzarbeit), more reliance on part-time employment, that reduced real incomes

Evidence is not yet clear on whether gender disparities were exacerbated, depending on countries and sectors

Youth unemployment rose, especially in Europe—it doubled in Spain between 2008 and 2010 for aged 24-29 cohort!

Collapse of venture capital markets, already not robust in some countries, and directly linked to innovative investment

Prolonged unemployment spells that restrict labor market re-entry—high percentage of long spells

Delayed entry by the young limits long-term earnings and asset accumulation.

Asset collapses reduce confidence and the efficacy of fiscal stimulus and the usefulness of monetary easing

Short-Medium term factors affecting the Long-Run

Some Modest Final Thoughts

Australia and Korea had among the largest stimulus packages ( % of GDP); among the best rated innovation systems (OECD), and had among the lowest upticks in additional unemployment during the crisis

The crisis is an outlier in Obstfeld and Gourinchas and we should therefore expect the labor market to also react badly

The Reinhart & Rogoff analysis tells us that this time is not so different historically, but for some it certainly has been, and the political economy of joblessness will be profound

The economic and social costs of joblessness in countries with limited safety nets are such that globalization may take a hard and irreversible hit