Notes

t ow A rd A n i ntegr A ted p oli C y r esponse 125

and shorten transitions. Similarly, addressing protectionism and unfair market conditions through better competition laws, lower subsidies, less state participation, and stronger procurement practices could promote stronger recoveries. LAC countries’ policy responses need to tackle these issues, which will have different weights depending on the country, the period, and other circumstances.

The COVID-19 pandemic is a convulsive, catastrophic crisis that is exacting a savage toll on labor markets in the LAC region. The region is experiencing an extraordinary rate of destruction of employment, massive negative income shocks, and rising levels of poverty. Between 35 and 45 million people in the region may become newly poor in 2020 as a result of the pandemic, and although the region’s middle class has grown significantly since 2000, the crisis could reduce it by 5 percent, pushing out 32 to 40 million people (Diaz-Bonilla, Moreno Herrera, and Sanchez Castro 2020). This shrinking of the middle class and increase in poverty are driven by losses of labor earnings; the crisis is projected to be the most severe labor market recession in some LAC countries’ history. Millions of workers in the region have lost their jobs, and millions more have seen significant reductions in their earnings. And these losses are not expected to be evenly spread across the income distribution—rather, the crisis could increase inequality substantially, pushing the region’s Gini coefficient from 51.5 to as high as 53.4 (Diaz-Bonilla, Moreno Herrera, and Sanchez Castro 2020).

Although this crisis—which was triggered by the public health imperatives of mitigating a global pandemic—is exceptional in some ways, it is also yet another in a long series of aggregate demand shocks that have hit the LAC countries. On one hand, the crisis has several distinctive factors. First, the lockdown caused by the pandemic was bad for many jobs and worse for those for which home-based work is not an option (or for workers who lack quality access to the internet). Second, the prolonged uncertainty around this crisis, particularly around the form in which employment will rebound, has delayed investment. Third, some LAC countries have exhibited strong policy responses to the crisis, although the effectiveness of these responses has varied considerably.

On the other hand, this crisis is not so different from others before. A large part of the crisis’s effects on the LAC region derive from the global recession, the sharp fall in demand for many months, and the possibility of financial crises in some countries. The region has a notable history of frequent and often severe economic slowdowns. What happens to workers during these slowdowns is largely determined by aggregate demand fluctuations (although some domestic crises have been self-inflicted by economic mismanagement).

This deep crisis arrived just as many governments in the LAC region were grappling with known structural challenges. It has accelerated some long-running structural shifts that have been changing the nature of work, magnifying the crisis’s potential to further reduce employment opportunities in what were traditionally considered “good jobs”—the standard, stable, protected employment associated with the formal sector (Beylis et al. 2020).

The employment dynamics already observed in many LAC countries will lead this crisis to cause sizable labor scarring effects. Sector and location characteristics are likely to further magnify these effects for some workers. However, the threedimensional policy framework presented in this study provides a roadmap that could lead to a more resilient recovery. How public and business policies address the current challenges will shape the progress of the LAC countries’ economies and the well-being of their workers and citizens for decades. The challenge is immense, but now is the defining time to take it on.

1. Although monetary and fiscal stabilization policies (including the management of a country’s capital account, exchange rate policy, fiscal rules, and sovereign welfare funds and

126 e mployment in Crisis

the adjustment of its interest rate) are powerful tools to respond to crises, they are not the main focus of this study. 2. These safety-net stabilizers work best when supported by monetary and fiscal measures, including exchange rate policies and capital account management; interest rates and other levers of monetary policy; fiscal rules and sovereign precautionary savings funds; and access to global financial and risk-sharing markets and international risk-pooling mechanisms (such as the International Monetary

Fund and the World Bank). Each of these examples is supported by a vast academic and policy literature. The discussion of such measures in this report, however, is limited to the measures most directly linked to labor market outcomes. 3. These estimates are based on the World

Economic Outlook. Inflation rates are compounded. The values for Argentina for 1981–97 are from the World Development

Indicators. 4. Nominal downward wage rigidity is a feature of most economies, and the LAC region is no exception (see Castellanos, García-Verdú, and Kaplan [2004]; Dickens et al. [2007];

Holden and Wulfsberg [2009] and the references therein; and Schmitt-Grohé and Uribe [2016]). Moreover, the evidence suggests that the region’s lower inflation in recent decades increased the downward rigidity of nominal wages. Hence, to the extent that the 2011–16 slowdown was marked by low and relatively stable inflation, real wage adjustments are likely to have been lower during that period than during the slowdowns and crises in the 1980s and 1990s, which were characterized by large increases in inflation. 5. However, there have been some episodes of significant inflation spikes and corresponding reductions in real wages in the region since the early 2000s, including the 2004 banking crisis in the Dominican Republic, which resulted in a significant and long-term wage correction. 6. The discussion here focuses on job displacement and other livelihood losses caused by shocks to aggregate demand. However, state-contingent support programs can help households cope with a wide range of shocks. 7. These figures are taken from the International Labour Organization’s LABORSTA database. 8. This program’s combination of individual savings accounts and risk pooling provides effective financial support while incentivizing job searches and reemployment (Hartley, van

Ours, and Vodopivec 2011). Four features of the plan are particularly attractive. First, its

“hybrid” insurance model is able to address the needs of workers who change jobs frequently as well as those of the long-term unemployed (although it is debated whether the maximum payout period from the risk-pooling component is adequate, given the observed duration of unemployment spells among the country’s lowest-paid workers). Second, the plan provides better levels of compensation and consumption smoothing than Chile’s purely noncontributory flat unemployment benefit. Third, the plan’s benefits are indexed to protect their value from inflation and to stabilize replacement rates at their starting levels. And fourth, the system has a sound financial basis, underpinned by reserves that serve as an additional channel of fiscal support to weather crises. Since its inception, the plan has included an automatic extension of benefits triggered when the national unemployment rate rises above a certain level. In the current COVID-19 contraction, the plan has also served as the platform for additional protections, such as subsidized furloughs. 9. The “tax wedge” for formally employed workers is the difference between take-home pay and the total amount that the law requires that the employer and employee pay (including income taxes, statutory contributions to social insurance, and other mandated benefits) in order to have the employee (Summers 1989). 10. There are no clear-cut guidelines to set appropriate transfer amounts, and the appropriate level of benefits depends on the program’s objective. The transfer values of CCT programs should therefore reflect such programs’ twin objectives of reducing current poverty among beneficiaries and providing incentives for human capital accumulation (Grosh et al. 2008). One of the most generous

CCT programs in the LAC region is Bolivia’s (which combined two CCT programs, the

Bono Juancito Pinto and the Bono Juana

Azurdy), which provided 36 percent of prior income, followed by Honduras’s Bono Programa de Asignación Familiar, later renamed

Bono 10,000 and now Bono Vida Mejor.