• Low-skilled workers in Latin America and the Caribbean have been most affected by the pandemic, and it could impact for up to a decade.
  • This is exacerbated by a lack of national assistance and unemployment insurance programs, write two World Bank experts.
  • Understanding the effects of previous crises can help policymakers make informed decisions to reduce the detrimental effects of future shocks.

In stable countries, crisis are rare. And when they occur, their effects wear off quickly. This is not the case in Latin America and the Caribbean (LAC).

As some of the largest shocks that have shaken the region in recent decades show, the consequences of crisis in our countries are long-term and they leave deep scars on employment . On average, after three years, a major regional crisis can cause a net loss of 1.5 million jobs, with a 3% contraction of formal work and an expansion of the informal sector of 2%, which only partially dampens the impact.

Economic crisis pushes many workers into the informal labour market.
Economic crisis pushes many workers into the informal labour market.
Image: World Bank

Of course, low skilled workers tend to suffer the most, exacerbating persistent inequities in the region. For them, the scars of crises can remain for up to a decade, with loss of income and greater vulnerability since two thirds of the countries in LAC do not have national assistance or unemployment insurance programs. But the entire employment structure as a whole is affected by crisis, and it is mainly in the formal sector of the economy where new opportunities disappear and the consequences are more lasting, and sometimes permanent.

It is key to take this into account at a time when the LAC region is going through a severe shock as a result of the pandemic. Its recessive impact could cause an even greater contraction in formal employment than previous crises, of up to 4%. If appropriate measures are not applied to recover the lost jobs and create new opportunities, these loses can be long term.

Persistent employment loss following crisis.
Persistent employment losses following crises happy all over the world.
Image: World Bank

The mirror of past crises should help us avoid repeating mistakes or aspiring to go back to where we were before the pandemic . We must build better. That is the goal of the World Bank study “Employment in Crisis: The Path to Better Jobs in a Post-COVID-19 Latin America”, which examines the profound impacts major crises have had on the regional labor market and proposes policies aimed at mitigating and reversing their effects in the light of past experiences.

For example, employment data from before and after the Brazilian 1992 debt crisis, the effects of the Asian financial crisis in Chile, and the impact of the 2008-2009 global crisis in Mexico demolish the myth of a rapid recovery. In all three cases, the employment curve suffered a strongly negative deviations as a result of these crises, which, far from reversing became more pronounced over time.

Even milder crises than these were followed by long periods of low job growth rates. Regional leadership faces this dilemma in dealing with the effects of the current pandemic. It is not always easy to do, but responses need to learn from these experiences to obtain better results.

The key initial step is to put strong, prudent macroeconomic frameworks and automatic stabilizers in place to shield labor markets from potential crises. Sound fiscal and monetary policies can preserve macroeconomic stability and avert system-wide financial strain in the face of a shock. Fiscal reforms, including less distortive taxation, more efficient public spending, financially sustainable pension programs and clear fiscal rules are the first line of defense against crises .

Countercyclical income support programs, such as unemployment insurance and other transfers to households during downturns, limit the damage caused by contractions and help economies recover faster. One of the region’s challenges, though, is that large segments of the workforce are informal and thus cannot be reached through traditional unemployment insurance.

Also, it is crucial to increase the capacity of the region´s social protection and labor policies, blending these policies into systems that provide income support and prepare workers for new jobs through reskilling and reemployment assistance. Governments’ quick reaction to expand some social protection and labor programs in the wake of the pandemic can lead to progress in building better and more integrated social registries. This is feasible in the short run and can make a difference in the reach of these programs.

However, stronger macroeconomic stabilizers and reforms to social protection and labor systems are not enough. Jump-starting job recovery by supporting vigorous job creation is also needed. This requires tackling structural issues. Competition policies, regional policies and labor regulations are key policy areas in which important changes can ensure that recoveries and rapid job creation can come hand in hand. These transformations are possible and should not be delayed.