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IDB report says Latin America’s labor market can improve with greater technology, productivity and education

Technology, productivity and education are the keys to strengthening Latin America’s underperforming labor markets, which for over a decade have been characterized by high unemployment and low wages, according to a new report produced by the Inter-American Development Bank.

“It is often stated that modern technology reduces the demand for workers, particularly those with low levels of education, but history and the evidence for Latin America indicate that this is not the case,” said the report, titled Good Jobs Wanted: Labor Markets in Latin America.

“Indeed, higher productivity growth, the best indicator available for technological improvements, has been associated with faster employment growth at the industry level,” the report said.

“It is not technology, but the lack of it that has been behind some of the unsatisfactory labor outcomes.”

The report, the latest of the annual Economic and Social Progress Report series, was written and produced by a team of 55 economists, researchers, academics and other experts under the overall direction of Guillermo Calvo, IDB chief economist and head of the Bank’s Research Department.

Good Jobs Wanted notes the importance of secondary and tertiary education in earning potential, as “every year of secondary education increases earnings by 11 percent relative to the earnings of workers with primary education.” A four-year college degree increases earnings by an additional 85 percent.

But education alone is not enough to produce a well functioning labor market. “Since the basic level of productivity of all workers largely depends on the quality of the institutional and economic environment in which firms operate, efforts to raise the average level of education may turn out to be a slow (and even inefficient) way to eliminate poverty, unless efforts are also made to improve the conditions for firms to invest, innovate and achieve higher levels of productivity.”

Jobs biggest concern

Public opinion surveys show that job unemployment, low wages and job instability are the most pressing concern of Latin Americans, more so than corruption, crime and other serious social problems.

“Unemployment is at its highest in many years, and, although wages have improved in some countries, they have done so at a very slow pace,” the report says. “Many workers receive pay that is too low to escape poverty, and wage inequality, which is among the highest in the world, is not getting any better.”

Nevertheless, the report also noted some positive labor market trends. “Female labor force participation rates are growing fast from levels that are still low by international standards,” the study says. The surge in female job opportunities “has been the most important source of growth in income per capita in the region.”

Other trends noted in the report are a growing percentage of workers without benefits as mandated by labor laws or working in small firms, and a growing gap in wage levels among workers with higher educational levels compared with those with lower skills. The study reported major labor market differences among countries. While unemployment grew in most of Latin America during the 1990s, it declined in the Caribbean and in Bolivia, Mexico and Panama. Unemployment grew in Argentina, Brazil, Chile, Colombia, Uruguay and Venezuela.

Another feature of the region is “job churning,” in which on average “as many as one in four jobs are created or destroyed in a given year, and a large percentage of workers transit between jobs and between employment, unemployment and inactivity.” While turnover may occur for many reasons, “Workers that are involuntarily displaced from their jobs tend to find jobs that pay lower wages than the jobs they had before.”

Turnover is an important engine of growth, and limiting it may also limit growth. However, the IDB report emphasizes that a majority of workers are ill prepared to face present levels of churning.

Among the “surprises” of researchers was the fact that the wave of privatization during the 1990s and the liberalization of international trade had little effect on unemployment.

Another surprise was the finding that wages is the main variable of adjustment to negative economic shocks.   

Can labor markets be rectified?

How can the recent bleak performance of Latin America’s labor markets be rectified?

Good Jobs Wanted suggests first of all that governments adopt “policies to reduce macroeconomic volatility and create stable, growth-friendly macroeconomic conditions.”

At the same time the report recommends a “new agenda” of labor policies to be carried about by a “strengthened labor authority” and a “complex network of public and private institutions.”

The new agenda consists of four policy initiatives: increasing the efficiency of matching job opportunities with worker skills, insuring workers against the risk of job churning, expanding job training in a comprehensive and effective way, and enforcing regulations while promoting improved labor-management relations.

A better system to match job openings with workers’ skills will reduce unemployment “by more quickly filling the available openings” as well as “increase the quality and therefore the productivity of job-worker matches.”

More than half the workers in Latin America are not covered by unemployment insurance mechanisms, while others enjoy the benefits of job stability mechanisms that are more stringent than those of the developed countries. Countries should design and enforce unemployment insurance systems that promote “the well functioning of the labor market” and that “adequately reflect the characteristics of its economy and the preferences of its citizens.”

Job training should be strengthened through a broad series of reforms that involve changes in taxes, regulations and collective bargaining. The objectives are to “improve the incentives for firms, workers and training providers to fund, seek and provide high-quality training.” Adult education for workers should also be broadened and strengthened.

Finally, national labor authorities should be strengthened in their capacity to enforce regulations, carry out policies and collect, analyze and process information. The report also urges greater cooperation between unions and employers to achieve better labor relations.

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