Every 1% increase in economic growth, employment increases 0,2% - IDESA

Informe Nº: 12/05/2014

Every 1% increase in economic growth, employment increases 0,2%

The drop in unemployment rate that was reported by the INDEC occurred because many people stopped looking for a job. This is the result of the loss of capacity to create new jobs due to the low economic growth and the poor quality of labor institutions. The problems is not solved by inducing employers and unions to set their wages below the inflation level or using public funds to subsidize inactivity- such as the Asignación Universal por Hijo and the Progresar- but by improving the design of labor market institutions.

INDEC reported that the Monthly Economic Activity Estimator (EMAE), which is an estimator of the GDP, grew 2.7% inter-annually in the last quarter. During the same period, INDEC also reported that the unemployment rate fell from 6,9% to 6,4% of the active population. Analyzed superficially, the data might lead to optimistic conclusions.

On the one hand, there are doubts about the quality of the data produced by the official body regarding the level of economic activity. But even more important is that INDEC also reported that the active population (i.e. people that are working or looking for work) had a significant drop from 46,3% to 45,6% of the total population in the last quarter of the year. This is extremely important because if participation rate had not been reduced, unemployment rate would have not been of 6,4% but of 7,7% of the active population. This means that the unemployment rate declined because many people decided not to search for a job, otherwise unemployment would have increased.

One of the main reasons why people stop taking part of the labor market is because of the inadequate availability of jobs. In this regard, the official data of the Ministry of Economy shows that:

· Between 2003 and 2008 the economy grew at a 8,4% annually, and total employment did so at a 2,8% rate annually.

· Between 2008 and 2012 the economy grew 5,1% annually and total employment 1,3% annually.

· During 2013 the economy grew 4,9% and employment just 0,9% annually

These data shows that the labor markets problems are associated with the sluggishness in the growth of productive activity. It is expected that a less growing economy creates fewer jobs. But it is not so obvious that the official information points out that for every point growth in the economy, employment grows less and less. After the mega-devaluation of 2002, for each point of economic growth, total employment grew 0,33 points. In the year 2008 this ratio fell to 0,26 and in 2013, 0,18. In other words, economic growth “yields” less in terms of new jobs.

There are reasons to suspect that the official data from INDEC on economic growth would be overestimated. But this does not invalidate the reasoning, since employment data includes an increasing portion of low quality jobs, essentially, self-employment and public employment. Estimates for 2013 show that formal private salaried employment has remained virtually stagnant, so most new jobs are either self-employment or public employment.

Labor market indicators in the last decade show the enormous social costs associated with having low quality labor institutions. Until about 2008, employment generation was based on the loss of real value of labor costs due to the decline in real wages caused by the 2002 mega-devaluation.  The consequences of not having replaced a model based on low real wages by another model that emphasizes high productivity and better design in labor institutions, has been made very clear in recent years. Proof of this is that employment has stagnated and that authorities are being forced to demand nominal wage increases below inflation in order to balance the economy.

The growing labor inactivity externalises the decay. The phenomenon is aggravated by the enormous amount of public funds used to subsidize the inactive segment of the population (as the Asignación Universal por Hijo and the Progresar).  An alternative strategy is to promote social inclusion by improving the design of labor market institutions and promoting public policies that encourage labor participation. 

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