More Work to Do? Taking Stock of Latin American Labor Markets

IMF Working Papers, March 8, 2019

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Strong GDP growth during the commodity boom period led to important gains in employment and a fall in the unemployment rate as labor demand outpaced an increasing labor supply.
Informality plays a central role in the dynamics of labor markets in Latin America.
A re-examination of Okun’s law shows that informality dampens changes in unemployment accompanying output fluctuations.
Countries with higher redundancy costs and cumbersome dismissal regulations exhibit “excess” informality over and above what would be expected based on their income and educational levels.
Case studies of labor market reforms analyzed using the synthetic control method show mixed results in terms of labor market outcomes.

Labor demand increases during boom periods can outpace labor supply growth, reducing measured unemployment rates.
Informality reduces the responsiveness of measured unemployment to output shocks, weakening the typical Okun’s law relationship.
Regulatory burden related to dismissal and redundancy costs appears associated with higher-than-expected informality, implying a link between labor market institutions and informal employment choices.

Labor market reforms could contribute to reducing informality and increasing the responsiveness of labor markets to output growth.
Reforms targeting dismissal regulations and redundancy cost structures may help lower “excess” informality, especially when calibrated to income and educational conditions.
Given mixed empirical results from case studies, reforms should be designed and assessed carefully, with attention to country-specific conditions and implementation details.

Antonio David, Frederic Lambert, and Frederik G Toscani. March 8, 2019. More Work to Do? Taking Stock of Latin American Labor Markets.