Coping with Crises: Policies to protect workers

1. Coping with Crises: Policies to protect workers The World Bank PRMPR

2. 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

3. 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)

4. 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

5. 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

6. 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

7. 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

8. 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

9. Taxonomy

10. 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

11. Policy responses 3. Social protection of those hit by the crisis • Extended unemployment benefits • requires time and substantial fiscal and institutional capacity to implement, monitor and target • Public works • 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

12. 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.

13. What Happened in This Crisis?

14. 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

15. In Selected MICs Hours Worked and Earnings Played a Major Role

16. The fall in productivity may be the result of a sectoral shift in employment Growth in employment and change in growth of employment across sectors

17. 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.