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Labor Markets and the Crisis Antonio Spilimbergo (IMF and CEPR) World Bank April 29, 2009 1 Outline Context Big picture How will labor markets be affected? One important macro trade-off Policy responses 2 Global Growth Projected to Recover Gradually Real GDP Growth (Percent change from previous quarter, annualized) 12 Emerging and Developing economies 10 8 6 World 4 2 0 Advanced economies -2 -4 -6 -8 2007 2008 2009 2010 3 But Unemployment Rates Will Peak Later Unemployment Rate (in percent) 12 10 Euro area 8 U.K. 6 U.S. 4 Japan 2 2006 2007 2008 2009 2010 3 4 Standard policy dilemmas Policy (macro) trade-off between: Attenuating effects of recession on the crisis Incentives to reallocation Usual (individual) trade-off in UI between moral hazard and incentives less relevant Active labor market policy is the usual answer 5 Why macro trade-off? If the crisis is a usual “business cycle” Just help workers and enterprises to survive the crisis and wait to go back to “business as usual” If the crisis is structural Need to provide incentives to move out from some sectors / regions What happen when wrong policies are in place? Take Italy in the 70s and the oil shocks Policy response on the premise that it was a temporary shock (business cycle) But it was not; consequence… Regional migration stopped Persistent large unemployment Increasing public debt (which was not a big problem before) 6 7 Which kind of crisis is this? This crisis is more structural than usual business cycle because: Deleveraging (financing will be more difficult in some countries for some industries) Current account reversals (some countries need to close current account because no financing will be available in the future) => new competitors Devaluation (tradable vs. nontradables) Trade Pattern of world consumption may change (for instance, Chinese consumers will demand different goods than U.S. consumers) Global Trade and Manufacturing Have Fallen Sharply Industrial Production and Manufacturing PMI Merchandise Exports (3m ma over 3m ma annualized) (3m ma over 3m ma annualized) 15 60 60 Global IP 10 55 5 50 Emerging 40 World 30 0 20 50 10 -5 0 45 Advanced -10 -15 8 -10 -20 40 Global Manf. PMI (SA, 50+=expansion; RHS) -30 -20 -40 35 -50 -25 Mar.09 -30 Jan-00 Feb.09 30 Jan-02 Jan-04 Jan-06 Jan-08 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 -60 -70 Emerging Economies Growth Slowed By Falling Exports and Industrial Production Industrial Production 9 Merchandise Exports (in percent change from a year earlier) (in percent change from a year earlier) 20 Emg. Asia Emg. Asia 60 Emg. Europe 15 40 10 20 5 Latin America Latin America 0 0 -20 Emg. Europe -5 Nov.08 Nov.08 -10 03 04 05 06 07 08 -40 09 03 04 05 06 07 08 09 Great volatility in Exchange Rates Exchange Rates 1/ (percent change; Sept. 2008 vs. March 2009) Nominal Effective rate Real Effective Rate Poland Mexico Russia Hungary Korea Brazil Romania Malaysia Argentina Thailand Bulgaria Estonia Latvia Lithuania China -30 -20 -10 0 10 1/Bilateral rate in euro per local currency. Positive numbers denote appreciation of local currency. 10 GDP Hardest Hit in Economies More Reliant on Manufacturing Exports 11 2008Q4 GDP Growth vs. Advanced Manufacturing Share in GDP 0 3 6 9 12 15 18 21 0 GDP Growth Q4/2008 (SAAR) Australia Netherlands Spain -5 Canada France U.K. U.S. Germany Italy -10 Mexico Malaysia Japan -15 -20 Korea Thailand -25 Taiwan POC -30 Share of high and medium-high tech manufacturing VA in GDP Sources: CEIC, OECD, Haver Analytics and IMF staff calculations. Ireland In addition this crisis is expected to be exceptionally long12 Real and Potential GDP Growth 1/ Output Gaps (percent change from a year earlier) (percent of potential GDP) 4 10 Emerging Emerging 8 2 6 World 0 4 2 -2 0 World -2 -4 Advanced Advanced -6 -4 90 95 00 05 10 90 95 00 05 10 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. 13 Characteristics of the Crisis Deep Prolonged Worldwide Financial/Trade Global Imbalances New role of fiscal policy Impact on Labor Markets (I): Deep and Prolonged The crisis will be deep. Safety nets, which were thought for a normal business cycle, may be not good for such a deep and prolonged recession. Changes may be necessary to unemployment benefits Protect most vulnerable groups 14 Impact on Labor Markets (II): Worldwide Usual “safety valves” are not possible: Migration is not an option; Remittances are not an option; and Lower wages will not work well. 15 Impact on Labor Markets (III): Sectoral Reallocation Not a simple business cycle fluctuation Many workers need to change sector For instance, many Eastern European countries, which used to run large current account deficits, will need to generate more export/less import => sectoral reallocation of workers 16 Impact on Labor Markets (IV): Industrial Policies are Back! Some industrialized countries are bailing out companies with the condition that jobs are saved at home => this could damage workers abroad 17 Impact on Labor Markets (V): Fiscal Constraints For now, some consensus that fiscal response is useful but policies will be constrained in the future as deficits have to be reduced Some proposals are dangerous. For instance, increasing public employment or subsidizing employment: not well targeted; difficult to reverse; and similar to transfers in their effectiveness. 18 Sustainability Concerns and Fiscal Projections G-20 Advanced Countries Fiscal Balance and Public Debt G-20 Advanced Countries Public Debt (in percent of GDP; PPP GDP weighted) -14 19 (in percent of GDP; PPP GDP weighted) 160 160 Contingent Liabilities -12 140 140 -10 Public debt (RHS) -8 120 -6 Baseline 100 -4 Fiscal Balance (LHS; inverse) 120 Low growth 100 80 80 -2 0 60 07 08 09 10 11 12 13 14 60 07 08 09 10 11 12 13 14 7 20 Difficult Choices (I) Subsidizing employment Large fiscal cost Obstacle to sectoral reallocation but.. Need to avoid skill depreciation Can be cost-effective, considering cost of unemployment 21 Difficult Choices (II) Subsidizing capital/firms Bad incentives Political problems Obstacle to sectoral reallocation but.. Could preserve some viable companies 22 Workers are also Consumers... Labor market policies may influence consumers’ behavior Three specific factors affect consumption at this juncture: decreases in wealth; tighter credit constraints; and high uncertainty. Need to increase confidence in workers/consumers