T he challenge of creating good jobs in Latin America: Recent trends & policy options

1. The challenge of creating good jobs in Latin America: Recent trends & policy options Carmen Pagés Chief of Labor Markets Unit Inter-American Development Bank

2. Thispresentation:

3. 1. Unemployment and underemployment in LAC

4. On average, unemployment in LAC is lower than in OECD countries, but not much lower… Average OECD: 8.5% Average LAC: 7.5% Source: Own elaboration from LAC household surveys and OECD data; OCDE 2010, LAC Circa 2009

5. Youth unemployment is also below, but close to OECD levels… Source: Own elaboration from LAC household surveys and OECD data; OCDE 2010, LAC Circa 2009

6. and underemployment is much higher… Share of total Employment Underemployed Underemployment: Share of workers that work less than 30 hours but willing to work longer Source: Own elaboration from LAC household surveys and OECD data; OCDE 2010, LAC Circa 2009

7. And most jobs are created in the informal sector… Composition of new job creation

8. And within the formal sector, half or more of the jobs are temporary… Composition of new job creation 9% 21% 32% 12% 21% 33%

9. 2. Explaining the good jobs deficit…

10. GDP growth is the engine of job creation, and productivity growth is the engine of GDP growth. Evolution of relativeGDPpc, TFP, and Factor accumulation, vs US

11. 2.3 2.2 2.1 South East Asia 2.0 1.9 1.8 1.7 DevelopedCountries 1.6 1.5 1.4 1.3 1.2 1.1 LAC 1.0 0.9 1976 1980 1984 1988 1992 1996 2000 2004 1960 1964 1968 1972 Productivitygrowth in LAClagsotherparts of the world Evolution of TFP ( Index1960=1) US

12. Productivity growth lags in manufacturing, and more importantly in services

13. Productivity gaps are highest in the service sector…

14. Services have grown to be 60% of employment but most jobs in this sector are of low productivity  informal

15. Productivityishigher in largerfirms…

16. and there is a strong association between productivity and informality

17. Counterfactual: Increasing share of medium and large firms, would increase productivity by.. • 90% in El Salvador • 120% in Mexico

18. In sum, low productivity growth hampers the creation of good quality jobs… Most jobs created in micro firms of low productivity that survive being informal. Need to discern whether: • Insufficient supply of good firms that can grow and create good jobs in the process. • Insufficient creation of large, productive companies.

19. 3. Addressing the good jobs deficit.

20. Howtoimproveproductivity? • A number of policies can helpimproveproductivity & goodjobcreation in the region: • Reducingtransportationcoststhatpreventproductivefirmsfromgrowing • Improvingtaxregimesthatpreventproductivefirmsfromgrowing • Promotinginnovationthatpreventfirmsfromgrowing in productivity • Butalso, needtoimprove labor policy

21. Labor policy • In the face of precariousness, informality and temporality many labor authorities resort to tighten (or attempt to tighten) their labor laws… • But on paper, restrictions to temporary employment, informality and other forms of precarious work are already very high.. • Although often not well enforced… • And for a reason… with low productivity compliance is not an option, the choice is between precariousness or unemployment.

22. Instead labor policy should go to the root of the problem and foster productivity growth: • Improving training systems • Redesigning social insurance

23. The % of LF thatbenefitsfrom training islow

24. Training systems suffer from: • Low quality • Low pertinence & relation to needs of firms • Information problems

25. Improving training systems: • Increase quality control: (M&E, follow up graduates, skill certification, accreditation). • Improve information about the system: Who is doing well, who is not?. What professions pay more? • Increase pertinence: Increase involvement of private sector to define training contents. • Increase competition or improve regulation. • Co-financing

26. Social insurance systems: • Finance health & pensions with high taxes on labor. • Mandate very high employment protection, but in most countries no UI. • Reach only a minority. • New wave of non-contributory programs for informal. • Reduce incentives to hire in the formal sector & increases informality. • Reduce productivity

27. Improving SI Universal Coverage funded with broader base taxes • Advantages: (specially in health) • It covers everyone, all the time, with the same benefits • It reduces distortions in the labor market • It allows for an integrated health system • Disadvantages: • It is fiscally costly, but due to reduction in distortions could beaffordable. Levy et al, 2011

28. Improving SI • Subsidizing SS for low wage workers • Advantages: • It reduces distortions in the labor market • It allows to keep contributory system • Disadvantages: • It may lead to underreporting of wages

29. Improving SI • Reforming EPL to become more like UI. • Pre-financing: • Individual accounts or contributions to a fund. • Improving ALMP (so workers find jobs faster) • Better Intermediation systems • Better job insertion programs

30. Conclusions • In ordertocreatehigherqualityjobs, Latin America needstoincrease the growth of productivity… • …particularly in the fastgrowingservice sector. • Improving training • Modernizingsocial insuranceschemes(pension, health, , EPL and UI) –whichpreventcompaniesfromhiring, particularlylowskilledlabor.