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The unemployment puzzle

Few things worry people in Latin America and the Caribbean more than finding and keeping a job.

According to Latinobarómetro, a survey conducted by an independent polling firm in 17 regional countries and released early this year, 19 out of 100 respondents consider unemployment the most serious problem of our time, above and beyond any other issue. An additional 8 percent say low wages are the number one problem, and an average 65 percent of all respondents say they are "concerned" or "very concerned" about losing their job in the next 12 months.

Nearly everyone has an explanation for the shortage of jobs. Theories surface in conversations among workers, on newspaper editorial pages, and, invariably, in political campaign speeches. Indeed, aspiring politicians have always claimed to know the real causes of unemployment-and the secret to its prompt eradication. But in fact, the causes of unemployment are extremely difficult to isolate, and they puzzle even economists who specialize in labor market dynamics.

That was the conclusion of a seminar that drew some of the world's leading authorities on Latin American labor issues to IDB headquarters in Washington, D.C., last May. Entitled "Employment in Latin America: What is the problem and how to address it?," the meeting consisted of a candid examination of the many uncertainties that surround labor market behavior.

Eduardo Lora, senior research economist in the IDB's Office of the Chief Economist, opened the seminar by reviewing the employment trends that most specialists see in the countries of the region.

To a large degree, these trends indicate that public anxiety is justified. For example, the rate of new-job creation has slowed in the 1990s to an average of 2.8 percent per year, about half a percentage point below the rate in the 1980s. And despite the higher economic growth rates that most Latin countries have enjoyed in recent years, unemployment has actually risen, from a regional average of 6 percent in the 1980s to around 8 percent in the 1990s.

Moreover, the informal employment rate (people employed in unregistered jobs that offer no benefits or security) has been rising. Between 1990 and 1996, the percentage of people who were self-employed, were domestic workers or were employed in enterprises with 5-10 workers rose from 51.6 percent to 57.4 percent. And while real wages have risen slightly in most Latin American countries since 1990, they have risen much more rapidly for high-skilled workers than for low-skilled ones.

UNPLEASANT SURPRISE. These developments have disappointed and confounded economists, who had predicted that the macroeconomic reforms and GDP growth of the last decade would lower unemployment and help to bring up the wages of low-skill workers. According to participants at the seminar, there are a number of explanations that might partially account for these disheartening trends.

First, lowered trade barriers have forced the region's companies to become more efficient in order to keep up with global competitors. Easier access to capital and foreign investors has allowed these companies to upgrade equipment and purchase new technology, making it possible to raise productivity without hiring new workers. Those companies that have been recruiting have sought out high-skilled workers who can best take advantage of new technologies--even though these workers are in short supply and command higher salaries.

Second, the fiscal restraint required to stabilize economies and attract foreign investment has forced governments to reduce public sector payrolls, further exacerbating unemployment. And the same imperatives have led many governments to maintain somewhat overvalued currencies--a practice that makes a country's low-skilled workers comparatively more expensive and thus restrains job creation in this segment.

Third, many observers believe job growth in the region is being held back by overly aggressive unions and rigid labor laws that make it too expensive for companies to hire and fire workers.

Yet even these hypotheses raise new questions. For example, market theory holds that in countries where companies are consistently paying a wage premium for highly skilled workers, individuals and families respond by investing more in education.

But according to Miguel Székely, an IDB economist who presented a paper at the seminar, there is little evidence that Latin Americans are spending more on education. Why? There are numerous possible explanations, says Székely; starting with the very limited supply and high costs of good quality education in the region. But the issue remains difficult to decipher.

Likewise, the notion that the region's labor markets are hobbled by powerful unions is not borne out by the facts. "Union membership in Latin America is comparatively low and falling, and collective bargaining mechanisms are weak," Gustavo Márquez, an IDB labor specialist, said at the seminar.

In most countries worker protections are enforced more through labor laws and regulations than through contracts negotiated by powerful and effective labor unions. And although these laws do tend to be very restrictive in Latin America, there simply isn't sufficient evidence to prove that they are responsible for the region's persistent unemployment rates.

These are but a few of the areas that, according to IDB specialists and several other speakers at the seminar, will require much more in-depth research before more solid answers can be found. In the meantime, policymakers and the general public should take sweeping generalizations about the causes of unemployment with a grain of salt.

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