Job Creation in Latin America

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					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     70            80         90 *
                          Decade

        GDP Growth rate            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   1994   1995 1996    1997 1998      1999 2000

               Simple average              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
                                            Manufacturing Real Wages and Unemployment Tequila              6.5
                        2.3
                                            Evolution                     Crisis
Relative wages=Mex/US




                                                                                                                 Unemployment rate (%)
                                                                                                           6
                        2.1

                                                                                        Unemployment       5.5
                        1.9

                                                                                                           5
                        1.7
                                                                                                           4.5
                        1.5
                                                                                                           4

                        1.3
                                                                                                           3.5

                        1.1
                                                                                                           3

                        0.9                                                                                2.5


                        0.7                                                                                2
                      80

                                82

                                       84

                                              86

                                                     88

                                                            90

                                                                   92

                                                                          94

                                                                                 96

                                                                                        98

                                                                                               00

                                                                                                      02
                    19

                              19

                                     19

                                            19

                                                   19

                                                          19

                                                                 19

                                                                        19

                                                                               19

                                                                                      19

                                                                                             20

                                                                                                    20
               Two important tendencies in job creation–
               Agriculture (IMSS Data) and Maquilas
     1,100                                                                                                                                                            550

     1,000                                                                 China Syndrome
             900                                                                                                                                                      500

             800
Thous ands




                                                                                                                                                                            Thous ands
             700                                                                                                                                                      450

             600

             500                                                                                                                                                      400

             400

             300                                                                                                                                                      350
                   1983
                          1984
                                 1985
                                        1986
                                               1987
                                                      1988
                                                             1989
                                                                    1990
                                                                           1991
                                                                                  1992
                                                                                         1993
                                                                                                1994
                                                                                                       1995
                                                                                                              1996
                                                                                                                     1997
                                                                                                                            1998
                                                                                                                                   1999
                                                                                                                                          2000
                                                                                                                                                 2001
                                                                                                                                                        2002
                                                                                                                                                               2003
                                                  Maquilas (left axis)                                 Agriculture (right axis)
Third dynamic- increase in
informality? What does it mean?
 .0 8




                                                                                                                               .5 5
                                             F o rm a l S e cto r/In fo rm a l S e cto r
 .0 6




                                                                                                                               .5
                                                                                                                               .4 5
 .0 4




                                                                                                                               .4
 .0 2




        1987q1   1989q1   1991q1    1993q1                                                 1995q1   1997q1   1999q1   2001q1

                          Unem ployment rate                                                             Form al Sector
                          Informal Sector
Rise in informality in early 1990s-
booms and welfare improvement?
                               Mexico




                                                                     .25
                      Self Employed  Formal
  .1




                                                                     .2
                                                Tasa de Desempl eo




                                                                     .15
.05




                                                                     .1
          Formal  Self Employed




                                                                     .05
          66% voluntary

                                             Unemployment




                                                                     0
      0




       1987q1 1989q1 1991q1 1993q1 1995q1 1997q1 1999q1 2001q1

       Bosch y Maloney 2004
Colombia: low rates of formal job creation
and increases in informality

              Colombia
  1.4                               4
                 Income Formal/SE
  1.2                               3.5
   1                                3
                                    2.5
  0.8
                                    2
  0.6
                  #Form/#SE         1.5
  0.4
                                    1
  0.2                               0.5
   0                                0
 19 Q3
 19 Q3
 19 Q3
 19 8Q3
 19 Q3
 19 Q3
 19 1Q3
 19 Q3
 19 3Q3
 19 Q3
 19 Q3
 19 6Q3
 19 Q3
 19 Q3

       3
      Q
    85
    86
    87


    89
    90


    92


    94
    95


    97
    98
    99
    8




    9


    9




    9
 19
               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    10    12                 9                   11             13   15
                                    lwage                                                     logwage
                         Mexico, 1999:1                                             Colombia, 1998




                      Similar effects probably at work in Argentina.
                      Regulations do matter!
But in the long run, informality is reduced
by increased formal sector productivity
                                              Self-Employment vs Level of Development   Peru
                                             .461
  Share of Labor Force in Self-Employment




                                                    Bol


                                                                      ElS
                                                                            Col                Ven
                                                                Gua                            Uru
                                                          Hon         Par

                                                                                                       Arg
                                                                                                               Gre
                                                                             Pan            Mex
                                                                                              Turk
                                                                                      Chi
                                                                            CR
                                                                                                 Bra           Kor
                                                                                                                             Ita

                                                                                                             Por
                                                                                                                      Spa

                                                                                                                     New
                                                                                                                                       Ice
                                                                                                                     Ire         Bel
                                                                                                                             UK
                                                                                                                            Ausl

                                                                                                                                 Fin
                                                                                                                              NethSw
                                                                                                                            Can
                                                                                                                              Fra Ge
                                                                                                                                US

                                            .0576
                                                      Log. Industrial Value Added/Worker                                      Aus D



                                                6.63332
                                                                                   Log of Industrial V.A./ Worker
LR: Increased formal productivity raises
demand, increases opp. cost of SE
             1.2
                                                                                       Wage
          Wage
                                                                                       (salaried)
(self employed)                 Change in formal
               1                sector productivity
                                  Change in salaried productivity




             0.8




         W'se                                                                           W's
            0.6
         Wse                                                                            Ws



             0.4
                   MP's*Ps



             0.2
                                                                           -MPse*Pse
                             MPs*Ps


               0

                                Lse                                   Ls
                             L'se                                   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



        1
                                                                                                   1970-79
                                                                                                   1980-89
        0

                                                                                                   1990-99




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Fuented: Calderon, Fajnzylber y Loayza (2002)
                               R & D in Mexico and LA: far below the
                               average of innovation superstars
                               5.0%                                                                           2
                                                                               R&D      GDP       GDP 
                                                                                    1      2 
                                                                                                  CAP 
                                                                                                       
                               4.5%
                                                                               GDP      CAP
                               4.0%
                                                                                                   Israel         Finlandia
Predicted & Observed R&D/GDP




                               3.5%


                               3.0%


                               2.5%


                               2.0%


                               1.5%                                                        Korea
                                                                      China
                               1.0%


                               0.5%                  India
                                                                                                            Argentina
                               0.0%
                                      4             5             6             7                  9
                                                                                    Mexico8 Costa Rica            10          11

                                                                           Log GDP per Capita
                                          Fuented: Lederman y Maloney (2002)
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           30-72 %
          Informal Credit         4 -23 %
          Training                10-30 %
          Business associations    8-31 %
          Paying taxes            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