Introduction

The Impact on Workers, Firms, and Places 3

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. 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

52 e mployment in Crisis

dissolved because of the temporary shock. This loss may slow the ramping up of production later on, and it implies a loss in productivity. However, job loss spurred by an economic crisis can also have an important cleansing effect and lead to increased productivity at both the firm and market levels. It can be a good thing—provided that new jobs are created after the crisis is over.

This chapter begins with a careful characterization of the scarring caused by involuntary and exogenous job loss—that is, job loss unrelated to the worker’s performance or preferences—by looking at the longterm wage losses of displaced workers following firm closures. The literature on the LAC region finds large, short-run effects of such displacements; for example, Amarante, Arim, and Dean (2014) find wage losses in excess of 14 percent one year after job separation for high-tenure Uruguayan workers. Arias-Vázquez, Lederman, and Venturi (2019) add to this growing literature, finding large and long-lasting wage effects of displacement caused by firm closure. Two years after the closure of a plant, wages tend to be 11 percent lower for displaced workers than for nondisplaced workers. Four years after the closure, the wage gap is 6 percent. Wages do not fully recover until nine years later.

Next, this chapter considers the scarring caused by the initial conditions faced by new entrants into the labor force in the LAC region. It considers whether there are longterm employment and wage consequences of entering the labor market during a downturn, generating what the popular press calls “a lost generation.” This question is particularly salient for the LAC region, given its high rates of youth unemployment and its investments in increasing and improving educational outcomes at the secondary and tertiary levels. Are these investments in the region’s human capital stock undermined by frequent crises? Previous research that has found evidence of long-term effects of economic downturns on labor market entrants has focused on high-income economies.1 Studies of countries such as Japan, Sweden, and the United States find evidence of negative long-term wage effects for new graduates.

But to what extent do these results apply to labor markets in the LAC region, where the share of college-educated workers is far smaller and where informality continues to be a significant employment option? Moreno and Sousa (2021) estimate the extent of the scarring caused by the initial labor conditions new entrants face in the first decade of their working lives in four Latin American economies. Their findings confirm that entering the labor market during a crisis does have longterm consequences in the LAC region. However, this scarring is found in employment outcomes (lower participation rates, higher unemployment rates, and higher likelihood of informality) rather than in a long-term effect on earnings, and it is most prominent among workers with only secondary education. Similarly, Fernandes and Silva (2021) find stronger scarring effects in employment and wage outcomes for lower-skilled workers than for higher-skilled workers in the formal sector in Brazil and Ecuador. One explanation for this effect is that competition is lower for skilled jobs because of the relative scarcity of college graduates in the LAC region. That is, the analysis suggests that scarring is likely exacerbating the region’s high level of wage inequality.

Switching gears to consider efficiency, this chapter shows that there are three main ways in which LAC firms and sectors adjust to crises that can alter their efficiency in the long term. First, worker adjustment varies depending on workers’ employer or firm characteristics: workers for larger, better-managed firms cope better with crisis effects (Fernandes and Silva 2021). This finding has implications for firms’ productivity and labor demand. In the LAC region, the adjustment mechanisms to crises include cleansing effects; scarring, which reflects a lack of opportunities; and shocks to distortions that led to rents, with potential positive effects on efficiency in the long run.

In addition, the results presented in this chapter lead to questions about how institutional and market factors external to workers affect scarring and, in general, long-run prospects for job recovery. The chapter’s results show that employment in protected