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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. 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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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
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?
i employment growth below the 70s and 80s
I. Employment growth below the 70s and 80s

Slowdown in 90s partly due to slowing demographics and female participation

employment rises through 1990s then falls
Employment rises through 1990s, then falls

Employment/Working Age Population

And what about the quality of the jobs?

mexico liberalization crisis increased female participation and job creation
Mexico: Liberalization, crisis, increased female participation and… job creation.

Manufacturing Real Wages and Unemployment Evolution

two important tendencies in job creation agriculture imss data and maquilas
Two important tendencies in job creation– Agriculture (IMSS Data) and Maquilas

China Syndrome

rise in informality in early 1990s booms and welfare improvement
Rise in informality in early 1990s-booms and welfare improvement?

Mexico

Self Employed  Formal

Formal  Self Employed

66% voluntary

Unemployment

Bosch y Maloney 2004

colombia low rates of formal job creation and increases in informality
Colombia: low rates of formal job creation and increases in informality

Colombia

Income Formal/SE

#Form/#SE

nominal rigidities have compounded the impact of the crisis
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!

but in the long run informality is reduced by increased formal sector productivity
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

lr increased formal productivity raises demand increases opp cost of se
LR: Increased formal productivity raises demand, increases opp. cost of SE

Change in formal sector productivity

ii expand agenda labor market as part of the national innovation system nis
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)

r d in mexico and la far below the average of innovation superstars
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)

central mystery why don t poor countries take advantage of global stock of knowledge
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
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
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
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
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
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