O v e r v i e w 5
Key insights This study offers new insights into each of its three analytical themes: the dynamics of labor market adjustment; the impact of crises on workers, firms, and places; and policy responses to crises.
Crises have significant impacts on the structure and dynamics of employment in Latin America How do crises change labor market flows? A macroeconomic shock results in microeconomic reallocation at the worker and firm levels. At these defining moments, workers’ and firms’ fates are linked. Firms can adjust their number of employees, hours of work, and wages paid, and workers can choose to accept these offers or search for other options. From these interactions, a new short-run equilibrium is formed. Negative shocks result in unemployment more than informality in the short run According to new research for this report, the short-term adjustment to crises occurs primarily through unemployment (Sousa 2021). Although exits from the labor force and shifts to part-time work do not appear to be significant margins of adjustment, Sousa (2021) finds a strong negative correlation between formal and informal job flows in five of the six countries analyzed (reductions in formality are often accompanied by increases in informality, and vice versa), where the countries’ large informal economies serve as de facto safety nets by absorbing excess labor. But even with this buffering function, outright unemployment remains a significant margin of labor market adjustment to economic shocks in the LAC region. The large gross labor flows to unemployment, in turn, represent significant reductions in household income, increasing vulnerability as well as expanding and deepening poverty. Labor income represents
60 percent of household income among the poorest 40 percent of households in LAC countries. Among households not living in poverty, a job loss by the main earner would push 55 percent into poverty. And job loss imposes costs on workers that go far beyond the immediate loss of income.4 Economic adjustment through unemployment is also especially costly because jobs are more quickly lost than gained; in other words, employment losses can persist for a substantial period following a crisis. Net loss of formal employment is driven by reduced job creation This report reveals that most of the reduction in employment in response to a crisis occurs in the formal sector. This result is important, because the potential for good worker-job matches, firm-specific earnings premiums, and match-specific human capital is highest among people who are employed in the formal economy. Fluctuations in unemployment are determined by the rates of transitions into and out of unemployment—job loss and job finding rates, respectively. During economic downturns, these rates are driven by increased job destruction (existing positions are eliminated), reduced job creation (new positions are not created), and lower levels of job reallocation, or churning, as fewer workers voluntarily leave their positions to look for better matches. 5 Addressing each of these transitions will take different policy tools. The relative contribution to unemployment of each type of transition varies across labor markets; some studies of high-income economies find that cyclical unemployment is driven by reduced job finding rates, while others find that it is driven by increased job separation rates.6 Sousa (2021) finds low cyclicality of job losses across formal and informal employment. Instead, in most countries analyzed, adjustment in employment during the global financial crisis of 2008–09 was driven by a drop in net job finding rates that was larger
