Transcript Document

Job Creation in Latin America
W.F. Maloney
World Bank
www.worldbank.org/laceconomist
State Dept. Oct. 2004
Washington, DC
Four issues in job creation
1. What’s driving deficient formal sector job
creation?


Trade openness
Regulation
2. New agenda: Labor regulation for productivity
growth
3. Integral labor policy and the law of unintended
consequences
4. What can we expect from micros?
•I. Employment growth below the
70s and 80s
6
5
%
4
3
2
1
0
50
60
GDP Growth rate
70
Decade
80
90 *
Employment growth rate
Slowdown in 90s partly due to slowing demographics
and female participation
Employment rises through 1990s,
then falls
52.5
Employment/Working Age Population
52.0
51.5
%
51.0
50.5
50.0
49.5
49.0
48.5
1990 1991
1992 1993
Simple average
1994
1995 1996
1997 1998
1999 2000
Weighted average (excl.. Brazil)
And what about the quality of the jobs?
Mexico: Liberalization, crisis, increased
female participation and… job creation.
2.5
7
NAFTA and Tequila
Manufacturing Real Wages and Unemployment
Crisis
Evolution
6.5
6
2.1
Unemployment
1.9
5.5
5
1.7
4.5
1.5
4
1.3
3.5
1.1
3
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
2
19
84
0.7
19
82
2.5
19
80
0.9
Unemployment rate (%)
Relative wages=Mex/US
2.3
Two important tendencies in job creation–
Agriculture (IMSS Data) and Maquilas
1,100
550
China Syndrome
1,000
500
800
700
450
600
500
400
400
Maquilas (left axis)
Agriculture (right axis)
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
350
1983
300
Thousands
Thousands
900
.5
.4 5
.0 2
.4
.0 4
.0 6
F o rm a l S e cto r/In fo rm a l S e cto r
.5 5
.0 8
Third dynamic- increase in
informality? What does it mean?
1987q1
1989q1
1991q1
1993q1
Unem ployment rate
Informal Sector
1995q1
1997q1
1999q1
2001q1
Form al Sector
Mexico
0
Unemployment
1987q1 1989q1 1991q1 1993q1 1995q1 1997q1 1999q1 2001q1
Bosch y Maloney 2004
.15
.1
.05
66% voluntary
0
Formal  Self Employed
Tasa de Desempl eo
.05
.2
.1
Self Employed  Formal
.25
Rise in informality in early 1990sbooms and welfare improvement?
Colombia: low rates of formal job creation
and increases in informality
Colombia
4
1.4
1.2
Income Formal/SE
3
1
2.5
0.8
0.6
3.5
#Form/#SE
0.4
0.2
19
85
19 Q3
86
19 Q3
87
19 Q3
8
19 8Q3
89
19 Q3
90
19 Q3
9
19 1Q3
92
19 Q3
9
19 3Q3
94
19 Q3
95
19 Q3
9
19 6Q3
97
19 Q3
98
19 Q3
99
Q
3
0
2
1.5
1
0.5
0
Nominal rigidities have compounded the
impact of the crisis
Distribution of informal and formal salaries
Formal and Informal workers
formal and informal workers
1.5
1.65927
1
.5
0
0
4
6
8
lwage
Mexico, 1999:1
10
12
9
11
13
logwage
Colombia, 1998
Similar effects probably at work in Argentina.
Regulations do matter!
15
But in the long run, informality is reduced
by increased formal sector productivity
of Labor Force in Self-Employment
Self-Employment vs Level of Development
Peru
.461
Bol
ElS
Hon
Gua
Ven
Uru
Col
Par
Arg
Pan
CR
Chi
G
Mex
Turk
Bra
K
Por
Log. Industrial Value Added/Worker
LR: Increased formal productivity raises
demand, increases opp. cost of SE
1.2
Wage
(self employed)
Wage
(salaried)
Change in formal
sector
Changeproductivity
in salaried productivity
1
0.8
W'se
0.6
W's
Wse
Ws
0.4
MP's*Ps
0.2
-MPse*Pse
MPs*Ps
0
Lse
L'se
Ls
L's
II. Expand agenda: Labor market as part
of the National Innovation System (NIS)
Half of growth is technological progress
Annual growth of TFP
4
3
2
1970-79
1
1980-89
0
-1
Ar
-2
a
in
t
n
ge
C
ta
os
R
a
ic
C
le
hi
-3
Fuented: Calderon, Fajnzylber y Loayza (2002)
o
ic
x
e
M
Am
a
ic
er
a
tin
a
L
O
C
ED
te
Es
o
t ic
a
i
As
1990-99
R & D in Mexico and LA: far below the
average of innovation superstars
5.0%
R&D
GDP
 GDP
 1
 2 
GDP
CAP
 CAP 
Predicted & Observed R&D/GDP
4.5%
4.0%
Israel
2
Finlandia
3.5%
3.0%
2.5%
2.0%
Korea
1.5%
China
1.0%
India
0.5%
Argentina
0.0%
4
5
6
7
9
Mexico8 Costa Rica
Log GDP per Capita
Fuented: Lederman y Maloney (2002)
10
11
Central Mystery: Why don’t poor countries take
advantage of global stock of knowledge?
National Learning capacity is limited


Low human capital, weak knowledge institutions and
networks.
The National Innovation System in LA is a bit like the
Holy Roman Empire
Barriers to the adoption of new technologies


Trade barriers, monopolistic structures
Labor Market Policy – clave (Parente y Prescott)



Need to permit adoption of new technologies and the efficient
reallocation of workers with protection.
Swedish and Finish unions: insist on the drastic adotino of new
technologies.
Chile- success partly due to labor flexibilization of the 1970s?
The protection system in LAC doesn’t serve
workers or employers:
Deficient protection for workers.


Risks are shared at the level of the firm
Lower levels of productivity/wage growth
Excessive emphasis on employment stability and not
on innovation to compete.


Dismissals for economic reasons are illegal, expensive, imply
high transaction costs.
Job security index in Mex ~3X Germany/France (See
Heckman and Pages 200)
Lessons from Scandanavia

Extensive labor protection system that
Encourages adoption of new technologies
III. Improving job quality: thinking of
protections in an integrated way
The informal sector offers a viable alternative for
workers.


There are functioning informal protection mechanisms
Micros chose optimal level of participation in formal
institutions.
...and avoid inefficiencies in labor law.


Poor alignimentof costs and benefits of protections
Rigidities in promotion
... And this generates unexpected consequences even in
well designed reforms.
Brazil- Reform of unemployment
insurance (FGTS)
Gov. subsidizes individual accounts



Improves “matching”
Avoids “moral hazard”
Reduces burden on firm.
Workers request dismissal and open micros

FGTS resolved a problem of credit restrictions to openning
a business and gave a subsidy to informality.
This can damage the formal sector


Raises salaries
Reduces incentive to invest in human capital.
Chile- Pension Reform (AFP): Option
for informal self employed
Efficient and aligns costs and benefits well.

SE can take out money with interest when
retires.
But only 6% of SE participate
Alternative investments or protections?
 Liquidity costs?
 Implied compliance with other undesired
regulations?
 Lack of confidence in the government?

IV. Can we improve the
performance of the micro sector?
Yes- increasing incomes in MX by increasing
access to





Formal credit
Informal Credit
Training
Business associations
Paying taxes
30-72 %
4 -23 %
10-30 %
8-31 %
24-63 %
This should increase the size of the sector
But no impact on employment (same result in
Colombia-Lopez-Castaño)
Little impact on growth
Fajnzylber, Maloney, Montes 2003