Unemployment: Troubles Ahead for Emerging Markets

IMF Blog, May 3, 2016

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Data cover 116 countries: 37 classified as "advanced" and 79 as emerging and developing economies.
The unemployment rate in advanced economies has declined over the past couple of years—with sharp declines in the United States and slower progress in the euro area—and this trend is expected to continue.
The unemployment rate in emerging economies is expected to increase over the course of this year.
Much of the increase in emerging economies is concentrated in countries where fuel exports are a big share of export earnings.
Chart 2 projection: the unemployment rate in the fuel-exporting group is expected to increase to 8.4 percent this year, a full percentage point above the estimate for last year.

The region faces a sharp increase in the unemployment rate.
Projection for 2016: unemployment in the region is expected to be nearly 8 percent, over two percentage points higher than it was two years ago.
The sharp rise is driven by recessions in large economies in the region, such as Brazil.
Job losses example: in Brazil, the job loss between 2014 and 2016 is expected at over 2 million people.
Elsewhere in the region, many economies are growing modestly, limiting labor market deterioration in those cases.

The Inter-American Development Bank’s 2016 report notes that the cloudy labor outlook follows a decade of progress:
- More than 50 million people in the region escaped poverty.
- Inequality fell.
- The share of informal workers declined significantly.
Despite a slowdown in growth, labor markets seemed buoyant as of last year, but there was evidence of "weakening beneath the surface."
With the growth outlook marked down further, the labor market outlook has become much more disturbing.

The strength of the relationship between GDP growth and unemployment varies across countries in the region.
For the three countries with the biggest increases in unemployment rates—Argentina, Brazil and Venezuela—the link is reasonably strong by emerging-economy standards:
- Brazil and Venezuela: a one percentage point increase in growth lowers the unemployment rate by 0.2 percentage points.
- Argentina: the impact is about half as strong.

Restoring labor market health will require:
- A return to stronger growth.
- Targeted measures to tackle barriers to private sector job creation, which may vary by country.
Specific assistance for job seekers could include:
- Placement services.
- Retraining.
- In some instances, subsidies to encourage formal sector employment.
Short-run dynamics:
- Large informal sectors may buffer increases in formal sector unemployment rates in the short-run.
- However, transition to the informal sector is likely associated with wage losses in the short-run and a loss of skills and ability to move to the formal sector if it persists.
Conclusion: A more lasting solution is needed to the emerging unemployment problem in the region beyond informal-sector absorption.

Prakash Loungani, Zidong An — May 3, 2016