1 Globalization and Protection against Unemployment Risk in the Americas (Chapter V, Social Security Report 2007) Mexico, October 2006.

1

Globalization and Protection against Unemployment Risk in the Americas(Chapter V, Social Security Report 2007)

Mexico, October 2006

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Importance of Studying Employment Protection Mechanisms

In OECD countries the response has been to combine structural changes with labor market policies.

The Latin American context:

High levels of unemployment (8% in LAC vs. 6.2% in the world)

Informal economies

Wages and wealth inequality

Financial and and institutional limitations

This document studies unemployment and its possible causes in Latin America and discusses the mechanisms that offer protection to

workers in case of job loss

Globalization International CommerceCapital Mobility

Uncertainty Job Loss Affecting Family’s Well-Being

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Contents

The Importance of Employment Protection Mechanisms: Unemployment and Globalization

Unemployment Trends in the Americas Regional Trends Unemployment among the Economically Active Population Long-Term or Persistent Unemployment

What Are the Causes of Unemployment? —Contemporary Theories

Unemployment Insurance and Protection in the Americas

Conclusions: Protection Systems against Unemployment in a Context of Globalization

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What is unemployment?

A person is defined as unemployed if he/she has not worked for more than an hour during a given period of reference, but is actively looking for a job (ILO).

Open unemployment is the proportion of the economically active population that is unemployed.

In the past, labor markets were simpler. Until the end of the 19th century, the composition of unemployment was mainly defined by the structure of production, not by the workers’ characteristics.

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At present, there are large differences in the characteristics and composition of unemployment among countries:

In some countries episodes of long-term unemployment are more common (Europe); in others there is high rotation combined with short episodes of unemployment (United States, formal sector in Mexico).

In LAC, the greatest differences between groups are those defined by income, age, education and gender (E. May 2001).

Unemployment Results from a Combination of Factors

Unemployment

Macroeconomic Factors

Globalization: trade-openess, mobility of

capital and technology

Active and passive labor market policies to foster employment (unemployment insurance, training courses, etc.)

Labor market Institutions and regulations: legislation, trade-unions, minimum wages

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Unemployment Trends in the Americas:Regional Trends

Unemployment Trends by CISS-Region(% of Total Labor Force )

Source: Own elaboration using World Bank (2004) and ILO (2006).

0

5

10

15

20

%

AndeanCentral AmericaSouthern ConeNorth America and English-Speaking CaribbeanMexico and Latin Caribbean

7

Women

0

5

10

15

20

25

1980

1984

1988

1992

1996

2000

2004

%

AndeanCentral AmericaSouthern ConeNorth America and English-Speaking CaribbeanMexico and Latin Caribbean

Unemployment Trends by CISS-Region(% of Total Labor Force )

Men

0

5

10

15

20

25

1980

1984

1988

1992

1996

2000

2004

%


Female labor force participation has increased. The number of children increases the

likelihood of leaving employment or working part-time.

A number of women in LAC work are “caregivers,” a non-remunerated activity without social security benefits.


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Female Unemployment (% of Total Labor Force )


Andean

0

5

10

15

20

25

30

80 82 84 86 88 90 92 94 96 98 00 02 04

Bolivia Colombia Ecuador

P eru Venezuela

Central America

0

5

10

15

20

25

30

80 82 84 86 88 90 92 94 96 98 00 02 04Costa Rica El Salvador Guatemala

Honduras Nicaragua P anama

Southern Cone

0

5

10

15

20

25

80 82 84 86 88 90 92 94 96 98 00 02 04

Argentina Brazil Chile

P araguay Uruguay


Mexico and Latin Caribbean

0

5

10

15

20

25

30

35

40

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

Dominican Republic Mexico

North America and English-Speaking Caribbean

0

5

10

15

20

25

30

80 82 84 86 88 90 92 94 96 98 00 02 04

CanadaUnited States

English-Speaking Caribbean

9


Andean

02468

101214161820

80 82 84 86 88 90 92 94 96 98 00 02 04

Bolivia Colombia Ecuador

P eru Venezuela

Central America

0

5

10

15

20

25

30

80 82 84 86 88 90 92 94 96 98 00 02 04Costa Rica El Salvador Guatemala

Honduras Nicaragua P anama

Southern Cone

0

5

10

15

20

25

80 82 84 86 88 90 92 94 96 98 00 02 04

Argentina Brazil Chile

P araguay Uruguay

Male Unemployment (% of Total Labor Force )

Fuente: Elaboración propia con datos de Banco Mundial (2004) y OIT (2006).


0

2

4

6

8

10

12

14

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04



0

2

4

6

8

10

12

14

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04


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Unemployment Trends in the AmericasUnemployment among the EAP: Youth Unemployment.

Ratio of Youth Unemployment Rate (15-24) to Adult Unemployment Rate (25+)

Source: UN (2006).Note: The data correspond to the years 1990 and 2001, or to the closest year available. Data for Brazil, Panama, Bolivia, Puerto Rico, Nicaragua, Colombia, and Surinam correspond to 1990; data for the Netherlands Antilles to 1992, and the rest to 1991. Data for Panama, Bolivia, Puerto Rico, Colombia, Netherlands Antilles, and Dominican Republic correspond to 2000, and the rest to 2001.

0

1

2

3

4

5

6

Pa

rag

ua

y

Co

sta

Ric

a

Bra

zil

Ec

ua

do

r

Uru

gu

ay

Ba

rba

do

s

Pa

na

ma

Ch

ile

Un

ite

d S

tate

s

Ve

ne

zue

la

Me

xic

o

Bo

liv

ia

Tri

nid

ad

an

d T

ob

ag

o

Pu

ert

o R

ico

Arg

en

tin

a

Nic

ara

gu

a

Ho

nd

ura

s

Co

lom

bia

Pe

ru

Ne

the

rla

nd

s A

nti

lle

s

Ca

na

da

Do

min

ica

n R

ep

ub

lic

El

Sa

lva

do

r

Su

rin

am

St.

Vin

ce

nt

an

d G

ren

ad

ine

s

Bri

tis

h V

irg

in I

sla

nd

s

1990 2001

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Unemployment Trends in the AmericasUnemployment among the EAP: Long-Term or Persistent Unemployment

Proportion of Long-Term Unemployed Aged 15 to 64 (Unemployment Duration Higher than 12 Months)

Source: IADB (2004).Note: Data correspond to the years 1990 and 2001, or to the closest available year. Data from Costa Rica and Panama correspond to 1991. Data from Argentina, Honduras, and Uruguay correspond to 1992. The rate of Nicaragua corresponds to 1993. Data for Peru, Canada, and the United States are from 1994. Data from Ecuador corresponds to the year 1995. Data from Chile and the Dominican Republic are from 1996. Data for Bolivia are from 1997 only. Data from Ecuador, Nicaragua, and Uruguay correspond to the year 1998. Data from Honduras, Paraguay, and, Colombia correspond to 1999. Data from Costa Rica and Panama are from 2000. Data from Canada and the United States correspond to 2004. The others are from 2001.

0

5

10

15

20

25

30

35

40

45

Co

lom

bia

Pa

rag

ua

y

Bo

livia

Pa

na

ma

Uru

gu

ay

Co

sta

Ric

a

Un

ite

d S

tate

s

Arg

en

tin

a

Ca

na

da

Nic

ara

gu

a

Ec

ua

do

r

Ho

nd

ura

s

Me

xic

o

Do

min

ica

n R

ep

.

Pe

ru

Ch

ile

%

1990 2001

12

Unemployment and Long-Term Unemployment Rates in OECD Countries, 2004

Source: OECD (2005).Note: Long-term unemployment calculated as a proportion of unemployment.

0

10

20

30

40

50

60

70

Slo

va

k

Gre

ec

e

Cze

ch

Ge

rma

ny

Ita

ly

Be

lgiu

m

Po

lan

d

Hu

ng

ary

Po

rtu

ga

l

Fra

nc

e

Tu

rke

y

Sp

ain

Ire

lan

d

Ja

pa

n

Sw

itze

rla

nd

Ho

llan

d

OE

CD

To

tal

Au

str

ia

Fin

lan

d

Lu

xe

mb

urg

De

nm

ark

Un

ite

d

Au

str

alia

Sw

ed

en

Un

ite

d

Ne

w

Ice

lan

d

Ca

na

da

No

rwa

y

Me

xic

o

Ko

rea

%

Unemployment Rate Long-Term Unemployment

Unemployment Trends in the AmericasUnemployment among the EAP: Long-Term or Persistent Unemployment

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Contents


Unemployment Trends in the Americas

What Are the Causes of Unemployment? —Contemporary Theories Job Search and Matching Theories Labor Market Institutions and Regulations Other Theories



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What Are the Causes of Unemployment? —Job Search and Matching Theories

In these theories, the unemployment rate depends on how easily workers who are searching for a job are matched with available vacancies.

Unemployment is understood as a period of search for the most adequate job, at the best wage. Searching for job offers is costly when workers and firms do not have complete information (facing costs of resources and time).

Search and temporary unemployment are common results within this framework, because the intensity with which workers search for a job, and decisions to accept job offers, determine the duration of time workers remain unemployed.

Among other results, these models try to explain why:

Determinants of aggregate rates of unemployment and vacancies

Duration of employment and unemployment spells

The reasons why some unemployed workers decide to remain unemployed after rejecting job offers

Why do apparently homogeneous workers with similar jobs obtain different wages

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What Are the Causes of Unemployment? —Job Search and Matching Theories

Important policy implications:

A generous unemployment insurance: i) raising the wage at which the worker is willing to take a job; ii) raising the general level of wages—not due to higher productivity, but because low-wage jobs stop being filled; and iii) decreasing the rate at which the unemployed find a job.

Higher unemployment benefits may eliminate the creation of some jobs by firms and increase the duration of unemployment.

Employment duration and the rate at which workers leave their jobs are important determinants of wages.

Unemployment insurance can increase productivity and wages: workers are risk-averse and liquidity is constrained to finance consumption during unemployment.

The existence of marked wage dispersion among workers who apparently have the same characteristics. These differences can be explained by: i) Workers are heterogeneous (different value for leisure, unobserved characteristics); ii) Firms are heterogeneous; iii) Market frictions exist.

Firms can pay higher wages to increase the entrance flow of potential workers. As a consequence, firms that pay higher wages are larger.

When there is an ex-post negotiation between the firm and worker, labor market inefficiencies may arise.

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What Are the Causes of Unemployment? —Labor Market Policies

Active Labor Market Policies:

Are those designed to reduce unemployment through actions directed at the unemployed: promoting the match of demand and supply of labor through public and

administrative services of employment creating training programs to increase the abilities and knowledge of the

unemployed until they find a job encouraging public intervention in the creation of public-sector jobs or

provision of work subsidies in the private sector

In developed countries, active labor market policies are usually implemented in conjunction with passive policies, such as unemployment insurance.

The literature about the effectiveness of active labor market policies to reduce unemployment in developed countries shows positive outcomes, though adverse effects have also been noticed. For instance, a social loss can arise because these policies are costly and some individuals would probably find a job even without the programs.

In LAC, government-promoted training programs have not stimulated employment as desired

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What Are the Causes of Unemployment? —Labor Market Institutions and Regulations: Rigidities

Labor markets can have inadequate institutions or “rigidities” that promote unemployment. Among these are minimum wages, unions and collective bargaining, and “efficiency wages.”

The literature about effects of wage rigidities on employment is inconclusive. For example, It has been argued that low unemployment in the United States, when compared to Europe, is related to the high flexibility that allows real wages of low-ability workers to adjust against changes in the economic environment.

Card, Kramarz, and Lemieux (1999) study wage differences of these types of workers in the United States, France, and Canada and find no evidence that wage inflexibilities account for differences in the levels of employment in these three countries.

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What Are the Causes of Unemployment? —Labor Market Institutions and Regulations: Unemployment Insurance

“Passive” policy considered to be a useful tool for a competitive economy to support both workers and firms by allowing employment rotation while avoiding unacceptable costs, such as loss of a family’s income.

The literature about the effects of UI generally analyzes benefits, duration of benefits, and the form in which insurance is financed.

Three main features in the design of UI that help it to function properly: i) duration and form of benefits; ii) monitoring process to guarantee job search effort, and sanctions; and iii) requirements or conditions that oblige beneficiaries to take training courses or other work programs.

In relation to the well-being and behavior of individuals: i) the extent to which families value their consumption smoothing; ii) how much unemployment insurance contributes to smooth consumption; and iii) how an unemployment spell’s duration is extended as a result of unemployment insurance benefits.

Should unemployment insurance have wider objectives than just smoothing consumption? This argument can be valid, but it is still convenient to assess the use of UI as a healing tool to handle structural problems.

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What Are the Causes of Unemployment? —Labor Market Institutions and Regulations: Employment Protection Regulation

Employment protection policies attempt to protect workers against job loss caused mainly by reasons attributable to the employer. The most common legislations include payments for dismissal, severance, voluntarily leaving the job, and advance notice of dismissal.

The indemnity or payment proposed by these labor policies for dismissal of workers may increase firms’ costs. Then firms can restrict their hiring behavior, and the duration of unemployment may increase.

Economic theories of unemployment generally assume that unemployment benefits can cause more unemployment as they reduce people’s incentives to work. Nonetheless, it is apparent that some historical episodes characterized by great growth in both unemployment insurance coverage and benefit payments occurred because economic crises detonated social pressures to increase those benefits. These were not cases in which governments designed an unemployment program with undesirable effects, but where unemployment was already there, and the program tried to mitigate a social problem that came out before benefits were granted.

Europe and LAC are regions with strict employment protection regulations.

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What Are the Causes of Unemployment?—Other Theories

Macroeconomic Theories

Histéresis

Over-educationHypothesis

Effect of Taxes on Employment

States that unemployment is based on lack of aggregate demand in the national market. Then the solution to foster unemployment seems to be in a higher level of public spending or by creating inflation (Keynes).

Based on the interaction of adverse economic effects and institutions to explain long term unemployment.

Once workers are unemployed, they start to lose their skills and abilities to return to similar jobs. If the unemployment spell is too long, returning to work could become a very difficult task.

Educated workers take jobs at inferior levels because their supply increased, thus replacing less educated workers.

Consumption- Reducing taxes on certain goods and services could help reduce unemployment. (Calmfors y Holmlund 2000). Labor costs-Some studies point out that reducing payroll taxes could have favorable effects on job creation. Particularly in LA,

where studies point to high costs of labor as an important factor that determines unemployment growth (CISS Anual Report 2005, chapter IV).

Income- When tax systems are integrated with welfare systems, the income of the individuals when unemployed or not is affected.

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Contents




Unemployment Insurance and Protection in the Americas Unemployment Insurance Individual Unemployment Accounts Regulation for Employment Protection Public Works Programs


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Unemployment Insurance and Protection in the Americas: Unemployment Insurance

Heterogeneity can be found in the provision of protection against the risk of becoming unemployed in countries of the Americas. In general, countries can be divided in two large groups according to their labor markets:

Countries in which labor is traded in a framework of almost universal social security coverage

Canada (national program financed with contributions of employer and workers; the replacement rate is of 55%)

United States (each state has its own program; financed by employer according to the firm’s history of layoffs)

Countries with a high participation of the informal economy in labor markets. In this group, only some countries have unemployment insurance .

*Source: Velázquez (2003).

Unemployment insurance in Latin America only covers a small proportion of the unemployed*

Argentina 10 (%)Brazil 11.8Chile 6.7Uruguay 14.7Venezuela 7.2

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Unemployment Insurance and Protection in the Americas: Individual Accounts

The idea that individual accounts can be used in case of unemployment is based on the creation of savings funds to guarantee compensation

Private insurance can help to solve the problems of moral hazard of unemployment insurance, to prevent distortions in workers’ behavior

Individual accounts have been used to protect the unemployed by taking advantage of pension system reforms.

In LAC individual accounts have been used in different ways. For instance, in

Chile they are combined with benefits from a pooled fund

Mexico, workers are allowed to withdraw resources from their individual retirement accounts

Ecuador, affiliates are entitled to benefits each time the fund accumulates a certain sum

24

Unemployment Insurance and Protection in the Americas:Regulation for Employment Protection

The main difference between unemployment insurance and regulations for employment protection is that the former tries to allocate unemployment risk to society by transferring it from the employer-worker’s relationship to a collective fund.

Legal Compensations for Dismissal

most common form of employment protection in Latin America.

It generally consists of a single payment granted to the worker when an employer ends a labor relationship without a justified cause.

The payment is a function of the wages and time the worker has spent employed.

Coverage is usually limited to formal private sector workers with indefinite contracts.

In most countries, the employer is in charge of directly paying this amount.

Labor legislation defines the cases in which dismissal is not justified, and gives formulae to calculate the amount of compensation.

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Unemployment Insurance and Protection in the Americas: The Cost of Employment Protection

Cost of Staying in Employment due to Protection Laws

0

0.5

1

1.5

2

2.5

3

Latin America Canada United States OECD

%

Advance Notification Compensation for DismissalPayment for Years Worked

Contributions to Social Security vs. Total Costs

0

10

20

30

40

50


%

Contributions to Social Security Total Costs

Source: Own elaboration using data from Heckman and Pagés (2005).

26

Unemployment Insurance and Protection in the Americas: The Cost of Employment Protection

Contributions to Social Security as a Percentage of Wage

0

5

10

15

20

25

30

35


% o

f W

age

Fuente: Elaboración propia usando datos de Heckman y Pagés (2005).

Contributions to Social Security as a Percentage of Total Costs

0

20

40

60

80

100


%

27

Unemployment Insurance and Protection in the Americas: Public Works Programs

They have been used by governments to counteract unemployment during recessions and in cases of natural disasters.

Public works programs offer individuals temporary or part-time jobs that generally require physical activity and pay low wages; for example, in construction or maintenance of highways and avenues.

It has been argued that administration of these programs is not complicated and that benefits can be observed relatively fast. Nevertheless, public works programs allow neither permanent job creation nor the development of training programs.

Example: Trabajar (Argentina), Empleo en Acción (Colombia).

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Contents






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Many institutions and program that grant employment protection are currently operating; nevertheless, their scope is still limited.

Unemployment insurance is the direct tool that governments and social security institutions use to tackle the problem of unemployment. It prevails in North America and in some Latin American countries (in a segmented form).

In an attempt to avoid the inconveniences of UI (behavioral distortions and monitoring costs), several countries have opted for the use of individual unemployment accounts.

Regarding the optimal design of unemployment insurance, it is considered that it should rest upon two pillars: a solidarity component, and an individual provision through saving. Insurance should allow workers to select the relative weight of each component in their personal insurance plan, with an aim of achieving a self-selection that decreases the costs of insurance.

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Developing countries still lack the required institutions to match the supply and demand for labor. This means that designing and implementing some active labor market policies, such as training courses, may not guarantee protection against job loss.

Even when the use of UI in LAC is not generalized, these countries count with extensive legislation for employment protection. However, there is an open debate about the adverse effects of the high costs of labor regulations on employment

The structural change resulting from globalization has to be accompanied by adequate labor market policies that promote the match between employers that offer jobs, and workers who need them, allow labor mobility, and foster workers’ productivity.

1 Globalization and Protection against Unemployment Risk in the Americas (Chapter V, Social Security Report 2007) Mexico, October 2006.

Documents

americas unemployment

proportion of unemployment

female unemployment

causes of unemployment

composition of unemployment

unemployment risk

unemployment results

open unemployment