2.2 Cyclicality of net flows across sectors and out of employment, 2005–17

t he d yn A mi C s o F lA bor mA rket Adjust ment 31

TABLE 2.2 Cyclicality of net flows across sectors and out of employment, 2005–17

OLS coefficients of the cyclical components of net flows and lagged growth

Net flows into Argentina Brazil Chile Ecuador Mexico Peru Note

Formality Informality Informality (wages) Independent work 474.0 1153.3 160.5 30.4 888.7 −2639.7 ***

−382.3 −177.8 −697.4 −121.9 −2879.4 465.1

−571.8 −435.9 −506.7 15.6 −5439.9 165.9

163.7 −413.9 −943.4 −702.0 ** −2629.9 705.5 *

OLS coefficients of the cyclical components of net flows between employment sectors and lagged growth

Quarter 1 Quarter 2 Argentina Brazil Chile Ecuador Mexico Peru Note

Formal (private sector) Informal −443.5 −102.0 −851.4 −46.9 −2660.1 1812.1 *** Unemployment 5.7 −305.7 415.4 44.7 277.6 55.3 Out of labor force −101.9 −555.4 −12.5 −123.1 393.3 299.0

Informal (wage) Formal (private sector) 506.8 −95.4 −243.7 110.2 1759.8 −997. 3 ** Unemployment 175.6 298.8 304.5 681.6 ** 776.6 971.6 ** Out of labor force −252.22 373.3 448.2 −117.0 4413.8 −293.9

Independent work Formal (private sector) −63.3 197.4 1095.1 −63.2 900.3 −814.8 ** Unemployment 421.5 * 33.7 −595.9 −39.4 2158.3 267.8 Out of labor force −756.6 ** −100.9 −101.6 −94.3 6580.4 860.0

Source: Sousa 2021. Note: These calculations are based on the cyclical components of net flows (formal to informal work minus informal to formal work, and so forth) of full-time jobs. The sample analyzed is limited to workers who were in the formal private sector, in the informal wage sector, or independent (self-employed and employers) in the first quarter of observation. Flows are estimated as the number of workers who changed their employment status between two consecutive quarters of observation. The cyclical component of each flow is estimated with seasonal adjustments and a Hodrik-Prescott filter. OLS = ordinary least squares. Significance level: * = 90 percent, ** = 95 percent, *** = 99 percent.

work are also procyclical, while the country’s flows from informality (both dependent and independent work) to formality are countercyclical. The question of why this might be the case for Peru (and not the other countries studied) may be worth exploring further in future research. A key distinctive feature of Peru compared with the other countries studied is Peru’s high share of self-employed workers and low number of formal salaried employees (Jaramillo and Nopo 2020).

Adjusting hours worked

A temporary reduction in hours could be an effective alternative to layoffs when a firm faces a temporary decrease in demand. By reducing the hours of employees rather than letting them go, the firm can maintain the employment links it has previously established, reducing firm adjustment costs (current firing costs and future hiring costs), while preserving valuable firm-specific human capital. However, employees whose hours are reduced will see their incomes fall but not be able to tap into unemployment insurance (in the countries where this mechanism exists). Labor regulations restrict the extent to which this option is feasible in the LAC region’s formal sector.7 (These labor regulations are discussed in more detail in chapter 3.) Even so, the option may be an additional margin of adjustment available to the informal sector and independent workers. For example, rather than becoming fully unemployed, self-employed workers may instead reduce their work hours in response to lower demand for their services.

Analysis of net flows into part-time work in the LAC region suggests that this option is not a significant margin of adjustment in the labor market, either in general or in the

32 e mployment in Crisis

formal or informal sectors. Figure 2A.1 in annex 2A shows the net flows into part-time work among workers who remain in the same sector (formal or informal), thus isolating the adjustment of existing employment. In Argentina, Brazil, Mexico, and perhaps Peru’s formal sector, net flows into part-time work seem to spike in the early part of the 2008–09 global financial crisis, but these flows show similar spikes outside crisis periods. Of the net and gross flows into part-time and fulltime work across the six countries and two sectors, only flows into part-time work in the informal sector of Ecuador are correlated with the cyclical component of growth.

Despite the differences in regulations between the formal and informal sectors, in four of the six countries analyzed, net flows into part-time work in the two sectors are positively correlated: they move together, suggesting similar patterns of fluctuations in job finding and churning rates. This correlation is particularly strong in Mexico (with a correlation coefficient of 0.59) and less strong in Argentina (0.24). With a correlation coefficient of −0.23, Chile has the strongest negative correlation between net flows into part-time work in the two sectors.8

There is evidence that Argentina’s informal sector makes some adjustments through the reduction of hours (panel a of figure 2.3). At the beginning of the global financial crisis, the number of part-time workers flowing into full-time work in Argentina fell below trend, while the number of full-time workers flowing into part-time work greatly surpassed the trend. At the end of the crisis, the data reflected a short but large reversal: flows into full-time work grew significantly above trend. As shown in panel b of figure 2.3, adjustment to part-time status in the formal sector is not strongly correlated with growth. However, transitions across full- and parttime status are highly cyclical for independent workers. Transitions into full-time work are strongly procyclical (increasing during good times and decreasing during bad times), while transitions to part-time work are strongly countercyclical (increasing during bad times and decreasing during good times).

What are the main margins of adjustment in Latin America?

The analysis above, which measures the cyclicality of labor transitions across job types, shows that despite the evidence of informal employment serving as a buffer for employment in the LAC region, unemployment in the region is strongly countercyclical (despite large differences in labor markets among countries). In contrast, exits from the labor force or shifts to part-time work do not appear to play a big role in Latin American labor markets’ adjustment to crises. Importantly, the results presented in this section until now reflect only the short-run adjustments to crises: unemployment is the main margin of adjustment during that period, but in the medium to long run, workers may transition from unemployment to informality, as has been shown by Dix-Carneiro and Kovak (2019).

This section’s findings reflect significant changes in Latin America’s flows to unemployment during the global financial crisis, despite the relatively low estimates for these shifts given by Okun’s Law for Latin America.9 According to that rule of thumb, the acceleration of GDP growth in the region by 1 percentage point is associated with a contemporaneous (or 1-year lagged) 0.2 percentage point reduction in the unemployment rate. Existing data on the LAC region as a whole do not allow for a precise estimate of this elasticity when restricting the sample to crisis years. However, this estimate can be made for Brazil and Mexico, where we find an elasticity of about 0.5 during crises in the 2000s. In line with this estimate, the latest projections of the impact of the COVID-19 pandemic on the region predict a 9.1 percent drop in regional GDP and a rise of 4 to 5 percentage points in the unemployment rate, which would correspond to a record 44 million workers unemployed.

The important role of the informal sector reflected in this section’s findings helps explain why, at the aggregate level, the unemployment rate seems to be less