NOTE NUMBER 325 58576 viewpoint PUBLIC POLICY FOR THE PRIVATE SECTOR OcTOBER 2010 Jobs and the Crisis FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY David McKenzie and What Has Been Done and Where to Go from Here? David Robalino I n r e s p o n s e t o t h e f i n a n c i a l a n d e c o n o m i c c r i s i s , m a ny c o u n t r i e s David McKenzie (dmckenzie@worldbank.org) s o u g h t t o s t i m u l at e l a b o r d e m a n d , f a c i l i t at e j o b s e a r c h a n d p r e s e r ve is senior economist in s k i l l s , a n d p r ot e c t i n c o m e . W h i l e l i t t l e i n f o r m at i o n i s av a i l a b l e a b o u t the Finance and Private t h e i m p a c t of t h e s e i n t e r ve n t i o n s , t h e r e i s s o m e ev i d e n c e t h at t h ey Sector Development Unit of the World Bank's i nvo l ve d a s u b s t a n t i a l n u m b e r of p e o p l e d e s p i t e l i m i t e d b u d g et s . Development Research At t h e s a m e t i m e , t h e r e a r e c o n c e r n s a b o u t t h e e f f e c t i ve n e s s of Group. David Robalino (drobalino@worldbank.org) p r og r a m s , p a r t i c u l a r l y i n l ow- a n d m i d d l e - i n c o m e c o u n t r i e s . T h e is lead economist and c h a l l e n g e n ow i s t o r ev i s e t h e p o l i c y m i x t o m a x i m i ze t h e i m p a c t of labor team leader in the World Bank's Social t h e r e c ove r y o n e m p l oy m e n t c r e at i o n . Protection and Labor Department and codirector Global unemployment is estimated to have and World Bank.1 The estimated increase in of the Employment and increased by almost 34 million between 2007 expenditure related to active labor market Development Program at and 2009 as a result of the crisis, with the largest programs was generally modest, about 0.5 the Institute for the Study increases in high-income economies, Europe percent of GDP or less. While information of Labor (IZA). and Central Asia, and Latin America and the on the number of beneficiaries is limited, Caribbean (ILO 2010c). But the effects have coverage appears to have varied greatly by varied greatly across countries, and there is evi- country and type of program. In Argentina, dence that earnings growth slowed far more on Brazil, China, South Africa, and Turkey, for THE WORLD BANK GROUP average than employment growth did. In sev- example, it is estimated that unemployment eral countries workers' hours were reduced and insurance covered 7­13 percent of the unem- wages changed little. ployed in 2008. 2 Public works programs that were scaled up tended to involve substantial What policies were used? numbers--more than 500,000 people in Countries used a range of policy mixes aimed South Africa and more than 39 million in at stimulating labor demand (protecting or India's national rural employment guarantee creating jobs), facilitating job search and scheme. In Europe and Central Asia cover- preser ving skills, and protecting income, age of active labor market programs ranged according to a policy inventor y by the from less than 1 percent of the labor force in International Labour Organization (ILO) Azerbaijan to nearly 70 percent in Lithuania. JOBS AND THE cRISIS WhAT hAS BEEN DONE AND WhERE TO GO FROM hERE? Figure Labor market policy interventions implemented, 2007­ 09 Facilitating job search and preserving skills 1 Job search assistance and training The most common policies were related to job Countries implementing the policy search assistance and training. Among the 0 10 20 30 40 50 60 70 countries surveyed by the ILO­World Bank policy inventory, 40 percent implemented or Training expanded training programs and employment Job search services. These were particularly important in assistance OECD countries (figure 1).3 Skills certification Training programs played a prominent role, focusing on the unemployed (often youth) and Intermediation workers who would have been laid off. In Latin Counseling America, Colombia doubled the training slots through employment offices and training Job creation institutes, targeting youth. Chile, Costa Rica, 0 10 20 30 40 50 60 70 and Mexico introduced training programs for workers in enterprises affected by the Credit and support to SMEs crisis while providing incentives to preserve jobs. Armenia, Croatia, Estonia, the Russian Public works Federation, and Turkey almost doubled their budgets for employment services offices, train- Public jobs ing programs, or both. Still, the coverage of these programs remains small outside the Wage subsidies (for new entrants) OECD. Income protection Stimulating labor demand 0 10 20 30 40 50 60 70 Most countries also adopted policies to support Extended level or duration the creation of new jobs. These policies focused of unemployment benefits largely on supporting small and medium- size enterprises (SMEs) and entrepreneurs by Cash transfers facilitating access to credit, giving preferential Early retirement treatment in public tenders, or reducing taxes. or social pensions For example, Estonia, Latvia, and Poland allo- Additional social cated funds for entrepreneurship assistance, protection measures and Romania exempted firms from tax on Subsidized health insurance reinvested profits. Public works were most common in Latin In-kind transfers (including food subsidies) America and Africa. Argentina, Ecuador, and Mexico expanded existing public works pro- Job protection grams, and El Salvador started a new one. 0 10 20 30 40 50 60 70 Kazakhstan implemented the largest such pro- gram in Europe and Central Asia. Work sharing Less common was the use of wage subsidies to Reduction of stimulate the creation of new jobs. Several coun- nonwage labor costs tries in Europe and Central Asia-- including Bulgaria, Estonia, Hungar y, the former Job subsidies Yugoslav Republic of Macedonia, Serbia, and Turkey--introduced wage subsidies, predomi- OECD members Europe & Central Asia Latin America & Caribbean nantly for youth. In Latin America subsidies Middle East & North Africa South Asia East Asia & Pacific Sub-Saharan Africa targeted to new entrants have so far been used Source: ILO­World Bank policy inventory. only in Chile, which introduced an employment subsidy for hiring of young workers. Protecting income and jobs stimulus package led to the creation of 750,000 Countries also intervened to protect the jobs, mostly through public works (ILO 2010b). incomes of workers affected by the crisis. Cash The ILO (2010a) estimates that in G-20 coun- transfers were most common in Latin America, tries government actions created or saved 21 where 15 countries had implemented condi- million jobs in 2009 and 2010. There are fewer tional cash transfer programs before the crisis estimates aimed at taking account of what would hit. All of them expanded these programs, pro- have happened without the policies. In Europe, tecting the incomes of the poorest. In OECD where countries introduced a number of mea- countries unemployment benefits were the sures to prevent job losses, unemployment 3 preferred policy instrument for protecting increased less than could have been expected income. These were extended or increased in from the fall in GDP (European Commission most countries. Outside the OECD few coun- 2009). More generally, one can argue that the tries have implemented unemployment benefit biggest impact of policies on saving jobs has systems, and those that have cover only a minor- been indirect, through stimulus actions to stop ity of workers in the formal sector. global panic and lessen the fall in GDP. More In OECD countries and, to a certain extent, rigorous, formal impact evaluations of particu- Europe and Central Asia and Latin America, lar country programs are now being undertaken wage subsidies and work-sharing arrangements by World Bank researchers. were used to protect jobs. Between 2008 and 2009 most OECD countries adopted wage sub- Where do we go from here? sidies to protect employed workers--mainly Prolonged use of crisis mitigation policies in the through reductions in social security contribu- labor market runs the risk of causing longer- tions. In Europe and Central Asia, Bulgaria, term harm to productivity, government fiscal F Y R Macedonia, Poland, and Turkey also positions, and growth. Protecting jobs in the reduced nonwage labor costs. short term can lessen the impact of the crisis Work sharing, a more novel initiative, has and allow workers to retain skills. But in the received considerable attention. The largest longer term such actions may prevent needed program was Germany's Kurzarbeit, expected reallocation. This raises the risk of a jobless to cost 6 billion in 2010 alone. This program recovery. This was the case, for example, in has been credited with enabling German Indonesia during the 1997 crisis, when the gov- firms to quickly accelerate production during ernment tightened regulations to protect jobs the first phases of a recovery.4 Middle-income (see Manning 2000). countries implementing such programs include Over the short term countries need to start Argentina, Colombia, Costa Rica, Mexico, reviewing their policy portfolio, moving away Poland, and Turkey. from mitigation toward policies that maximize the impact of growth on employment creation What has been the impact? (Banerji, Newhouse, and Robalino forthcom- It is still too early to be able to say much, with ing). This approach would continue support accuracy and rigor, about the effectiveness of to small and medium-size enterprises and the these policies during the current crisis. Even less self-employed while reinforcing job search assis- can be said about potential dynamic trade-offs tance, counseling, and retraining programs. between saving jobs today and increasing produc- Wage subsidy programs would move away from tivity growth and employment in the longer term policies to protect existing jobs and toward through needed reallocation. Moreover, it is diffi- incentives for new hiring. As the recovery pro- cult to separate the impact of particular jobs poli- ceeds, governments will need to start signaling a cies from the effect of general stimulus packages. contraction in cash transfers or unemployment Nevertheless, there is some sense that the benefits to provide incentives to look for jobs. policies have helped. The simplest estimates To stimulate employment creation, countries of impact count the participants in programs, may also want to consider reforms in labor reg- treating each as a job saved or generated. The ulations (see, for example, Ribe, Robalino, and government of Indonesia estimates that its Walker forthcoming, ch. 5). JOBS AND THE cRISIS WhAT hAS BEEN DONE AND WhERE TO GO FROM hERE? Looking forward, countries need to devise OECD. In the other regions, for which information is more flexible systems to manage labor mar- still incomplete, at least one policy has been implement- ket risks. Four challenges would need to be ed by eight countries in Sub-Saharan Africa, six in East addressed: developing (or increasing the fre- Asia, four in South Asia, and four in the Middle East. quency of) current labor force surveys and 2. Examples come from ILO (2010b). viewpoint improving macroeconomic statistics; insti- 3. The Czech Republic, Hungary, Poland, the Slovak tutionalizing and integrating targeted cash Republic, and Turkey, though geographically part of transfer programs and public works that can Europe and Central Asia, are classified as OECD mem- is an open forum to expand and contract in response to the cycle; bers in figure 1 so as to avoid double counting. encourage dissemination of expanding the coverage of social insurance 4. Daniel Schäfer, "Germany: On a Roll," Financial public policy innovations programs; and optimizing the design of active Times, August 15, 2010. for private sector­led and labor market programs that deal with failures in market-based solutions for the labor market related to limited information References development. The views and skills mismatches (see Banerji, Newhouse, Banerji, Arup, David Newhouse, and David Robalino. published are those of the and Robalino forthcoming). Forthcoming. Labor Markets during the Great Recession: authors and should not be Ultimately, long-term sustained job creation Impacts and Policy Responses. Human Development attributed to the World requires sustained economic growth. A key to Series. Washington, DC: World Bank. Bank or any other affiliated creating such growth is fostering a competi- European Commission. 2009. "Draft Joint Employment organizations. Nor do any tive, productive, and innovative private sector. Report 2009/2010." http://ec.europa.eu/social/. of the conclusions represent Governments have traditionally been advised to ILO (International Labour Organization). 2010a. Ac- official policy of the World do this through a supportive role--by reducing celerating a Job-Rich Recovery in G-20 Countries: Building Bank or of its Executive the regulatory burden, pursuing financial and on Experience. Geneva. Directors or the countries macroeconomic stability, and building the nec- ------. 2010b. Employment and Social Protection Policies they represent. essary infrastructure. But the challenges of job from Crisis to Recovery and Beyond: A Review of Experi- To order additional copies creation after the crisis have led to increasing ence. An ILO report to the G-20 Labor and Employ- contact Suzanne Smith, demands for governments to actively and more ment Ministers Meeting, Washington, DC, April managing editor, directly work with the private sector through 20­21. Geneva. Room F 4K-292, industrial policy. The challenge for policy mak- ------. 2010c. Global Employment Trends, January 2010. The World Bank, ers, researchers, and the World Bank is not only http://www.ilo.org/. 1818 H Street, NW, to build on analysis about conditions that make Manning, Christopher. 2000. "Labor Market Adjust- Washington, DC 20433. the success of such policy more likely, but to learn ment to Indonesia's Economic Crisis: Context, whether and how such conditions can be created. Trends and Implications." Bulletin of Indonesian Telephone: Economic Studies 36 (1): 105­36. 001 202 458 7281 Ribe, Helena, David Robalino, and Ian Walker. Forth- Fax: coming. From Right to Reality: How Latin America and 001 202 522 3480 Notes the Caribbean Can Achieve Universal Social Protection Email: 1. The inventory of policy interventions, managed by Improving Redistribution and Adapting Programs to ssmith7@worldbank.org jointly by the ILO and the World Bank's Human Devel- Labor Markets. Washington, DC: World Bank. opment Network, Social Protection Unit, today covers Produced by Communications 103 countries, including all countries in Europe and Development Incorporated Central Asia, Latin America and the Caribbean, and the Printed on recycled paper This Note is available online: http://rru.worldbank.org/PublicPolicyJournal