1.3 Stabilizers and macroeconomic frameworks: Policy reforms

12 Employm E nt 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.

Beyond large-scale unemployment 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

Stabili zers + M a c r o e c o n o m ic framewor ks

Prudent macroeconomic frameworks to avoid crises • Normalized in ation implies labor market adjustment on quantitative employment, with long-lasting scarring

Monetary and scal stabilization policies to manage crises • Create scal space with a broader, long-term perspective (tax policy, energy subsidies, social spending e ciency, and nancial 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

o verview 13

Workers: A policy package for cushioning crises’ impacts and preparing for change

The labor scarring documented in this study and its adverse impact on countries’ productivity potential imply that greater long-term growth could be achieved in the LAC region if crisis-induced, worker-level human capital decay was reduced. This change would require cushioning the shortterm impact of job loss through income support to protect welfare. However, displaced workers need more than just income support to recover from crises; they also need social protection and labor systems that help build human capital and promote faster, higher-quality transitions into new jobs. Social protection and labor systems should help people to renew and redeploy their human capital. In this broader sense, reforms to the LAC region’s existing social protection and labor policies and systems are needed. These reforms will, in turn, affect labor market flows and provide a responsive system that contributes to countries’ automatic stabilizers.

Although some workers can benefit from expansionary macroeconomic policies, this study shows that others are scarred more permanently by crises and are unlikely to respond to such policies. Social protection and labor systems would be the second line of response to avoid or mitigate the aforementioned scarring effects. However, in general, and despite tremendous advances in the past thirty years, countries in the LAC region still lack reliable and robust income protection paired with effective job-search support services. The need for such programs is intensified by the fact that the margin of adjustment to crises has shifted toward the quantity of employment, resulting in more cuts in hours, more dismissals, and, as shown by research for this study, much slower creation of new formal employment relationships. Most people who lose their jobs or whose livelihoods are otherwise adversely impacted in a downturn are largely unprotected.

Governments around the world have learned the importance of strong social protection and labor systems to limit scarring and other human capital losses caused by crises. Despite advances in this area, formal assistance in the case of labor income loss— or other losses of livelihood associated with economywide transitory shocks—is still beyond the reach of most people in the LAC region. Two-thirds of LAC countries do not yet offer nationally administered income support plans for people who lose their jobs. These countries rely instead on severance pay mandates, which perform poorly in the context of systemic shocks. In terms of job search support, most LAC countries spend very little on active labor measures, and even those that spend more have poor track records for their programs.

At the same time, countries’ social protection and labor systems are oriented principally toward providing cash transfers to chronically poor households. Although these programs offer vital “last-resort” support and in some countries are able to quickly scale up during crises, they still fall short of meeting the needs of most displaced workers. In the COVID-19 crisis, countries have relied heavily on cash transfer programs to get money into the hands of vulnerable people quickly. Some of these programs have been more effective than others: for example, the success of these efforts in the LAC region is largely determined by the coverage of the population by social registries, which allow programs to be quickly expanded to include previously uncovered and newly vulnerable groups. Countries that entered the COVID-19 crisis with low-coverage social registries and weaker social assistance programs were less able to provide robust income protection.

How can LAC countries do better for workers and communities in terms of social protection and labor responses to crises? Policy actions to buffer the effects of crises on workers can be organized into the following categories:

14 e mployment in Crisis

1. Augmenting unemployment income support through the creation or redesigning of unemployment insurance. A history of frequent systemic shocks combined with the emergence of a significant middle class has created more demand for robust unemployment insurance mechanisms in LAC countries than exists in other regions (De Ferranti et al. 2000).

Past crises and the 2020 pandemic shock have dramatically demonstrated the usefulness of unemployment income support systems with deep and extensive risk pools that provide a channel for additional, extraordinary support measures when needed. In Latin America, several countries have implemented changes to their social insurance plans that loosen eligibility requirements and increase benefits. For example, Brazil and Chile, in addition to paying benefits to displaced workers, used their unemployment insurance systems to implement subsidized furlough measures and other employee-retention programs. These systems make all the difference in how well labor markets adjust to crises. 2. Improving the capacity of social assistance transfer programs to be robust and responsive. There are three main policy priorities when improving the dynamism of social assistance cash transfers.

First is improving the “adaptability” of these programs, that is, their capacity to respond to shocks (such as economic or natural disasters), including by establishing comprehensive and dynamic social registries that are usable across social programs. On the basis of a rare quasinatural experiment, Gerard, Naritomi, and Silva (2021) show that expanding welfare programs has aggregate benefits for the entire local economy in addition to individual-level benefits. Second is moving from budgeted programs to protection guarantees, thus transforming these programs into safety nets that can expand to catch all those vulnerable to impoverishment before they become poor (Packard et al. 2019). Third is preventing the emergence of assistance “ghettos” by structuring benefits to incentivize the return to work (with support from augmented reemployment services).

3. Building robust and coordinated employment services to get people back to work quickly. Several lessons from international experience can be used to guide the reform of reemployment support services. First, it is important to move away from single interventions and toward providing an integrated package of services (such as combinations of coaching, training, information, and intermediation, all informed by market demand).

Even individuals who are affected by the same type of shock seldom face identical constraints to accessing new jobs. Hence, the success of a reemployment program depends on its ability to adapt its services to different profiles and needs. Second, to make this change, public employment assistance services need strong registration and statistical profiling systems. Finally, modern monitoring and evaluation practices are key to assessing the results of programs and to introducing course corrections when needed. Making larger, more effective programs fiscally sustainable will require diverse sources of financing: when governments make risk-pooling structures more widely available to cover shocks with uncertain and catastrophic losses, it is reasonable to expect resources contributed by people and firms to meet the needs of more-foreseeable and less-costly shocks. Today, most active labor measures are financed from general budget expenditures, spreading already small allocations too thin.

4. Supporting working people through periods of change by enhancing their skills. This effort involves strengthening technical education and vocational training, expanding short-cycle higher education programs to reach low-income students, and conditioning the funding for such programs upon participants’ employability.