Economic crises such as the one Latin America and the Caribbean is currently experiencing have lasting effects on the structure of employment and could permanently drive many people out of the formal economy, according to a new World Bank report.
The COVID-19 pandemic mostly impacts low-skilled workers and also exacerbates the region’s already high inequality, according to “Employment in Crisis: A Path to Better Jobs in Post-COVID-19 Latin America.”
After a crisis, low-skilled workers often have lower incomes over the course of a decade, while highly skilled workers experience a quick recovery.
Along those lines, the World Bank recommends that public policies should focus on protecting workers from this strong long-term impact through the use of unemployment insurance, social safety nets, and retraining programs, as well as facilitating job creation and helping workers stay where the jobs are.
All this can be facilitated through greater competition, more flexibility in managing human resources and a reduction in subsidies.
Through trade policies and public procurement, governments can improve the environment for competitive businesses to thrive.
Likewise, public investment focused on transportation can bring workers closer to jobs, while affordable housing can help them reside where jobs are.
“Economic recovery has often been a myth in terms of job creation. The right policies can help limit the impact of crises on jobs and promote the creation of more jobs in the recovery phase,” said World Bank Vice President for Latin America and the Caribbean Carlos Felipe Jaramillo.
As some of the biggest shocks in the region in recent decades show, the consequences of crises in Latin America and the Caribbean are long-lasting and leave deep imprints on employment.
For example, employment data before and after the Brazilian debt crisis, the effects of the Asian financial crisis in Chile, and the impact of the 2008-2009 global crisis in Mexico show that rapid recoveries did not materialize. In all three cases, the employment curve experienced a very negative deviation due to these crises, something that, far from being reversed, deepened over time.
The bank noted that, on average, after three years a recession generates a net loss of 1.5 million jobs, with a 3% contraction in formal employment and an expansion of informal employment.
Thus, the current crisis could be even worse and cause a contraction in formal employment of up to 4%, the WB said. He added that low-skilled workers are often the hardest hit, exacerbating persistent inequalities in the region. For them, the aftermath of crises can last up to a decade, with income losses and increased vulnerability.
In addition, two-thirds of the countries in the region lack unemployment insurance programs. In order to minimize the long-term consequences, governments must put in place policies to support the sustainable revival of the economy and facilitate the recovery of employment.
Strengthening the labour market
“We must seize the opportunity to rebuild better. We must strengthen our labor markets so that they are able to cope and quickly reverse the impact of future shocks,” said Joana Silva, senior economist at the World Bank and lead author of the report.
He pointed out that the first key step is to move towards a solid and prudent macroeconomic context, with automatic stabilizers that protect labor markets against any potential crisis.
He also indicated that a sound fiscal and monetary policy can preserve macroeconomic stability and avoid systemic financial pressures in the face of a shock.
Moreover, fiscal reforms, including a less distorted tax framework, more efficient public spending, financially sustainable social security systems, and clear fiscal rules, are the first line of defense against crises.
Economic aid programs, such as unemployment insurance and other transfers to households during economic downturns, limit the damage caused by contractions and help economies recover.
However, one of the challenges facing the region is that significant segments of the labor force operate in the informal sector and are thus not covered by traditional unemployment insurance.
In addition, it is imperative to increase the capacity of the region’s labour and social protection policies, combining them with systems that provide financial support and prepare workers for new jobs through help with retraining and job relocation.
A rapid response by governments to expand labour and social protection programmes can help to advance the development of higher-quality and more integrated social registers. This is feasible in the short term and can make a difference in the scope of these programs.
The World Bank concluded that stronger macroeconomic stabilizers and reforms in labour and social protection systems are not enough. The recovery of the labour market must also be boosted through strong job creation.
This requires solving structural problems. Competition policy, regional policy and labour standards are key areas. If countries do not address these key issues, the recovery will continue to be characterized by low job creation.