Transcript Coping with the Crisis: Policies to protect workers

COPING WITH CRISES:
POLICIES TO PROTECT WORKERS
The World Bank
PRMPR
LABOR MARKET IMPACTS OF THE CRISIS

During 2009, the economic crisis turned into a jobs
crisis
In the developed countries, pool of unemployed estimated to
have increased by 15 million in 2009 (ILO, 2010)
 In developing countries: primarily lower earnings because
of lower hours worked, and a probable shift towards low
productivity, low pay jobs and more underemployment

(Khanna, Newhouse and Paci, 2010)

Labor is the main channel through which shocks are
transmitted to households
Especially in poorer countries
 Especially for the poor in those countries

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WHY POLICY INTERVENTIONS?

Short-term responses to crisis may have
important long term effects (Paci, Revenga and Rijkers,
2010)
Households coping responses
 Persistence (low pay traps and labor market scarring)
 Firm creation and destruction

Affecting the most vulnerable
 Optimal responses differ depending on channel



e.g. unemployment insurance (reductions in
employment) vs. cash transfers (reductions in wages)
Existing policies and institutions have an impact
on adjustment patterns (Paci, Khanna and Newhouse,
2010)
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WHY POLICY INTERVENTIONS?
HOUSEHOLD LEVEL EFFECTS:
DAMAGE TO HUMAN AND PHYSICAL CAPITAL

Household coping responses can have negative
long-term effects on welfare:
Take children out of school
 Spend less on health and nutrition
 Sell productive assets e.g. livestock


Loss of jobs destroy firm-worker human capital
gains
Unemployment persistence
 Low pay traps and labor market scarring

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WHY POLICY INTERVENTIONS?
FIRM LEVEL EFFECTS:
CREATIVE OR DESTRUCTIVE DESTRUCTION?

Schumpeterian creative destruction – resources
reallocate from inefficient to more efficient firms


But assumes perfect markets
Risk of excessive cleansing
Efficient production arrangements are more
vulnerable to credit constraints
 Innovative firms also more vulnerable
 Jobs created in crisis are less productive, pay less,
last less
 Risk of excess churning

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WHY POLICY INTERVENTIONS?
EQUITY CONSIDERATIONS

A crisis that started in the OECD countries but
quickly spread to developing countries because of
Lower exports demand
 Credit crunch
 Lower remittances and less new migration


Within developing countries, past crises suggest
rapid contagion from the directly hit sectors to
other parts of the economy and ultimately
affecting the most vulnerable
Mexico: rural farm workers saw a 17% income
reduction
 Indonesia: earnings fell by 40% across the board

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WHAT HISTORY TELLS US ABOUT POLICY

Custom tailor policy responses. These should
depend on
Type of shock and adjustment mechanisms
 Fiscal space
 Capacity and political economy constraints


Comprehensive policy packages beat piecemeal
interventions


Synergy and complimentarity
Easier to expand existing programs than start
from scratch during crisis
“on the run” policies have weak targeting
 difficulties associated with implementing incentive
compatible packages from scratch

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CONSTRAINTS AND TRADE-OFFS

Policy constraints
Labor market information lacking
 Fiscal space limited
 Institutional and political economy constraints


Policy trade-offs

Short-term assistance vs. long-term structural reform


Financial sector, labor market regulation
Support those most immediately affected or protect
the most vulnerable and chronically poor

Rapid contagion of crisis
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TAXONOMY
Protecting what/whom?
Protecting
Firms/Employ
ment
Directing
support or
acting on
labor market
imperfections
?
Providing
direct support
Rectifying
market
imperfections
Payroll
tax
holidays,
wage
subsidies,
reduction in hours
worked,
selfemployment
assistance
Alleviate
credit
constraints,
reform
labor
market regulation
Protecting
Workers/Earnings
and
Earnings
potential
Social
protection
policies:
unemployment
insurance,
public
works
programs,
cash transfers
Training programs,
conditional
cash
transfers (CCTs), job
search assistance
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POLICY RESPONSES
1. Protect employment directly

Tax holidays, wage subsidies


Constraint: high costs per job created and political economy
constraints (opposition from unions)
Self-employment assistance programs

more promising when targeted at particular groups such as women
and older individuals
2. Addressing labor market imperfections in the credit
market
Avoiding a credit crunch
 Microfinance schemes


In Indonesia, micro-finance institutions (MFIs) appear to have
been very resilient to the East Asian crisis
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POLICY RESPONSES
3. Social protection of those hit by the crisis

Extended unemployment benefits


Public works


requires time and substantial fiscal and institutional capacity to implement,
monitor and target
most common response to the current crisis (ILO, 2009)
Targeted cash transfers


IF labor market adjustments take place through earnings rather than the
quantity of jobs THEN: relatively low administrative costs and do not
distort prices.
In contrast, they cannot rely on self-selection, and political pressures may
potentially make a scaling back of temporary programs impossible once the
crisis is over.
4. Promoting human capital accumulation and employability

Conditional cash transfers


But where cash transfer programs are not in place, conditional schemes
take longer to implement than unconditional schemes; poorly designed
schemes can exclude the most vulnerable
Training programs

Can help enhance worker productivity
PREPARE, PRESERVE, EXPAND POLICIES
THAT WORK


Luck favors the prepared
Designing, implementing and evaluating sound
policies ex ante:






Prudent fiscal management -> resources for response
Reliable labor market information systems -> make
informed choices, monitor and evaluate
Flexible labor market regulations
Well functioning credit markets
SOUND SAFETY NET SYSTEMS -> can be expanded
Hopefully NOW we’ll see: increased global effort to
put in place efficient policy systems and high
frequency data to monitor labor market outcomes.
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WHAT HAPPENED IN
THIS CRISIS?
LABOR MARKET DYNAMICS IN THE
CURRENT CRISIS
 Higher
impact on earnings than on job
creation
 Increasing underemployment and shift
into low productivity sectors which offer
less work and lower earnings


Lower earnings in ‘formal’ and higher paying
sectors
Increased labor supply in informal, lower
paying sectors -> lowering earnings further
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IN SELECTED MICS HOURS WORKED AND
EARNINGS PLAYED A MAJOR ROLE
Number of
countries
Change in total wage bill
2 Year Pre
Crisis
Average
Postcrisis
Difference
between Post
and Pre Crisis
28
9.4
1.1
-8.3
Percent change in employment
41
2.0
-0.1
-2.1
Percent change in earnings
.
31
6.7
1.3
-5.4
Percent change in wages
14
5.1
5.8
0.6
Percent change in hours.
14
1.4
-4.3
-5.6
Contribution to change in wage
bill growth
% due to
employment
% due to
earnings
26%
Contribution to change in
earnings growth
%due to real
wages
74%
%due to hours
-20%
20%
60%
100%
THE FALL IN PRODUCTIVITY MAY BE THE RESULT
OF A SECTORAL SHIFT IN EMPLOYMENT
al
e
g
ur
in
m
an
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ac
t
ct
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In
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ho
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du
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se
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es
es
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Se
rv
pr
od
uc
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w
Ag
ric
ul
tu
re
-6
-4
-2
0
Change in growth
-3 -2.5 -2 -1.5 -1
2
-.5
Growth in employment and change in growth of employment across sectors
sectors
Crisis YoY Growth
Change in growth
POLICY IMPLICATIONS
How to protect earnings (not only jobs)?
 Preliminary evidence suggests that effective
policy packages should include earnings and
income support.

 Responses
in European OECD countries
include
partial unemployment insurance,
 expanding cash transfers to poor workers
 temporary wage subsidies.
 These may be priority interventions in those
countries where hours and earnings
adjustments dominated.
