COVID-19 and labour markets in Latin America: How to repair the damage?

By José Manuel Salazar Xirinachs, Former Regional Director of the International Labour Organisation (ILO) for Latin America and the Caribbean, and former Minister of Foreign Trade of Costa Rica

This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.

Lima, Peru – April 7, 2020. Photo: Shutterstock

The damage of the COVID-19 pandemic and the ensuing global lockdown crisis will be devastating, causing the worst disruption to labour markets in Latin America since the Great Depression. Up to 43 million people – probably more – could be unemployed in 2020. Tragically, the state of labour markets in the region was bad even before the crisis. Repairing the damage while addressing past structural legacies is possible, but it will be slow and challenging, and will require something most countries in the region have not done well in the past: a massive focus on microeconomic policies for accelerated productive transformation, and technological and human talent development.

The damage has only just begun and is still evolving, but already looks severe. The Economic Commission for Latin America and the Caribbean (ECLAC) estimates a contraction for the region of -5.3%, the IMF of -5.2%, and the World Bank of -4.6%. All projections now point to severe recessions in all countries in the region.

The Inter-American Development Bank (IADB) estimated three scenarios for the impact on employment of the recession. The first and most benign (“short term crisis”), assumes that the economic contraction hits only during this second quarter, the health emergency disappears in the second part of the year and economies gradually reopen. In this case, the loss of formal jobs is estimated at -4.4%, some 5 million jobs. The second scenario (“medium term crisis”), assumes that the recession lasts two quarters and recovery begins at the end of 2020. The loss of formal jobs would be -8.2%, some 10 million additional people. The most severe scenario is a prolonged recession, meaning a severe contraction for the rest of 2020 with recovery only starting in 2021. In this case, 15% of formal jobs would be lost, with some 17 million additional people unemployed. If one adds the 17 million additional unemployed to the regional unemployment rate in 2019, which the ILO estimated at 8.1% (26 million people), some 43 million people would be looking for jobs, with an unemployment rate reaching 16%. ECLAC estimates a peak of 37 million people unemployed. I would argue these estimates are conservative.

But unemployment is only the tip of the iceberg. The COVID-19 crisis is also bringing higher under-employment, shorter hours, higher informality and increased poverty and inequality. According to the IADB, informality could increase to 62% from the pre-COVID-19 level of 54%. This would mean going back to the levels of the end of the 20th century; two lost decades of progress in informality reduction. ECLAC estimates that some 30 million additional people could become poor, a 5 point increase in the poverty rate from 30% in 2019, with extreme poverty rising from 11 to 13.5%, or some 16 million additional people.

Inequality will also worsen. As Lustig and Birdsall have argued, confinement measures are creating a new type of “brutal inequality” between those that continue to have the same levels of income streams (or have savings to finance 3 or 4 months without income or with reduced income) and those that do not have that luxury. Not to mention the impact on the 154 million children that are out of school. Many risk falling behind in terms of learning and nutrition, and the most vulnerable may never return to school.

All these estimates are surrounded by extreme uncertainty. Actual results will depend on the duration of the “great confinement”, the rhythm at which economic activities can be reopened, the impact of the contraction on international trade flows and national policy responses. For instance, several countries adjusted their labour legislation to allow reduced working hours, as a way to enable enterprises to retain workers temporarily, while reducing payroll costs. “Hibernating” jobs in this way will be helpful, but these schemes do not have the scale to return to pre-crisis levels of employment when recovery comes.

If further waves of contagion happen, as is likely, some restrictions will have to be re-established, and negative effects will multiply. Impacts and performance will vary greatly by country depending on their economic structures, exit strategies from confinement and ability to bring people back to work.

So, can the damage to labour markets caused by COVID-19 be repaired? What should be done? How long will it take? These are pressing questions for governments and policy makers in the region, questions that many citizens are asking themselves too. As surveys have shown, having a good job is the top concern of most people, not only in Latin America. The future of wellbeing, social cohesion and even democracy in Latin America hangs on the answers to these questions.

My argument is that, in addition to ensuring macroeconomic stability and the capacity to finance social protection policies and transfers to cushion income losses, an indispensable policy response to restart economies in the short run and promote high quality jobs in the medium to long term, are place-based and cluster-based microeconomic policies.

What cluster-based policies provide is much needed coordination and governance capabilities. That is, well organized processes of collaboration between all relevant actors, public and private, at sufficiently disaggregated levels to propose and implement solutions for the range of challenges that each location, sector and its value chains have: health protocols to return to work, financial support, human talent mismatches, job creation and training, marketing, internationalization, digital transformation, etc.

Having a territorial and sectoral level of coordination and governance is essential since phasing out of lockdown will not be a linear process. Rather, it will be one with oscillations and even backward steps if new pockets of contagion emerge. It is also key in light of the major rearrangements in global value chains that COVID-19 has triggered and no doubt will continue.

Colombia, for instance, the country with one of the most developed cluster-based programmes in the region, has been using existing clusters to develop sectoral “economic reactivation agendas” centered around four key themes: safe return to work, reactivation of sales, business model reinvention and acceleration of digital transformation. In Costa Rica, the tourism sector, which represents 8% of GDP, 12% of employment and one third of exports, was basically shut down by the pandemic. The sector is well organized and has been working under the leadership of the Tourism Institute to develop a comprehensive recovery and growth plan post pandemic.

There will be no better future of jobs and work in the region without a better future of production. If Latin American countries want to do more than just repairing the devastation inflicted to the labour market by COVID-19, they must accelerate productive transformation and diversification in the medium-term, and address long-term structural gaps that held back growth and productivity before the crisis, whether technological, digital, in human talent or innovation. Latin American countries should use this opportunity to drive microeconomic, place and cluster-based, productive development policies forward.