Some Reflections on the Job Scene

1. Some Reflections on the Job Scene Danny Leipziger Professor of Int’l Business, George Washington University NYU Jobs Conference, Sept. 25-26, 2011

2. Basic Themes • What do we learn from the Latin American experience? And from Chile in particular? • What is there in the advanced countries’ experience that should raise cautionary flags for middle income countries in Latin America and beyond? • How do we connect the dots on the Great Recession and the longer run in terms of jobs and economic growth?

3. Latin Lessons • Maintenance of fiscal space, a new development for many countries in the region, has served them well • Jobs, even if lower paying, provide an entry point into the formal or quasi-formal sector and are the only way to deal with persistent income inequality • Some hybrid between the US labor model that was associated with rapid job creation and the Euro-model that protects more in the downturn is probably best course • Poor educational outcomes and weak innovation systems separate the region from the best performers in East Asia

4. Latin American Concerns • All Latin Am. countries are well below average in the OECD PISA scores, with Chile ranked the highest at #43, despite expenditure levels that are not markedly low • Most countries participating in PISA are in the 5th or 6thdecile of respondents. Same is true for science & mathematics rankings • Regional labor productivity 1990-2005 was 1.5% on average, well below advance countries and far behind East Asia’s 4 percent • Youth unemployment is three-times the overall average

5. Issues Most Relevant to Chile • Chile’s U-rate rose 2% in 2009 but reverted close to its 2008 level by 2010; still U-rate for the age cohort 24-29 tended to average 12% over the past decade • Female labor force participation rates lag those in Brazil, Argentina and Uruguay ( Growth Commission Special Report) and part-time employment impediments are a problem and this may worsen the income distribution • Income distribution is stubbornly unequal as seen in Gini coefficients above .5 despite low absolute poverty rates • The innovation system, including links between business and government, has been difficult to remedy despite efforts

6. Some OECD Lessons • OECD Jobs Strategy speaks of innovation and technology diffusion policies to accompany education and training • Most countries now embrace knowledge-based industries • The externalities from major university centers is apparent • Governments have a fundamental role to play in coordination, management of science, functioning of financial and labor markets, and increasingly in providing signals if not a clear vision • Once jobs are lost, they are not likely to be regained

7. Long Run Implications of Factors Affecting Labor Market • Education has longest term effect in terms of skills enhancement and adaptability of the labor force • Innovation policy has a strong effect via TFP • Infrastructure investments influence efficiency and labor productivity • Those with better education, innovation record and infrastructure, ceteris paribus, survived the crisis better—Australia, Canada, Finland (OECD) • During prolonged recessions, hh expenditures on education slip (WB evidence for Eastern Europe) and firm R&D expenditures on innovation fall (OECD evidence) with long-term effects on potential growth rates. Infrastructure evidence uncertain.

8. Existing trends that the Great Recession exacerbated • In the US, poor distribution of income, got worse, and real wage declines of blue collar workers was extended to others • Incidence of shorter work weeks (Kurzarbeit), more reliance on part-time employment, that reduced real incomes • Evidence is not yet clear on whether gender disparities were exacerbated, depending on countries and sectors • Youth unemployment rose, especially in Europe—it doubled in Spain between 2008 and 2010 for aged 24-29 cohort!

9. Short-Medium term factors affecting the Long-Run • Collapse of venture capital markets, already not robust in some countries, and directly linked to innovative investment • Prolonged unemployment spells that restrict labor market re-entry—high percentage of long spells • Delayed entry by the young limits long-term earnings and asset accumulation. • Asset collapses reduce confidence and the efficacy of fiscal stimulus and the usefulness of monetary easing

10. Some Modest Final Thoughts • Australia and Korea had among the largest stimulus packages ( % of GDP); among the best rated innovation systems (OECD), and had among the lowest upticks in additional unemployment during the crisis • The crisis is an outlier in Obstfeld and Gourinchas and we should therefore expect the labor market to also react badly • The Reinhart & Rogoff analysis tells us that this time is not so different historically, but for some it certainly has been, and the political economy of joblessness will be profound • The economic and social costs of joblessness in countries with limited safety nets are such that globalization may take a hard and irreversible hit