LATIN AMERICA’S SLOWDOWN PUTS PRESSURE ON JOBS AND HOUSEHOLD INCOMES

Lima, October 7, 2015.- Four years of an economic downturn are beginning to have adverse effects on jobs and household incomes in Latin America and the Caribbean. After a commodity boom brought significant gains, a drop in labor force participation is causing families to feel the pinch, according to the latest World Bank semiannual regional report.

In the report, Jobs, Wages and the Latin American Slowdown, the World Bank´s Office of the Chief Economist for Latin America and the Caribbean points out that the expectation is that the region will see 0 percent growth for 2015 with a slight improvement to 1 percent in 2016, although uncertainty around that projection is high. That would be the fifth year in a row the region has underperformed initial expectations, a sign that new factors, mainly internal, are prolonging the effects of worsening external conditions, particularly the sharp deceleration in China and fall of commodity prices.

“Even with the slowdown, labor markets in the region had managed to remain strong,” said Augusto de la Torre, World Bank Chief Economist for Latin America and the Caribbean. “More recently, however, we are seeing employment quality deteriorate, as salaried workers become self-employed, and workers shift from larger to smaller companies. Most notable, however, is the fact that workers are exiting the labor market altogether, a propensity that is particularly marked among less educated, young males. As they go back home, or back to school, without a salary, the income of poorer households may suffer more.”

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

Mexico, Central America and the Caribbean, more directly linked to the U.S., grew less during the commodity boom and after the 2008-2009 global financial crisis, but are now recovering faster. More concretely, Panama, the Dominican Republic and Nicaragua will grow at strong rates of 5.9 percent, 5 percent and 4.5 percent respectively, well above the regional average.

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

“Most countries in the region are still in the midst of adjusting to the new reality of diminished export revenue,” said De la Torre. “The key will be to make the adjustment as smooth as possible to avoid excessive loses in economic activity and employment. From a policy perspective, the key question is whether and how labor market conditions and income distribution will be affected in the months and years to come.”

Countries with flexible exchange rate regimes have been allowing their currencies to absorb much of the external shock. This helps reduce imports immediately and should promote exports over time. However, the report cautions, this switch of economic activity in favor of exports will likely take time, due to weaker global demand and a shrinkage of non-commodity tradable sectors experienced during the commodity boom. Countries with sufficient fiscal space will be able to borrow to smooth out the path of adjustment in their external current accounts. For those countries without fiscal or financial flexibility the adjustment will be more difficult.

During the boom years, income inequality declined as more members of the household found work; and wages of unskilled, poorer workers rose faster than wages of skilled employees. At the same time, workers moved from self-employment to salaried jobs; and from smaller to larger firms.

During the current slowdown, however, while the rate of unemployment has not risen appreciably so far, employment generation has stalled, the quality of employment has deteriorated, and labor force participation has dropped; particularly as young men have stopped looking for work, which could cause household income inequality to increase. In addition, while unskilled workers are seeing their wages decline less than those of skilled workers, their job losses have been much higher.

This situation raises important policy implications, the report argues. Well-targeted safety nets can help cushion the impact of the economic downturn on those most affected. Also important to consider is the role of minimum wage legislations that helped raise labor income for low-skilled workers during the boom years, but may undermine employment generation during the downturn.