The Impact on Workers, Firms, and Places
Introduction The previous chapter showed how crises in Latin America and the Caribbean (LAC) change aggregate employment dynamics and the employment structure. Crises lead to higher unemployment (more than they lead to increases in informality), with particularly prominent job losses in the formal sector. As good job opportunities shrink, the overall economic structure is altered. Job loss caused by crises is particularly painful in the LAC region because of its sluggish recovery processes. The region’s slow job creation depends on demand-side factors, like firms and locations, not just on workers. Although the evidence presented thus far suggests that crises have detrimental impacts at the aggregate level, how severe are their impacts on individual workers? How do sectors and firms adjust employment and wages in response to crises? Which margins of adjustment are used, beyond shedding jobs, and what are their medium- to long-run effects on efficiency? And how do the characteristics of localities shape crisis impacts? These questions are important to the LAC region’s crisis response agenda, particularly because of their long-lasting implications.
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If unemployment is persistent, the associated human capital decay will be greater and will lead to a larger decrease in long-term growth potential. Notwithstanding the size of a shock, if its effects are largely heterogeneous across workers, with some losing much more than others, targeting scarce support toward the workers who lose the most may yield larger gains. The stakes are very high for Latin America in terms of not only growth potential but also social stability; some recent studies have linked job displacement with rising violence (Dell, Feigenberg, and Teshima 2019). Furthermore, the previous chapter showed that quantitative adjustments to crises affect lower-skilled workers more than higher-skilled workers. Scarring can amplify this effect, further eroding the earnings of lower-skilled workers and increasing inequality in an already highly unequal region. Crises can decrease individual welfare, but they can also increase efficiency in the short and medium run. During a crisis, employer-employee matches and the job-specific human capital arising from them, which often take a long time to build and would regain viability when the economy goes back to normal, may be permanently
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