Transcript in percent change from a year earlier

Labor Markets and the Crisis
Antonio Spilimbergo
(IMF and CEPR)
World Bank April 29, 2009
1
Outline
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Context
Big picture
How will labor markets be affected?
One important macro trade-off
Policy responses
2
Global Growth Projected to Recover Gradually
Real GDP Growth
(Percent change from previous quarter, annualized)
12
Emerging and
Developing economies
10
8
6
World
4
2
0
Advanced economies
-2
-4
-6
-8
2007
2008
2009
2010
3
But Unemployment Rates Will Peak Later
Unemployment Rate
(in percent)
12
10
Euro area
8
U.K.
6
U.S.
4
Japan
2
2006
2007
2008
2009
2010
3
4
Standard policy dilemmas

Policy (macro) trade-off between:
Attenuating effects of recession on the crisis
 Incentives to reallocation
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
Usual (individual) trade-off in UI between moral
hazard and incentives less relevant

Active labor market policy is the usual answer
5
Why macro trade-off?
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If the crisis is a usual “business cycle”


Just help workers and enterprises to survive the
crisis and wait to go back to “business as usual”
If the crisis is structural

Need to provide incentives to move out from some
sectors / regions
What happen when wrong policies
are in place?
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

Take Italy in the 70s and the oil shocks
Policy response on the premise that it was a
temporary shock (business cycle)
But it was not; consequence…
Regional migration stopped
 Persistent large unemployment
 Increasing public debt (which was not a big problem
before)
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6
7
Which kind of crisis is this?

This crisis is more structural than usual business cycle
because:
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Deleveraging (financing will be more difficult in some
countries for some industries)
Current account reversals (some countries need to close
current account because no financing will be available in the
future) => new competitors
Devaluation (tradable vs. nontradables)
Trade
Pattern of world consumption may change (for instance,
Chinese consumers will demand different goods than U.S.
consumers)
Global Trade and Manufacturing Have Fallen Sharply
Industrial Production and
Manufacturing PMI
Merchandise Exports
(3m ma over 3m ma annualized)
(3m ma over 3m ma annualized)
15
60
60
Global IP
10
55
5
50
Emerging
40
World
30
0
20
50
10
-5
0
45
Advanced
-10
-15
8
-10
-20
40
Global Manf. PMI
(SA, 50+=expansion; RHS)
-30
-20
-40
35
-50
-25
Mar.09
-30
Jan-00
Feb.09
30
Jan-02
Jan-04
Jan-06
Jan-08
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
-60
-70
Emerging Economies Growth Slowed By
Falling Exports and Industrial Production
Industrial Production
9
Merchandise Exports
(in percent change from a year earlier)
(in percent change from a year earlier)
20
Emg. Asia
Emg. Asia
60
Emg.
Europe
15
40
10
20
5
Latin
America
Latin
America
0
0
-20
Emg.
Europe
-5
Nov.08
Nov.08
-10
03
04
05
06
07
08
-40
09
03
04
05
06
07
08
09
Great volatility in Exchange Rates
Exchange Rates 1/
(percent change; Sept. 2008 vs. March 2009)
Nominal Effective rate
Real Effective Rate
Poland
Mexico
Russia
Hungary
Korea
Brazil
Romania
Malaysia
Argentina
Thailand
Bulgaria
Estonia
Latvia
Lithuania
China
-30
-20
-10
0
10
1/Bilateral rate in euro per local currency. Positive numbers denote appreciation of local currency.
10
GDP Hardest Hit in Economies
More Reliant on Manufacturing Exports
11
2008Q4 GDP Growth vs.
Advanced Manufacturing Share in GDP
0
3
6
9
12
15
18
21
0
GDP Growth Q4/2008 (SAAR)
Australia
Netherlands
Spain
-5
Canada
France
U.K.
U.S.
Germany
Italy
-10
Mexico
Malaysia
Japan
-15
-20
Korea
Thailand
-25
Taiwan
POC
-30
Share of high and medium-high tech manufacturing VA in GDP
Sources: CEIC, OECD, Haver Analytics and IMF staff calculations.
Ireland
In addition this crisis is expected to be exceptionally long12
Real and Potential GDP Growth 1/
Output Gaps
(percent change from a year earlier)
(percent of potential GDP)
4
10
Emerging
Emerging
8
2
6
World
0
4
2
-2
0
World
-2
-4
Advanced
Advanced
-6
-4
90
95
00
05
10
90
95
00
05
10
1/ Estimates of the output gap, in percent of potential GDP, are based on IMF staff calculations. GDP growth rates of actual
(solid line) versus potential (dashed line) for advanced economies. For emerging economies, Hodrick-Prescott filter applied
for potential GDP.
13
Characteristics of the Crisis
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Deep
Prolonged
Worldwide
Financial/Trade
Global Imbalances
New role of fiscal policy
Impact on Labor Markets (I):
Deep and Prolonged

The crisis will be deep. Safety nets, which were
thought for a normal business cycle, may be not
good for such a deep and prolonged recession.
Changes may be necessary to unemployment
benefits
 Protect most vulnerable groups

14
Impact on Labor Markets (II):
Worldwide

Usual “safety valves” are not possible:
Migration is not an option;
 Remittances are not an option; and
 Lower wages will not work well.

15
Impact on Labor Markets (III):
Sectoral Reallocation
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Not a simple business cycle fluctuation
Many workers need to change sector
For instance, many Eastern European countries,
which used to run large current account deficits,
will need to generate more export/less import
=> sectoral reallocation of workers
16
Impact on Labor Markets (IV):
Industrial Policies are Back!

Some industrialized countries are bailing out
companies with the condition that jobs are
saved at home
=> this could damage workers abroad
17
Impact on Labor Markets (V):
Fiscal Constraints
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For now, some consensus that fiscal response is
useful but policies will be constrained in the
future as deficits have to be reduced
Some proposals are dangerous. For instance,
increasing public employment or subsidizing
employment:
not well targeted;
 difficult to reverse; and
 similar to transfers in their effectiveness.

18
Sustainability Concerns and Fiscal Projections
G-20 Advanced Countries
Fiscal Balance and Public Debt
G-20 Advanced Countries
Public Debt
(in percent of GDP; PPP GDP weighted)
-14
19
(in percent of GDP; PPP GDP weighted)
160
160
Contingent
Liabilities
-12
140
140
-10
Public debt
(RHS)
-8
120
-6
Baseline
100
-4
Fiscal Balance
(LHS; inverse)
120
Low growth
100
80
80
-2
0
60
07
08
09
10
11
12
13
14
60
07
08
09
10
11
12
13
14
7
20
Difficult Choices (I)

Subsidizing employment
Large fiscal cost
 Obstacle to sectoral reallocation
but..
 Need to avoid skill depreciation
 Can be cost-effective, considering cost of
unemployment

21
Difficult Choices (II)

Subsidizing capital/firms
Bad incentives
 Political problems
 Obstacle to sectoral reallocation
but..
 Could preserve some viable companies
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22
Workers are also Consumers...
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Labor market policies may influence consumers’
behavior
Three specific factors affect consumption at this
juncture:
decreases in wealth;
 tighter credit constraints; and
 high uncertainty.
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Need to increase confidence in
workers/consumers