World Bank: LatAm’s slowdown puts pressure on jobs and household incomes

Lima, Peru.– Fouryears of an economic downturn are beginning to have adverse effects on jobs andhousehold incomes in Latin America and the Caribbean. After a commodity boombrought significant gains, a drop in labor force participation is causingfamilies to feel the pinch, according to the latest World Bank semiannualregional report.

In the report, Jobs,Wages and the Latin American Slowdown, the World Bank´s Office of the ChiefEconomist for Latin America and the Caribbean points out that the expectationis that the region will see 0 percent growth for 2015 with a slight improvementto 1 percent in 2016, although uncertainty around that projection is high. Thatwould be the fifth year in a row the region has underperformed initialexpectations, a sign that new factors, mainly internal, are prolonging theeffects of worsening external conditions, particularly the sharp decelerationin China and fall of commodity prices.

“Even with theslowdown, labor markets in the region had managed to remain strong,” saidAugusto de la Torre, World Bank Chief Economist for Latin America and theCaribbean. “More recently, however, we are seeing employment qualitydeteriorate, as salaried workers become self-employed, and workers shift fromlarger to smaller companies. Most notable, however, is the fact that workersare exiting the labor market altogether, a propensity that is particularlymarked among less educated, young males. As they go back home, or back toschool, without a salary, the income of poorer households may suffer more.”

The report, issuedahead of the World Bank Group and IMF annual meetings in Lima, finds that theregion’s weighted average growth will stagnate in 2015. But the heterogeneitywithin the region remains and has shifted significantly.

Mexico, CentralAmerica and the Caribbean, more directly linked to the U.S., grew less duringthe commodity boom and after the 2008-2009 global financial crisis, but are nowrecovering faster. More concretely, Panama, the Dominican Republic andNicaragua will grow at strong rates of 5.9 percent, 5 percent and 4.5 percentrespectively, well above the regional average.

South Americancountries, more directly affected by China’s slowdown and the drop in commodityprices, are showing different growth trends. Bolivia, Colombia, Paraguay, Peruand Uruguay are estimated to grow in 2015 at 3 percent average, Argentina willgrow slightly above 0 percent, and Brazil, Ecuador and Venezuela will have anegative growth rate. Chile is a somewhat atypical case growing at 2.2 percentthis year but anticipated to be on the rebound in 2016 having already made thenecessary adjustments to the new post-commodity boom reality.

“Most countries inthe region are still in the midst of adjusting to the new reality of diminishedexport revenue,” said De la Torre. “The key will be to make the adjustment assmooth as possible to avoid excessive loses in economic activity andemployment. From a policy perspective, the key question is whether and howlabor market conditions and income distribution will be affected in the monthsand years to come.”

Countries withflexible exchange rate regimes have been allowing their currencies to absorbmuch of the external shock. This helpsreduce imports immediately and should promote exports over time. However, thereport cautions, this switch of economic activity in favor of exports willlikely take time, due to weaker global demand and a shrinkage of non-commoditytradable sectors experienced during the commodity boom. Countries withsufficient fiscal space will be able to borrow to smooth out the path ofadjustment in their external current accounts. For those countries withoutfiscal or financial flexibility the adjustment will be more difficult.

During the boomyears, income inequality declined as more members of the household found work;and wages of unskilled, poorer workers rose faster than wages of skilledemployees. At the same time, workers moved from self-employment to salariedjobs; and from smaller to larger firms.

During the currentslowdown, however, while the rate of unemployment has not risen appreciably sofar, employment generation has stalled, the quality of employment hasdeteriorated, and labor force participation has dropped; particularly as youngmen have stopped looking for work, which could cause household incomeinequality to increase. In addition, while unskilled workers are seeing theirwages decline less than those of skilled workers, their job losses have beenmuch higher.

This situation raisesimportant policy implications, the report argues. Well-targeted safety nets canhelp cushion the impact of the economic downturn on those most affected. Alsoimportant to consider is the role of minimum wage legislations that helpedraise labor income for low-skilled workers during the boom years, but mayundermine employment generation during the downturn.