## _wp14115

## Source details

**Canonical URL:** [_wp14115](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14115.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14115.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14115.pdf.json)

---

### I. INTRODUCTION
- Caribbean countries are small open economies subject to frequent external shocks.
- Country diversity: commodity exporters and service-based economies with heavy reliance on tourism receipts and financial services.
- Common macroeconomic challenges:
  - Very high openness to international trade increases vulnerability to external shocks.
  - High exposure to natural disasters.
  - Limited scope for stabilization policies due to rigid exchange rate regimes and tight fiscal space.
- Fiscal and debt context:
  - Many economies pursued pro-cyclical fiscal policy, exacerbating economic fluctuations.
  - Extensive borrowing following external shocks pushed debt ratios to risky levels.
  - In 2012, overall public debt in the region was estimated at about 79 percent of regional GDP.
- Growth and employment outcomes:
  - Growth has stagnated in the last two decades, except in commodity exporters.
  - Past rapid-growth episodes driven by external factors (commodity prices, tourism receipts, banana production, external grants) rather than domestic policy/structural reforms.
  - Job content of growth limited during booms; persistent high unemployment.
  - Consequences: slow growth of per capita income, rising unemployment (especially among youth and women), increased vulnerability, rising poverty.
- Research objectives:
  - Explain historically high unemployment across many Caribbean countries.
  - Assess extent to which varying country experiences reflect domestic policies and structural rigidities.
  - Track labor market developments relative to economic cycles and document structural impediments.
  - Provide policy recommendations and structural reforms to increase job creation and sustainable human development.

### II. EMPIRICAL ANALYSIS: FRAMEWORK AND STEPS
- Four-step empirical approach:
  1. Present available labor market indicators for Caribbean countries and draw insights (Appendix Figures 1–8; data available through 2012).
  2. Use country-specific and panel data estimations to measure employment-output elasticity and produce forward-looking projections of unemployment under:
     - baseline growth projections, and
     - two alternative scenarios that target absorbing new entrants to the labor market and 50 percent reduction in the unemployment rate.
  3. Provide structural estimates to explain variation in the employment-output elasticity and contrast labor market flexibility and transmission of cyclical growth to unemployment across countries.
  4. Estimate determinants of employment growth, in the long and short run, to identify the significance of domestic policies and external factors and draw a menu of policy recommendations.

### III. LABOR MARKET INDICATORS: STYLIZED FACTS AND COUNTRY SUMMARIES
- General note: visual analysis based on national authorities and international sources; figures available only through 2012.
- Country highlights (selected):
  - Bahamas:
    - Labor force education composition: secondary school graduates 63 percent; tertiary graduates 25.5 percent.
    - Youth unemployment: 18.9 percent in 2007 versus aggregate unemployment of 7.9 percent in 2007; aggregate rose to 14.2 percent in 2009.
    - Productivity growth shows downward trend with sharp negative swings in 1998, 2003, and 2009.
  - Barbados:
    - Unemployment trended downward until 2009, low single digits in 2007; rose to 11.2 percent in 2011 after 2009 contraction.
    - Secondary school graduates make up almost two-thirds of the labor force.
    - Productivity growth upward but extremely volatile; negative swings in 1994 and early 2000s.
  - Belize:
    - Unemployment has varied cyclically; recent upward trend with unemployment 16.1 percent in 2012.
  - Guyana:
    - Unemployment declined from 16.8 percent in 1980 to 11.7 percent in 1992; unemployment 10.7 percent in 2006; youth unemployment estimated at 24 percent in 2002.
  - Jamaica:
    - Unemployment was 13.9 percent in 2012; youth unemployment more than double aggregate unemployment.
  - St. Lucia:
    - High youth unemployment shares: 54 percent between 15–19 years and 34 percent between 20–24 years.
- Aggregate statements:
  - Approximately 75 percent of the total labor force are job seekers with primary or less than primary education (aggregate statement in excerpt).
  - Employment predominately private sector, accounting for nearly 90 percent of total employment (aggregate statement).
  - Productivity growth volatile with zero net gain on average; some countries exhibit flat or negative productivity (Jamaica, Suriname); resource-rich countries show productivity gains but limited non-extractive diversification.
  - Wages have grown faster than productivity in some cases, particularly in the public sector (St. Lucia example).

### IV. EMPLOYMENT-OUTPUT ELASTICITY: METHODS AND KEY ESTIMATES
- Methodology:
  - Country time-series regressions (2SLS with and without trend) and panel/longitudinal frameworks using country-specific output slopes to compute long-term elasticity β.
  - Equation forms: ln(E_t) = α + β ln(Y_t) + θ'X_t + ... and panel specification ln(E_it) = α + β0 ln(Y_it) + β_i ln(Y_it) + ...
  - Instruments and lags used to address endogeneity; OLS approximates cointegration when variables are I(1).
- Range of long-run employment-output elasticity (Lowest / Average / Highest):
  - Bahamas: 0.16 / 0.53 / 0.77
  - Barbados: 0.34 / 0.79 / 1.34
  - Belize: 0.24 / 0.69 / 0.87
  - Jamaica: 0.41 / 1.06 / 1.63
  - St. Lucia: 0.29 / 0.54 / 0.75
  - Trinidad & Tobago: 0.22 / 0.32 / 0.39
- Interpretation:
  - Lowest elasticity in Trinidad and Tobago (government-driven employment expansion, low association with growth).
  - Highest elasticity in Jamaica (strong cyclical association between output and employment).
- Selected log_GDP elasticity coefficients (selected country coefficients):
  - Bahamas: 0.158182 (t = 4.12)
  - Barbados: 1.339672 (t = 3.1)
  - Belize: 0.236694 (t = 2.63)
  - Jamaica: 1.304168 (t = 7.88)
  - St. Lucia: 0.488359 (t = 1.53)
  - Trinidad & Tobago: 0.343156 (t = 6.73)

### V. MEDIUM-TERM LABOR MARKET SCENARIOS AND KEY STATISTICS (2013–2018 PROJECTIONS)
- Historical and projected growth and employment (selected values from Medium-Term Labor Market Outcomes):
  - Average real GDP growth rate (2002-12): Bahamas 0.62%, Barbados 1.13%, Belize 3.79%, Jamaica 0.65%, St. Lucia 2.56%, Trinidad & Tobago 4.69%.
  - Real GDP growth rate (2012): Bahamas 2.50%, Barbados 0.00%, Belize 5.29%, Jamaica 0.08%, St. Lucia -0.43%, Trinidad & Tobago 0.41%.
  - Average real GDP growth rate (2013-18): Bahamas 2.53%, Barbados 1.60%, Belize 2.50%, Jamaica 1.78%, St. Lucia 2.17%, Trinidad & Tobago 2.44%.
  - Labor force (millions) (2012): Bahamas 0.21, Barbados 0.15, Belize 0.15, Jamaica 1.28, St. Lucia 0.09, Trinidad & Tobago 0.62.
  - Unemployment rate (2012): Bahamas 11.00%, Barbados 11.00%, Belize 16.10%, Jamaica 13.00%, St. Lucia 21.83%, Trinidad & Tobago 5.50%.
  - New entrants to the labor force (2013-18): Bahamas 0.02, Barbados 0.01, Belize 0.02, Jamaica 0.08, St. Lucia 0.01, Trinidad & Tobago 0.02.
- Baseline medium-term unemployment (based on medium-term GDP growth projections and average elasticity):
  - Bahamas 13.37%, Barbados 8.92%, Belize 16.24%, Jamaica 8.57%, St. Lucia 25.86%, Trinidad & Tobago 4.01%.
- Scenario 1 — absorb new entrants (based on average elasticity):
  - Required cumulative change in employment (percent) over 2013–18: Bahamas 12.70, Barbados 6.00, Belize 13.10, Jamaica 7.35, St. Lucia 16.71, Trinidad & Tobago 3.32.
  - Required annual percentage growth in employment (percent): Bahamas 2.01%, Barbados 0.98%, Belize 2.07%, Jamaica 1.19%, St. Lucia 2.61%, Trinidad & Tobago 0.55%.
  - Required annual real GDP growth rate for 2013–2018 (percent): Bahamas 3.80%, Barbados 1.24%, Belize 3.01%, Jamaica 1.13%, St. Lucia 4.83%, Trinidad & Tobago 1.71%.
  - Resulting unemployment rate under Scenario 1: Bahamas 9.88%, Barbados 10.44%, Belize 14.51%, Jamaica 12.22%, St. Lucia 19.31%, Trinidad & Tobago 5.33%.
- Scenario 2 — 50% unemployment reduction by 2018 (based on average elasticity):
  - Required cumulative change in employment (percent) over 2013–18: Bahamas 18.88, Barbados 12.18, Belize 22.70, Jamaica 14.82, St. Lucia 30.68, Trinidad & Tobago 6.23.
  - Required annual percentage growth in employment (percent): Bahamas 2.92%, Barbados 1.93%, Belize 3.47%, Jamaica 2.33%, St. Lucia 4.56%, Trinidad & Tobago 1.01%.
  - Required annual real GDP growth rate for 2013–2018 (percent): Bahamas 5.52%, Barbados 2.46%, Belize 5.03%, Jamaica 2.21%, St. Lucia 8.44%, Trinidad & Tobago 3.18%.
  - Resulting unemployment rate under Scenario 2: Bahamas 4.94%, Barbados 5.22%, Belize 7.25%, Jamaica 6.11%, St. Lucia 9.65%, Trinidad & Tobago 2.67%.
- Additional medium-term points:
  - Over 2002–2012 average real growth ranged from 0.62 percent in the Bahamas to 4.7 percent in Trinidad and Tobago.
  - Average employment growth (2002–2012) ranged from 0.03 percent in Barbados to 1.9 percent in the Bahamas (table reports 1.88 percent for Bahamas).
  - Cumulative employment growth to absorb new entrants over 5 years: Bahamas 12.7, Belize 13.1, St. Lucia 16.7, Barbados 6, Jamaica 7.3, Trinidad & Tobago 3.3.
  - To halve unemployment in St. Lucia would require cumulative employment growth of 30.7 percent over 2013–18 and an annual output growth rate of 4.5 percent (based on an alternative elasticity assumption); assuming average elasticity the corresponding annual output growth is estimated at 8.4 percent.

### VI. DETERMINANTS OF EMPLOYMENT GROWTH AND DYNAMICS
- Conceptual determinants emphasized:
  - Domestic policy: government spending (investment vs. consumption) and private credit availability.
  - External factors: real effective exchange rate (REER), price of major exporting commodities, number of tourists, growth in major trading partners.
- Error-correction and short-run dynamics specification:
  - Long-run employment modeled as E* = f(REER, P*, PC, G) with decomposition of G into investment and consumption.
  - Short-run determinants include Δ private credit, lagged REER, Δ tourists (ta), and growth in major trading partners (gtpar).
- Country-specific empirical highlights:
  - Barbados: long-run positive role for public investment and private credit; short-run importance of private credit growth and growth in major trading partners; lagged REER appreciation negatively and significantly affects employment growth; error-correction term negative and significant indicating fast reversal to steady-state.
  - Jamaica: private credit growth is the primary long-term determinant; government investment not conducive to long-run job growth; short-run coefficients largely insignificant.
  - St. Lucia: private credit important long-run determinant; government investment stimulates employment in short run while government consumption is insignificant; REER appreciation negative (insignificant).
  - Trinidad and Tobago: long-run employment increases with private credit and REER depreciation; no evidence that higher prices for major exports raised employment; short-run coefficients not significant; government spending appears to crowd out private credit.
- Panel (pooled) results:
  - Long run: private credit and public investment support employment growth; public consumption detrimental to job creation.
  - Short run: private credit, tourist arrivals, and growth in major trading partners boost employment growth in pooled sample.

### VII. INSTITUTIONAL AND STRUCTURAL FEATURES; POLICY RECOMMENDATIONS
- Key structural/institutional constraints:
  - Skills mismatch between demand (service-oriented, professional/technical roles) and supply (high share of low-education workers).
  - High youth unemployment (about twice national rates).
  - Declining or stagnant labor productivity in many countries (except resource-rich ones).
  - Real wages growing in excess of productivity in many countries; rigid wage arrangements and high ratio of wage to per capita GNI in some countries (St. Lucia highlighted).
  - Labor regulations, social partnerships and non-wage labor costs increase labor market rigidity.
- Policy recommendations and reform agenda:
  - Restructure and refocus education and training systems (vocationalization, employer-subsidized training, entrepreneurship and skills programs) to address skills mismatch and youth unemployment.
  - Boost labor productivity via investment in human and physical capital, productivity agencies, trade integration, infrastructure, technology and innovation; address brain drain.
  - Mobilize demand for employment by enhancing competitiveness (manage REER dynamics), grow exports, and ensure labor supply matches demand through training.
  - Reform labor rules and regulations to enhance flexibility and adaptability while strengthening social dialogue among government, labor unions, and employers.
  - Rebalance public spending: prioritize public investment over consumption to support long-run job creation and avoid crowding out private credit and private employment.
  - Sustain credit growth to the private sector to mobilize employment growth.
  - Strengthen data availability for labor market analysis and policy design.
- Institutional observations:
  - CARICOM Recognition of Skills Certificate intended to enhance labor mobility and reduce skills mismatch but may exacerbate skills shortages in some countries.
  - Empirical literature finds regulations and institutions often inefficient and in need of revision to improve labor market mobility and reduce unemployment.

### VIII. BOX — THE BARBADOS LABOR MARKET: INSTITUTIONS, REGULATIONS, AND PRACTICES (KEY POINTS)
- Labor legislation and industrial practices:
  - Labor legislations in Barbados appear outdated; rigidity of working hours cited as most restrictive aspect.
  - Difficulty in firing arises from notification/approval requirements; Shops Act limits night work to 10pm unless approval is received from the Chief Labor Officer.
  - Distortions from national insurance contributions, severance payments, and minimum wages found to be minimal by Downes, Mamingi and Antoine (2004).
- Collective bargaining, unions, and social partnership:
  - Employers report quasi-fixed labor costs from collective agreements.
  - Union density reported at 30 percent by Ministry of Labor; alternative estimate up to 52 percent (Fashoyin, 2001).
  - Social partnership (CTUSAB and BPSA) has been central to economic and social policy coordination since early 1990s.
- Skills, education, and mismatch:
  - High youth unemployment and high incidence of workers without certification indicate a skills mismatch.
  - Close to 70 percent of the employed workforce during 2012 Q4 are in the low and semi-skilled categories.
  - 18 percent of the labor force completed tertiary education in 2003 (World Bank).
- Social protection and active labor market policies:
  - National insurance and social security system with unemployment insurance component introduced in 1981.
  - National Employment Bureau (NEB) provides labor market information, career counseling, placement services; technical and vocational training part of capacity development.
- Implications:
  - Regulatory and industrial-practice rigidities (working hours, dismissal procedures, collective agreements) constrain labor market flexibility and raise quasi-fixed labor costs.
  - Night work restriction (Shops Act limit of 10pm without approval) affects services and tourism sectors.
  - Despite social protection and active programs, large share of employment remains low and semi-skilled.

*Italic: Source: _wp14115 - References .............................................................................................................*

### References .............................................................................................................

### _wp14115 - References .............................................................................................................

### I. INTRODUCTION
- Caribbean countries are small open economies subject to frequent external shocks.
- Diversity across countries: commodity exporters and service-based economies with heavy reliance on tourism receipts and financial services.
- Common macroeconomic challenges:
  - Very high openness to international trade increases vulnerability to external shocks.
  - High exposure to natural disasters.
  - Limited scope for stabilization policies due to rigid exchange rate regimes and tight fiscal space.
- Fiscal and debt context:
  - Many economies pursued pro-cyclical fiscal policy, exacerbating economic fluctuations.
  - Extensive borrowing following external shocks pushed debt ratios to risky levels.
  - In 2012, overall public debt in the region was estimated at about 79 percent of regional GDP.
- Growth and employment outcomes:
  - Growth has stagnated in the last two decades, except in commodity exporters.
  - Past episodes of rapid growth were driven by external factors (commodity prices, tourism receipts, banana production, external grants) rather than domestic policy/structural reforms.
  - Job content of growth has been limited during booms, reflecting structural impediments and persistent high unemployment.
  - Consequences include slow growth of per capita income, rising unemployment (especially among youth and women), increased vulnerability, and rising poverty.
- Research objectives:
  - Explain why the unemployment rate has been historically high across many Caribbean countries.
  - Assess the extent to which varying country experiences reflect domestic policies and structural rigidities.
  - Track labor market developments relative to economic cycles and document structural impediments.
  - Provide policy recommendations and structural reforms to increase job creation and sustainable human development.

### II. EMPIRICAL ANALYSIS: FRAMEWORK AND STEPS
- Four-step empirical approach:
  1. Present available labor market indicators for Caribbean countries and draw insights (Appendix Figures 1–8; data available through 2012).
  2. Use country-specific and panel data estimations to measure employment-output elasticity and produce forward-looking projections of unemployment under:
     - baseline growth projections, and
     - two alternative scenarios that target absorbing new entrants to the labor market and 50 percent reduction in the unemployment rate.
  3. Provide structural estimates to explain variation in the employment-output elasticity and contrast labor market flexibility and transmission of cyclical growth to unemployment across countries.
  4. Estimate determinants of employment growth, in the long and short run, to identify the significance of domestic policies and external factors and draw a menu of policy recommendations.

### III. LABOR MARKET INDICATORS: STYLIZED FACTS AND COUNTRY SUMMARIES
- General note: visual analysis based on national authorities and international sources; figures available only through 2012.

- The Bahamas
  - Reduction in the unemployment rate through 2000 coincided with a pickup in real growth, notably in the late nineties.
  - Growth slowed during most of the last decade, coinciding with a surge in unemployment.
  - Labor force education composition: secondary school graduates 63 percent; tertiary graduates 25.5 percent.
  - Youth unemployment: 18.9 percent in 2007 versus aggregate unemployment of 7.9 percent in 2007; aggregate rose to 14.2 percent in 2009.
  - Productivity growth shows a downward trend with sharp negative swings in 1998, 2003, and 2009 that coincided with economic slowdowns and rising unemployment.

- Barbados
  - Unemployment trended downward until 2009, falling from double digits in the early nineties to low single digits in 2007.
  - Robust growth in the late nineties reduced unemployment; output contraction in early 2000s raised unemployment, later reversed by growth.
  - Severe contraction in 2009 pushed unemployment significantly upward; unemployment climbed to 11.2 percent in 2011.
  - Youth unemployment is significantly higher and cyclicality mirrors aggregate trends.
  - Secondary school graduates make up almost two-thirds of the labor force.
  - Productivity growth shows an upward but extremely volatile trend; negative productivity swings in 1994 and early 2000s coincided with slowdowns and surging unemployment.

- Belize
  - Unemployment has varied cyclically despite a high growth rate.
  - High unemployment coincided with low growth in the late nineties; early 2000s growth reduced unemployment.
  - More recently, the unemployment rate has been on an upward trend, surging to a record high of

### IV. EMPIRICAL STRATEGIES AND MEASURES EMPLOYED (from paper)
- Key quantitative elements used in the paper:
  - Employment-output elasticity estimation (country-specific and panel).
  - Forward-looking unemployment projections under baseline and two policy/scenario alternatives (absorb new entrants; 50 percent reduction in unemployment).
  - Structural estimates to explain cross-country variation in employment-output elasticity.
  - Long-run and short-run determinants of employment growth to identify policy and external factor effects.

### V. SELECTED FINDINGS HIGHLIGHTED IN THE TEXT
- External shocks and high indebtedness have hampered growth prospects and increased unemployment.
- Growth episodes often driven by external factors rather than domestic reforms, limiting sustainable job creation.
- Cyclical sensitivity: unemployment fluctuates with real growth, resulting in severe job loss during contractions and limited job gains during booms.
- Structural impediments and rigidities have constrained long-term job creation and amplified cyclicality effects on unemployment.
- Youth and women face disproportionately high unemployment in several countries.

### VI. IMPLICATIONS FOR POLICY (themes in the study)
- Need to address structural impediments and labor market rigidities to broaden the job-creation potential of growth.
- Policy menu aims to increase labor market flexibility, improve transmission of growth into employment, and target vulnerable groups (youth, women).
- Importance of fiscal sustainability to restore confidence and free resources for private sector activity and diversification.

*Italic: Source: _wp14115 - References .............................................................................................................*

### 16.1 percent in 2012. The composition of the labor force indicates heavy concentration in

### _wp14115 - 16.1 percent in 2012. The composition of the labor force indicates heavy concentration in

### Overview: labor market patterns and trends
- High and persistent unemployment with strong youth incidence:
  - Guyana: unemployment declined from 16.8 percent in 1980 to 11.7 percent in 1992; unemployment was 10.7 percent in 2006; youth unemployment estimated at 24 percent in 2002.
  - Jamaica: unemployment was 13.9 percent in 2012; youth unemployment more than double aggregate unemployment.
  - St. Lucia: high shares of youth unemployment — 54 percent between 15–19 years and 34 percent between 20–24 years.
  - Bahamas, Barbados, Belize, Jamaica, St. Lucia, Trinidad & Tobago: country-specific medium-term unemployment projections provided below.
- Labor force composition and employment structure:
  - Approximately 75 percent of the total labor force are job seekers with primary or less than primary education (aggregate statement for an unnamed economy in the excerpt).
  - Employment is predominately private sector, accounting for nearly 90 percent of total employment (aggregate statement in the excerpt).
- Productivity and wages:
  - Productivity growth has been volatile with zero net gain on average (aggregate statement).
  - In several countries productivity growth has been flat or negative for extended periods (Jamaica, Suriname); resource-rich countries saw productivity gains but limited non-extractive diversification (Trinidad and Tobago).
  - Wages have grown faster than productivity in some cases, particularly in the public sector (St. Lucia example).

### Employment-output elasticity analysis: methods and key estimates
- Methodology:
  - Two main approaches: country time-series regressions (2SLS with and without trend) and panel/longitudinal frameworks using country-specific output slopes to compute long-term elasticity β.
  - Equation forms: ln(E_t) = α + β ln(Y_t) + θ'X_t + ... and panel specification ln(E_it) = α + β0 ln(Y_it) + β_i ln(Y_it) + ...
  - Models estimated with and without time trend, using instruments and lags to address endogeneity; OLS approximates cointegration when variables are I(1).
- Range of long-run employment-output elasticity (Lowest / Average / Highest):
  - Bahamas: 0.16 / 0.53 / 0.77
  - Barbados: 0.34 / 0.79 / 1.34
  - Belize: 0.24 / 0.69 / 0.87
  - Jamaica: 0.41 / 1.06 / 1.63
  - St. Lucia: 0.29 / 0.54 / 0.75
  - Trinidad & Tobago: 0.22 / 0.32 / 0.39
- Interpretation highlights:
  - Lowest elasticity in Trinidad and Tobago (government-driven employment expansion, low association with growth).
  - Highest elasticity in Jamaica (strong cyclical association between output and employment).

### Medium-term labor market scenarios and key statistics (2013–2018 projections based on average elasticity)
- Historical and projected growth and employment (selected values from the Medium-Term Labor Market Outcomes table):
  - Average real GDP growth rate (2002-12): Bahamas 0.62%, Barbados 1.13%, Belize 3.79%, Jamaica 0.65%, St. Lucia 2.56%, Trinidad & Tobago 4.69%.
  - Real GDP growth rate (2012): Bahamas 2.50%, Barbados 0.00%, Belize 5.29%, Jamaica 0.08%, St. Lucia -0.43%, Trinidad & Tobago 0.41%.
  - Average real GDP growth rate (2013-18): Bahamas 2.53%, Barbados 1.60%, Belize 2.50%, Jamaica 1.78%, St. Lucia 2.17%, Trinidad & Tobago 2.44%.
  - Labor force (millions) (2012): Bahamas 0.21, Barbados 0.15, Belize 0.15, Jamaica 1.28, St. Lucia 0.09, Trinidad & Tobago 0.62.
  - Unemployment rate (2012): Bahamas 11.00%, Barbados 11.00%, Belize 16.10%, Jamaica 13.00%, St. Lucia 21.83%, Trinidad & Tobago 5.50%.
  - New entrants to the labor force (2013-18): Bahamas 0.02, Barbados 0.01, Belize 0.02, Jamaica 0.08, St. Lucia 0.01, Trinidad & Tobago 0.02.
- Baseline medium-term unemployment (based on medium-term GDP growth projections and average elasticity):
  - Bahamas 13.37%, Barbados 8.92%, Belize 16.24%, Jamaica 8.57%, St. Lucia 25.86%, Trinidad & Tobago 4.01%.
- Scenario 1 — absorb new entrants (based on average elasticity):
  - Required cumulative change in employment (percent) over 2013–18: Bahamas 12.70, Barbados 6.00, Belize 13.10, Jamaica 7.35, St. Lucia 16.71, Trinidad & Tobago 3.32.
  - Required annual percentage growth in employment (percent): Bahamas 2.01%, Barbados 0.98%, Belize 2.07%, Jamaica 1.19%, St. Lucia 2.61%, Trinidad & Tobago 0.55%.
  - Required annual real GDP growth rate for 2013–2018 (percent): Bahamas 3.80%, Barbados 1.24%, Belize 3.01%, Jamaica 1.13%, St. Lucia 4.83%, Trinidad & Tobago 1.71%.
  - Resulting unemployment rate under Scenario 1: Bahamas 9.88%, Barbados 10.44%, Belize 14.51%, Jamaica 12.22%, St. Lucia 19.31%, Trinidad & Tobago 5.33%.
- Scenario 2 — 50% unemployment reduction by 2018 (based on average elasticity):
  - Required cumulative change in employment (percent) over 2013–18: Bahamas 18.88, Barbados 12.18, Belize 22.70, Jamaica 14.82, St. Lucia 30.68, Trinidad & Tobago 6.23.
  - Required annual percentage growth in employment (percent): Bahamas 2.92%, Barbados 1.93%, Belize 3.47%, Jamaica 2.33%, St. Lucia 4.56%, Trinidad & Tobago 1.01%.
  - Required annual real GDP growth rate for 2013–2018 (percent): Bahamas 5.52%, Barbados 2.46%, Belize 5.03%, Jamaica 2.21%, St. Lucia 8.44%, Trinidad & Tobago 3.18%.
  - Resulting unemployment rate under Scenario 2: Bahamas 4.94%, Barbados 5.22%, Belize 7.25%, Jamaica 6.11%, St. Lucia 9.65%, Trinidad & Tobago 2.67%.
- Additional medium-term points:
  - Over 2002–2012 average real growth ranged from 0.62 percent in the Bahamas to 4.7 percent in Trinidad and Tobago.
  - Average employment growth (2002–2012) ranged from 0.03 percent in Barbados to 1.9 percent in the Bahamas (reported earlier as 1.88% for Bahamas in table).
  - Cumulative employment growth to absorb new entrants over 5 years: Bahamas 12.7, Belize 13.1, St. Lucia 16.7, Barbados 6, Jamaica 7.3, Trinidad & Tobago 3.3.
  - To halve unemployment in St. Lucia would require total cumulative employment growth of 30.7 percent over 2013–18 and an annual output growth rate of 4.5 percent (based on an alternative elasticity assumption noted in text); assuming average elasticity the corresponding annual output growth is estimated at 8.4 percent.

### Determinants of employment-output elasticity and dynamic empirical findings
- Conceptual determinants emphasized:
  - Domestic policy: government spending (investment vs. consumption) and private credit availability.
  - External factors: real effective exchange rate (REER), price of major exporting commodities, number of tourists, growth in major trading partners.
- Error-correction and short-run dynamics:
  - Long-run employment modeled as E* = f(REER, P*, PC, G) with decomposition of G into investment and consumption.
  - Short-run determinants include Δ private credit, lagged REER, Δ tourists (ta), and growth in major trading partners (gtpar).
- Country-specific empirical highlights:
  - Barbados: long-run positive role for public investment and private credit; short-run importance of private credit growth and growth in major trading partners; lagged REER appreciation negatively and significantly affects employment growth; error-correction term negative and significant indicating fast reversal to steady-state.
  - Jamaica: private credit growth is the primary long-term determinant; government investment not conducive to long-run job growth; short-run coefficients largely insignificant, suggesting scope for policy to mobilize employment via credit and competitiveness.
  - St. Lucia: private credit important long-run determinant; government investment stimulates employment in short run while government consumption is insignificant; REER appreciation has negative (insignificant) effect.
  - Trinidad and Tobago: long-run employment increases with private credit and REER depreciation; no evidence that higher prices for major exports raised employment; short-run coefficients not significant for cyclicality and government spending appears to crowd out private credit.
- Panel (pooled) results:
  - Long run: private credit and public investment support employment growth; public consumption detrimental to job creation.
  - Short run: private credit, tourist arrivals, and growth in major trading partners boost employment growth in pooled sample.

### Institutional and structural features; policy recommendations
- Key structural/institutional constraints noted:
  - Skills mismatch between demand (service-oriented, professional/technical roles) and supply (high share of low-education workers).
  - High youth unemployment (about twice national rates).
  - Declining or stagnant labor productivity in many countries, except resource-rich ones.
  - Real wages growing in excess of productivity in many countries; rigid wage arrangements and high ratio of wage to per capita GNI in some countries (St. Lucia highlighted).
  - Labor regulations, social partnerships and non-wage labor costs increase labor market rigidity and non-wage compensation complicates measures of rigidity.
- Policy recommendations and reform agenda (summary of suggested strategy):
  - Restructure and refocus education and training systems (vocationalization, employer-subsidized training, entrepreneurship and skills programs) to address skills mismatch and youth unemployment.
  - Boost labor productivity via investment in human and physical capital, productivity agencies, trade integration, infrastructure, technology and innovation; address brain drain.
  - Mobilize demand for employment by enhancing competitiveness (manage REER dynamics), grow exports, and ensure labor supply matches demand through training.
  - Reform labor rules and regulations to enhance flexibility and adaptability while strengthening social dialogue among government, labor unions, and employers.
  - Rebalance public spending: prioritize public investment over consumption to support long-run job creation and avoid crowding out private credit and private employment.
  - Strengthen data availability for labor market analysis and policy design.
- Specific institutional observations:
  - CARICOM Recognition of Skills Certificate intended to enhance labor mobility and reduce skills mismatch but may exacerbate skills shortages in some countries.
  - Empirical literature finds regulations and institutions often inefficient and in need of revision to improve labor market mobility and reduce unemployment.

*Sources: National authorities; World Economic Outlook; International Labor Organization; and IMF staff estimates and projections.*

### Box 1. The Barbados Labor Market: Institutions, Regulations, and Practices

### Box 1. The Barbados Labor Market: Institutions, Regulations, and Practices

### Labor legislation, regulations, and industrial practices
- Labor legislations in Barbados appear outdated and are not seen as adequately meeting the needs of modern times.
- A survey-based study (Archibald, Lewis-Bynoe and Moore, 2005) finds rigidity of working hours as the most restrictive aspect of the market, perhaps reflecting more industrial practices and less formal regulations that constrain flexibility to increase working hours.
- Difficulty in firing arises from the need to notify and seek approval from labor unions, or the labor ministry as the case may be, particularly with respect to group dismissal, and the existence of certain rules relating to dismissals and re-employment.
- A notable regulatory impediment is the restriction on night work, which appears to hamper the services sector given Barbados’ heavy reliance on tourism.
  - The Shops Act limits night work to 10pm unless approval is received from the Chief Labor Officer.
- Downes, Mamingi and Antoine (2004) find that distortions caused by regulations relating to national insurance contributions, severance payments, and minimum wages are minimal, reflecting long-standing rigidities that demand a voluntary approach to industrial relations.
- ILO conventions form the basis for labor regulations, government policies and programs in Barbados; as of 2009, the government has ratified up to 39 of such conventions.

### Collective bargaining, unions, and social partnership
- Employers express concern that rules under many “collective agreements” with employer groups have led to quasi-fixed labor costs, adversely affecting demand for labor (Downes, 2008).
- For bargaining purposes, employers usually recognize labor unions once a given number of their employees (at least half) wish to be represented and when the Department of Labor verification process is followed.
- Workers are free to form and belong to trade unions.
- About 70 percent of the estimated organized workforce is concentrated in three unions (Fashoyin, 2001).
- The Ministry of Labor puts union density at 30 percent of the labor force; Fashoyin (2001) considers it might be higher (about 52 percent), considering the demonstration effects of collective agreements in the organized sector.
- The general approach to collective bargaining is supported by a voluntary tradition and remains an overriding feature of Barbados’ industrial practice.
- Wages and conditions of employment are negotiated collectively at the industrial and national levels.
- Occupational minimum wages exist for categories such as shop assistant, domestic workers, and agricultural workers; average wages tend to be higher than the minimum wage.
- At the national level, an umbrella organization for unions is the Congress of Trade Unions and Staff Associations of Barbados (CTUSAB), and the private sector counterpart is the Barbados Private Sector Agency (BPSA).
- Under the social partnership, CTUSAB and BPSA have worked with the government (represented by the Department of Labor) in crafting and implementing the broader economic and social policy agenda for the country.
  - The Barbados model of social partnership came into force in the early 1990s as a joint response to an economic crisis; in the context of an IMF Program, the social partners implemented price and income policies, including a wage freeze.

### Skills, education, and labor market mismatch
- High level of youth unemployment, coupled with high incidence of workers without certification, presents a “mismatch” problem associated with a dysfunctional education system (Downes, 2006).
- Employers have expressed difficulties in hiring workers with required work ethic, attitude, job and technical skills (Downes, 2008).
- Recent data from the Barbados Statistical Service (BSS) indicate that close to 70 percent of the employed workforce during 2012 Q4 are in the low and semi-skilled categories.
- The country has a highly educated populace: an estimated 18 percent of the labor force completed tertiary education in 2003 (World Bank).

### Social protection and active labor market policies
- Barbados has a national insurance and social security system with extensive coverage including for the self-employed.
- The unemployment insurance component introduced in 1981 offers cash benefits to the unemployed, subject to qualifying conditions, in addition to a reverse tax credit for low income earners, and a welfare grants program.
- Active labor market policies are in place to improve employability:
  - The National Employment Bureau (NEB) offers free labor market information services for both local and overseas job seekers, undertakes career counseling and job application services, and facilitates placement of persons seeking jobs in overseas migrant worker programs.
  - Technical and vocational training is an important part of human capacity development in the country.

### Key findings and implications
- Regulatory and industrial-practice rigidities (working hours, dismissal procedures, collective agreements) constrain labor market flexibility and can raise quasi-fixed labor costs.
- Night work restriction (Shops Act limit of 10pm without approval) has pervasive implications for the services and tourism-dependent sectors.
- Despite extensive social protection coverage and active labor market programs, a large share of employment remains low and semi-skilled (close to 70 percent in 2012 Q4), while 18 percent of the labor force had tertiary education in 2003, indicating a skills mismatch.
- Union concentration and collective bargaining traditions produce strong voluntary industrial relations, but also contribute to labor cost rigidities and potential obstacles to labor reallocation.

*Source: Box 1. The Barbados Labor Market: Institutions, Regulations, and Practices (extracted from the supplied content).*

### 18.6 percent, and it increased markedly to over

### _wp14115 - 18.6 percent, and it increased markedly to over

### Unemployment levels and composition
- Structural unemployment is currently close to its long-term historical averages: 18.6 percent, with the remaining 3 percentage points a result of the cycle.
- Unemployment increased markedly to over 20 percent by mid-2012 with the economic slowdown.
- Youth and skill composition:
  - Unemployment rate among young labor force: about 45 percent.
  - Unemployment above 20 percent among those without tertiary education.
  - Unemployment close to 50 percent for persons with non-knowledge-based training.
  - About 95 percent of the unemployed hold secondary education or less; 5 percent hold tertiary or university education.
- Educational attainment in the labor force:
  - Almost 90 percent of the labor force has at most secondary education.
  - 43 percent of the labor force has none or primary education.
  - 34 percent has secondary education.
  - About 13 percent of the labor force currently has incomplete primary and secondary education.
- Demographics and labor supply:
  - Rapid population growth from high fertility in the 1980s produced a very young labor force.
  - Staff estimates that a growth of at least 2.1 percent is necessary to absorb new entrants into the labor market over the near and medium term.

### Causes and labor market distortions
- Sectoral shifts:
  - Shift from agriculture and labor-intensive manufacturing to services has increased demand for relatively more skilled workers.
  - Construction, transportation and retail previously absorbed some unskilled workers, but recent low growth in those sectors has penalized displaced low skilled workers.
  - Unemployment of the less skilled increased by about 7 percentage points in the last three years relative to the 1990s; unemployment among the skilled increased by 2 percentage points relative to the 1990s.
- Education and training weaknesses:
  - Universal secondary education introduction in 2000 led to expansion in the secondary system but did not significantly increase completed secondary education.
  - Two contributing factors: (i) mandatory schooling age remained at 15 while secondary extends to 17; (ii) weaknesses in primary education leave many entrants into secondary unprepared.
  - Vocational education is almost nonexistent, contributing to skill mismatches and “un-employability.”
  - Decreasing productivity over the past 5 years has hurt competitiveness.
- Minimum wage considerations:
  - Existing minimum wage described as very low, unbinding, and unchanged since 1985.
  - Authorities have studied proposals to increase the minimum wage; staff cautioned against increases, as binding minimum wages could affect employment, especially among youth. Plans to reconsider the minimum wage have been put on hold.

### Medium-term scenarios and policy priority
- Three scenarios based on historical employment-output elasticity:
  - Scenario 1: medium-term projections assuming baseline growth (estimates unemployment rate given baseline growth).
  - Scenario 2: calculates output growth rates necessary to stabilize the unemployment rate at its current level (create jobs to absorb new entrants).
  - Scenario 3: calculates growth rates necessary to reduce the unemployment rate by 50 percent.
- Upshot: comprehensive agenda needed to mobilize growth and sustain lower unemployment rates over the medium term, given prevailing high unemployment.

### Empirical findings and determinants of employment
- Employment-output elasticity indicates close association between employment and output in most countries (except resource-rich countries).
- Estimates identify important domestic and external determinants of employment:
  - Domestic policy variables: government investment, government consumption.
  - Financial variable: private sector credit (evidence points to importance of sustaining credit growth to the private sector).
  - External determinants: real effective exchange rate, prices of major exporting commodities, number of tourists, growth in major trading partners.
  - Maintaining a competitive real effective exchange rate and episodes of high growth in major trading partners support employment.
  - In pooled sample, a boom in tourism helped create jobs.
- Structural/institutional impediments identified:
  - Youth unemployment, skills-job mismatch, low labor productivity, inadequate labor market information.
  - Recommended reforms: close mismatch between educational output and skill demand, target higher productivity through training and skill upgrade, promote social partnerships, revise labor laws, improve capacity and flexibility to boost competitiveness and integration.

### Selected quantitative empirical coefficients (excerpted)
- Log_GDP elasticities (selected country coefficients from Table 1):
  - Bahamas: 0.158182 (t = 4.12)
  - Barbados: 1.339672 (t = 3.1)
  - Belize: 0.236694 (t = 2.63)
  - Jamaica: 1.304168 (t = 7.88)
  - St. Lucia: 0.488359 (t = 1.53)
  - Trinidad & Tobago: 0.343156 (t = 6.73)
- Okun's Law and unemployment-employment relations (Table 2, selected):
  - Trinidad and Tobago:
    - Okun's Law Employment (Υ): 0.22*** (R-sq 0.63)
    - U-E relation (δ): -0.36*** (R-sq 0.70)
    - Okun's Law Unemployment (β): -0.08*** (R-sq 0.42)
  - Barbados:
    - Okun's Law Employment (Υ): 0.68*** (R-sq 0.29)
    - U-E relation (δ): -0.75*** (R-sq 0.74)
    - Okun's Law Unemployment (β): -0.57*** (R-sq 0.65)
  - Jamaica:
    - Okun's Law Employment (Υ): 1.12*** (R-sq 0.60)
    - U-E relation (δ): -0.24*** (R-sq 0.56)
    - Okun's Law Unemployment (β): -0.27*** (R-sq 0.43)
  - St. Lucia:
    - Okun's Law Employment (Υ): 0.54** (R-sq 0.16)
    - U-E relation (δ): -0.57*** (R-sq 0.54)
    - Okun's Law Unemployment (β): -0.32** (R-sq 0.20)

### Policy implications and recommendations
- Top priority: mobilize additional growth and job creation to reduce poverty and increase real per capita GDP.
- Core of strategy: domestic policies and structural reforms that support private investment.
- Specific policy directions:
  - Sustain credit growth to the private sector to mobilize employment growth.
  - Maintain competitive real effective exchange rate to support employment.
  - Avoid pro-cyclical government spending that crowds out private activity and harms debt sustainability.
  - Implement structural reforms to address skills mismatch, strengthen vocational training, and improve labor market information.
  - Promote social partnerships and revise labor laws to increase labor market flexibility and capacity.

*Italic: Source material excerpted from the provided IMF content unit.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14115.pdf_