World Bank April 29, 2009

Labor Markets and the Crisis

Antonio Spilimbergo(IMF and CEPR)

2

OutlineOutline ContextContext Big pictureBig picture How will labor markets be affected?How will labor markets be affected? One important macro trade-offOne important macro trade-off Policy responsesPolicy responses

3

-8

-6

-4

-2

0

2

4

6

8

10

12

2007 2008 2009 2010

Real GDP Growth(Percent change from previous quarter, annualized)

World

Emerging and Developing economies

Advanced economies

Global Growth Projected to Recover Gradually

4

But Unemployment Rates Will Peak LaterBut Unemployment Rates Will Peak Later

2

4

6

8

10

12

2006 2007 2008 2009 2010

U.K.U.K.

U.S.U.S.

JapanJapan

Euro areaEuro area

Unemployment RateUnemployment Rate((in percent)in percent)

33

5

Standard policy Standard policy dilemmasdilemmas

Policy (Policy (macromacro) trade-off between:) trade-off between: Attenuating effects of recession on the Attenuating effects of recession on the

crisiscrisis Incentives to reallocationIncentives to reallocation

Usual (Usual (individualindividual) trade-off in UI ) trade-off in UI between moral hazard and between moral hazard and incentives less relevantincentives less relevant Active labor market policy is the usual Active labor market policy is the usual

answeranswer

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Why macro trade-off?Why macro trade-off? If the crisis is a usual “business If the crisis is a usual “business

cycle”cycle” Just help workers and enterprises to Just help workers and enterprises to

survive the crisis and wait to go back to survive the crisis and wait to go back to “business as usual”“business as usual”

If the crisis is structuralIf the crisis is structural Need to provide incentives to move out Need to provide incentives to move out

from some sectors / regions from some sectors / regions

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What happen when wrong What happen when wrong policies are in place?policies are in place?

Take Italy in the 70s and the oil shocksTake Italy in the 70s and the oil shocks Policy response on the premise that it Policy response on the premise that it

was a temporary shock (business cycle)was a temporary shock (business cycle) But it was not; consequence…But it was not; consequence…

Regional migration stoppedRegional migration stopped Persistent large unemploymentPersistent large unemployment Increasing public debt (which was not a big Increasing public debt (which was not a big

problem before) problem before)

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Which kind of crisis is Which kind of crisis is this?this?

This crisis is more structural than usual This crisis is more structural than usual business cycle because:business cycle because: Deleveraging (financing will be more difficult in Deleveraging (financing will be more difficult in

some countries for some industries)some countries for some industries) Current account reversals (some countries need Current account reversals (some countries need

to close current account because no financing to close current account because no financing will be available in the future) => new will be available in the future) => new competitorscompetitors

Devaluation (tradable vs. nontradables)Devaluation (tradable vs. nontradables) TradeTrade Pattern of world consumption may change (for Pattern of world consumption may change (for

instance, Chinese consumers will demand instance, Chinese consumers will demand different goods than U.S. consumers)different goods than U.S. consumers)

9Global Trade and Manufacturing Have Fallen Sharply

Merchandise Exports(3m ma over 3m ma annualized)

-30

-25

-20

-15

-10

-5

0

5

10

15

Jan-00 Jan-02 Jan-04 Jan-06 Jan-0830

35

40

45

50

55

60

Industrial Production and Manufacturing PMI(3m ma over 3m ma annualized)

Global IP

Global Manf. PMI(SA, 50+=expansion; RHS)

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

Mar.09

World

Feb.09

Advanced

Emerging

10

-40

-20

0

20

40

60

03 04 05 06 07 08 09

-10

-5

0

5

10

15

20

03 04 05 06 07 08 09

Emerging Economies Growth Slowed By Falling Exports and Industrial Production

Industrial Production(in percent change from a year

earlier)

Emg. Asia

Nov.08

Merchandise Exports(in percent change from a year

earlier)

Latin America

Emg. Asia

Latin America

Nov.08

Emg. Europe

Emg. Europe

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-30 -20 -10 0 10

ChinaLithuania

LatviaEstonia

BulgariaThailand

ArgentinaMalaysiaRomania

BrazilKorea

HungaryRussia

MexicoPoland

Nominal Effective rate Real Effective Rate

Great volatility in Exchange Rates

Exchange Rates 1/(percent change; Sept. 2008 vs. March 2009)

1/Bilateral rate in euro per local currency. Positive numbers denote appreciation of local currency.

12

-30

-25

-20

-15

-10

-5

00 3 6 9 12 15 18 21

Canada

Japan

Germany

2008Q4 GDP Growth vs. Advanced Manufacturing Share in GDP

IrelandTaiwan

POC

Malaysia

Korea

Mexico

Thailand

U.K. U.S.

Italy

Netherlands

France

Australia

Share of high and medium-high tech manufacturing VA in GDP

GD

P G

row

th Q

4/2

008 (

SA

AR

)GDP Hardest Hit in Economies

More Reliant on Manufacturing Exports

Spain

Sources: CEIC, OECD, Haver Analytics and IMF staff calculations.

13

-4

-2

0

2

4

6

8

10

90 95 00 05 10

In addition this crisis is expected to be In addition this crisis is expected to be exceptionally longexceptionally long

Real and Potential GDP Growth 1/

(percent change from a year earlier)

Advanced

World

Output Gaps(percent of potential GDP)

Emerging

-6

-4

-2

0

2

4

90 95 00 05 10

Emerging

World

Advanced

1/ Estimates of the output gap, in percent of potential GDP, are based on IMF staff calculations. GDP growth rates of actual (solid line) versus potential (dashed line) for advanced economies. For emerging economies, Hodrick-Prescott filter applied for potential GDP.

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Characteristics of the Characteristics of the CrisisCrisis

DeepDeep ProlongedProlonged WorldwideWorldwide Financial/TradeFinancial/Trade Global ImbalancesGlobal Imbalances New role of fiscal policyNew role of fiscal policy

15Impact on Labor Markets Impact on Labor Markets

(I):(I):Deep and ProlongedDeep and Prolonged

The crisis will be deep. Safety nets, The crisis will be deep. Safety nets, which were thought for a normal which were thought for a normal business cycle, may be not good for business cycle, may be not good for such a deep and prolonged such a deep and prolonged recession.recession. Changes may be necessary to Changes may be necessary to

unemployment benefitsunemployment benefits Protect most vulnerable groupsProtect most vulnerable groups

16Impact on Labor Markets Impact on Labor Markets (II):(II):

WorldwideWorldwide Usual “safety valves” are not Usual “safety valves” are not

possible:possible: Migration is not an option;Migration is not an option; Remittances are not an option; andRemittances are not an option; and Lower wages will not work well. Lower wages will not work well.

17Impact on Labor Markets Impact on Labor Markets (III): Sectoral (III): Sectoral ReallocationReallocation

Not a simple business cycle Not a simple business cycle fluctuationfluctuation

Many workers need to change sectorMany workers need to change sector

For instance, many Eastern European For instance, many Eastern European countries, which used to run large countries, which used to run large current account deficits, will need to current account deficits, will need to generate more export/less import => generate more export/less import => sectoral reallocation of workers sectoral reallocation of workers

18Impact on Labor Markets Impact on Labor Markets (IV): Industrial Policies (IV): Industrial Policies

are Back!are Back! Some industrialized countries are Some industrialized countries are

bailing out companies with the bailing out companies with the condition that jobs are saved at condition that jobs are saved at homehome

=> this could damage workers => this could damage workers abroad abroad

19Impact on Labor Markets Impact on Labor Markets (V):(V):

Fiscal ConstraintsFiscal Constraints For now, some consensus that fiscal For now, some consensus that fiscal response is useful but policies will be response is useful but policies will be constrained in the future as deficits constrained in the future as deficits have to be reducedhave to be reduced

Some proposals are dangerous. For Some proposals are dangerous. For instance, increasing public employment instance, increasing public employment or subsidizing employment:or subsidizing employment: not well targeted; not well targeted; difficult to reverse; and difficult to reverse; and similar to transfers in their effectiveness. similar to transfers in their effectiveness.

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60

80

100

120

140

160

07 08 09 10 11 12 13 14

Sustainability Concerns and Fiscal ProjectionsSustainability Concerns and Fiscal Projections

-14

-12

-10

-8

-6

-4

-2

0

07 08 09 10 11 12 13 14

60

80

100

120

140

160

Fiscal BalanceFiscal Balance(LHS; inverse)(LHS; inverse)

Public debt Public debt (RHS)(RHS)

G-20 Advanced CountriesG-20 Advanced CountriesFiscal Balance and Public DebtFiscal Balance and Public Debt(in percent of GDP; PPP GDP weighted)(in percent of GDP; PPP GDP weighted)

G-20 Advanced Countries G-20 Advanced Countries Public DebtPublic Debt

(in percent of GDP; PPP GDP weighted)(in percent of GDP; PPP GDP weighted)

BaselineBaseline

Low growthLow growth

Contingent Contingent LiabilitiesLiabilities

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Difficult Choices (I)Difficult Choices (I) Subsidizing employmentSubsidizing employment

Large fiscal costLarge fiscal cost Obstacle to sectoral reallocationObstacle to sectoral reallocation

but..but.. Need to avoid skill depreciationNeed to avoid skill depreciation Can be cost-effective, considering cost Can be cost-effective, considering cost

of unemployment of unemployment

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Difficult Choices (II)Difficult Choices (II) Subsidizing capital/firmsSubsidizing capital/firms

Bad incentivesBad incentives Political problems Political problems Obstacle to sectoral reallocationObstacle to sectoral reallocation

but..but.. Could preserve some viable companiesCould preserve some viable companies

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Workers are also Consumers...Workers are also Consumers...

Labor market policies may influence Labor market policies may influence consumers’ behavior consumers’ behavior

Three specific factors affect Three specific factors affect consumption at this juncture: consumption at this juncture: decreases in wealth; decreases in wealth; tighter credit constraints; andtighter credit constraints; and high uncertainty.high uncertainty.

Need to increase confidence in Need to increase confidence in workers/consumersworkers/consumers