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Job Creation in Latin America

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. What’s driving deficient formal sector job creation? Trade openness Regulation New agenda: Labor regulation for productivity growth

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Job Creation in Latin America

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  1. Job Creation in Latin America W.F. Maloney World Bank www.worldbank.org/laceconomist State Dept. Oct. 2004 Washington, DC

  2. Four issues in job creation • What’s driving deficient formal sector job creation? • Trade openness • Regulation • New agenda: Labor regulation for productivity growth • Integral labor policy and the law of unintended consequences • What can we expect from micros?

  3. I. Employment growth below the 70s and 80s Slowdown in 90s partly due to slowing demographics and female participation

  4. Employment rises through 1990s, then falls Employment/Working Age Population And what about the quality of the jobs?

  5. Mexico: Liberalization, crisis, increased female participation and… job creation. Manufacturing Real Wages and Unemployment Evolution

  6. Two important tendencies in job creation– Agriculture (IMSS Data) and Maquilas China Syndrome

  7. Third dynamic- increase in informality? What does it mean?

  8. Rise in informality in early 1990s-booms and welfare improvement? Mexico Self Employed  Formal Formal  Self Employed 66% voluntary Unemployment Bosch y Maloney 2004

  9. Colombia: low rates of formal job creation and increases in informality Colombia Income Formal/SE #Form/#SE

  10. Nominal rigidities have compounded the impact of the crisis Distribution of informal and formal salaries Similar effects probably at work in Argentina. Regulations do matter!

  11. But in the long run, informality is reduced by increased formal sector productivity Self-Employment vs Level of Development % Self Employed in Work Force Log. Industrial Value Added/Worker

  12. LR: Increased formal productivity raises demand, increases opp. cost of SE Change in formal sector productivity

  13. II. Expand agenda: Labor market as part of the National Innovation System (NIS) Half of growth is technological progress Fuented: Calderon, Fajnzylber y Loayza (2002)

  14. R & D in Mexico and LA: far below the average of innovation superstars Israel Finlandia Korea China India Argentina Mexico Costa Rica Fuented: Lederman y Maloney (2002)

  15. 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?

  16. 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

  17. 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.

  18. 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.

  19. 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?

  20. 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

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