Conclusion

t ow A rd A n i ntegr A ted p oli C y r esponse 123

more to the trade shock in cities that benefited from higher competition (Han et al. 2016).

What can be done?

Chapter 3 shows that the LAC region faces structural issues that affect the magnitude of the impacts of crises on workers. The policy implication of these findings and the related literature is that even if macroeconomic and labor market policies are in pristine order, better outcomes to crises could be achieved for workers by complementing these policies with sectoral and place-based policies to address the structural issues that impede strong recoveries from crises and have long-lasting productivity effects, as described in this report. This change would involve addressing the inefficiencies in labor market adjustment caused by labor market legislation, product market structures, the lack of geographic mobility, and depressed areas. All things considered, a more complete characterization of the possible policy areas of focus to tackle these structural issues (third policy dimension 3) is illustrated in figure 4.18.

This chapter presented this study’s policy implications and the current context in the LAC region. It argued that LAC countries’ policy responses to crises need to squarely tackle three key dimensions of adjustment. These dimensions are not inconsistent, and they have different weights in each country or setting. They call for a triple entry of policies. The first line of response to crises is policies that lead to fewer crises and that smooth out their impacts at the aggregate level. Reducing the number of crises requires creating a more stable macroeconomic environment and establishing adequate automatic stabilizers that provide countercyclical, publicly financed income support for people negatively affected by labor market adjustments. Prudent macroeconomic (fiscal and monetary) policies prevent certain types of crises and ensure the fiscal space needed to provide support and avert system-wide financial strain if other types of crises occur. Moreover, nationally administered income protection arrangements, such as unemployment insurance, have smoothed consumption and served as automatic stabilizers in most OECD countries. The costs of these programs and the LAC region’s smaller tax base might necessitate a different approach for expanding these programs in the region, such as combining individual savings and risk pooling.

Other potential alternative mechanisms include making the job retention schemes currently employed for the COVID-19 crisis permanent features of the LAC countries’ respective economies by making them state-contingent and automatically activated when, for example, unemployment reaches a certain rate or a recession worsens. By complementing existing adjustment-assistance mechanisms with countercyclical, publicly financed income support for affected individuals, the LAC region could achieve smoother, better-quality adjustments to crises and faster recoveries from them.

Some crises, however, are unavoidable, and better outcomes from them could be achieved if, in addition, the region transitions into augmented social protection programs that reduce scarring effects. The existence of these effects implies that the region could increase its long-term growth if crisis-induced, worker-level human capital decay were reduced. This change would require income support to cushion the shortterm impacts of crises and protect welfare as well as social protection policies aimed at building human capital and promoting faster, better-quality transitions across jobs for displaced workers. Social protection systems provide more than just income support; they also help build human capital. For these reasons, the second line of response includes deep reforms to the LAC region’s existing social protection and labor programs.

Traditionally, crises were viewed as transient (as opposed to permanent) systemic (affecting the whole economy) shocks. Although permanent systemic shocks such as trade liberalization and technological change also affect employment and productivity, they do so

124 e mployment in Crisis

over long time horizons. Cycle-independent (“secular”) forces cause some jobs to become permanently nonviable; these jobs will not rebound in the same firm, sector, or locality. In contrast, effects from exchange rate fluctuations or changes in the terms of trade are more likely to be temporary. Understanding is emerging that crises may have sticky effects on labor markets and productivity that differ from those generated by technology or globalization. However, because crises’ effects occur while changes in trends and structural factors and the normal churning of the economy are already happening, distinguishing these effects and better deploying programs to assist workers is difficult.

The standard advice in the presence of adverse permanent systemic shocks is to protect workers, not jobs—to prepare workers for change rather than prevent the change from coming about. Allowing sectoral or spatial restructuring is bound to increase efficiency; in contrast, retention subsidies and temporary employment programs delay (while the support lasts) but do not avoid job destruction. However, this advice does not apply to systemic shocks that are only temporary. In these cases, temporary retention programs may avoid the dissolution of employer-employee matches that took a long time to build but are threatened by a temporary shock, and they may stem productivity losses from the unnecessary destruction of job-specific human capital.19

When crises lead to permanent changes in labor demand or supply, however, reskilling initiatives and demand stimulus may be more appropriate responses. In addition, even though crises are systemic shocks, they generate highly heterogeneous effects across initially similar workers, so adaptive programs usually deployed to deal with more individual or idiosyncratic shocks (such as customized intermediation and job search support) may be adequate to address them. Moving from budgeted programs and rationed cupos to protection guarantees (i.e., from assisting only the chronically poor to offering benefits to all people in need), preventing the emergence of assistance “ghettos,” and structuring benefits to incentivize the return to work are key steps to ensure that social protection better cushions the short-term impacts of crises. Although it is clear that without job vacancies, placements will not occur, a normal economic rebound from a crisis will include job creation, and active searching is key to placing workers in these new jobs. More robust and coordinated employment services, with a greater focus on results and unintended consequences, are thus needed.

But will macroeconomic stabilizers and reforms to social protection and labor systems be able to spur enough job creation to generate better recoveries? In light of the evidence presented in this report, the LAC region urgently needs to tackle structural issues in order to improve its response to crises. The needed reforms include addressing the sectoral and spatial dimensions behind poor labor market adjustments. Without addressing these fundamental challenges, recoveries in the region will remain characterized by sluggish job creation. In this context, competition policies, regional policies, and labor regulations are a third key dimension of the policy response. This study highlights, for example, the dichotomy between protected and unprotected firms in the LAC region and the impact of low geographic mobility among workers, both of which serve to magnify the welfare effects of crises. It also highlights pockets of labor rigidity that hinder necessary transitions and adjustments in the labor market.

The policy implications of these findings and of the related literature are that even if macroeconomic, social protection, and labor systems are pristine and flawlessly implemented, they are insufficient unless complemented with sectoral and place-based policies that address the underlying structural issues impeding strong recoveries from crises. The existing literature and policy experiences suggest that place-based policies could address the lack of geographic mobility and maximize workers’ relocation potential. Reducing pockets of labor rigidity (by loosening restrictions on the human resource decisions of firms and individuals) could speed up adjustments