Employment in Crisis
Automatic stabilizers help households smooth their consumption, reducing the immediate impact of the shock on aggregate demand and employment and therefore mitigating the magnitude and composition of its effects on labor markets. In other words, these policies can reduce the severity of a crisis. The LAC region still needs stronger automatic stabilizers in order to ensure effective fiscal responses to crises. Missing or poorly functioning aggregate stabilizers limit governments’ ability to offer dynamic, countercyclical spending, which makes crises harder to manage and amplifies the effects of shocks. B eyond la rge - s c a le u nemploy ment insurance programs, other policies can also serve as automatic stabilizers. During the COVID-19 crisis, for example, strategies like work-time banking, furloughs, job retention subsidies, and short-term compensation programs8 have made up an important share of the spending meant to help limit the
short- and long-term harm of layoffs. Social assistance cash transfer programs have also been expanded, and evidence in this project shows that their expansion has increased employment at the aggregated local economy level, in addition to causing positive effects on poverty and inequality (Gerard, Naritomi, and Silva 2021). Installing some of these instruments as permanent parts of their respective countries’ automatic stabilizers could lower losses and adjustment costs in the wake of future shocks. Some of these programs could be made state-contingent and automatically activated when, for example, unemployment rises above a determined threshold. These microeconomic policies have macroeconomic consequences. A more complete characterization of the policy areas that can be focused on in order to achieve stronger macroeconomic frameworks and create automatic stabilizers (policy dimension 1) is given in figure 1.3.
FIGURE 1.3 Stabilizers and macroeconomic frameworks: Policy reforms
SHOCK
Source: World Bank.
oeconomic fram + Macr ewo rks zers i l i b a St
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Prudent macroeconomic frameworks to avoid crises • Normalized inflation implies labor market adjustment on quantitative employment, with long-lasting scarring Monetary and fiscal stabilization policies to manage crises • Create fiscal space with a broader, long-term perspective (tax policy, energy subsidies, social spending efficiency, and financial sustainability of pensionsystems) Automatic stabilizers to smooth crises • Create or reform unemployment insurance (UI) • Make short-time compensation (STC) programs a permanent part of the economy’s automatic stabilizers • Give UI and STCs the ability to adapt to changing conditions more swiftly
