The preceding sections show that millions of workers rotate between jobs.
Is this reallocation virtuous or not? The answer depends on the relationship between labor market dynamics, coverage of the risk to which workers are exposed, welfare, and productivity.
The constant reallocation of workers between jobs (high turnover) has a pos-itive effect on productivity and economic growth if workers are quickly and effectively reemployed in jobs where they are more productive. Labor mobility is therefore positive when workers are offered a better job than the one they had and where their contribution is greater. This is also true for workers who voluntarily leave a firm for self-employment where they are more productive. It is likewise positive when workers who involuntarily lose a job quickly manage to find a new one where their productivity is higher than in the previous job.
However, as indicated earlier, high labor mobility may also be a reflection of problems in the labor market. Furthermore, reallocation can be very costly from the workers’ standpoint, as they may endure long periods of unemploy-ment without an income or with a lower income and lose skills that would enable them to find a good job.
Therefore, the effect of reallocation on workers’ welfare has two components.
On the one hand, reallocation is positive for welfare insofar as it produces productivity gains, economic growth, greater formality, and higher real wag-es. On the other hand, greater reallocation increases the likelihood of long periods of unemployment (or work in poor-quality, informal jobs) and can have major consequences for a worker’s consumption and welfare, and pos-sibly that of his or her family. The fewer the mechanisms for mitigating risk, the higher the risk.
In the United States, Aghion et al. (2014) note the existence of the two effects described above. Comparing regions in the United States, these authors show that higher job rotation is associated with a greater subjective percep-tion of welfare in individuals when regions with similar unemployment levels are compared. If the unemployment levels differ, there is no clear association between job rotation and welfare, which indicates that the positive effects of turnover (higher growth and better wages) are diluted by the negative effects (greater likelihood of unemployment).
An additional dimension (specific to middle- and lower-middle-income coun-tries like those of the region) that should be considered from the welfare standpoint is that the mobility observed often occurs without the protections of unemployment insurance or severance pay found in the developed coun-tries. There are two reasons for this: first, there is no unemployment insur-ance in many LAC countries, and second, the mobility is associated with informal jobs (for a description of the mechanisms for unemployment protec-tion and their coverage, see Chapter 4).
Furthermore, turnover itself leaves even formal workers unprotected. Both unemployment insurance, when there is any, and severance pay depend on job tenure. When workers with little tenure lose their job, they often become ineligible for unemployment insurance or receive very little severance pay. All this accentuates the lack of protection from turnover for the region’s workers (for a more in-depth discussion of this issue, see Chapter 3).
This shows the importance of analyzing the point to which labor market be-havior fosters economic growth and, at the same time, workers’ welfare. It also demonstrates the urgency of promoting social protection mechanisms not only to mitigate the cost of unemployment but also to promote turnover that results in higher productivity and wages (see Box 2.5). As noted, gains in productivity occur only when workers are reallocated to a more produc-tive job; if workers lack the economic support and information they need to
conduct an appropriate job search and end up in an informal job where pro-ductivity is low, the economy will experience no gains in propro-ductivity. There is a high social value to achieving good matches, while excessive dismissals may entail a high cost that may justify state intervention.
Furthermore, in this context it is important to point out that the greater the impact of gains in productivity on wages, the more effective they are in in-creasing workers’ welfare. We know that gains in productivity are transferred to wages over the long term. That is why the wealthiest and most productive countries have higher average wages. Thus, the basic element for guaran-teeing that wages can steadily rise is to ensure the greater productivity of matches; however, it is no less certain that the way in which gains in produc-tivity are divided between employer and employee is important for calibrating welfare gains for workers, especially in the short and medium term. In this distribution, the respective bargaining power of workers and employers will determine the extent to which increases in productivity are reflected in higher wages (see Box 2.5). Mechanisms such as the minimum wage or collective bargaining are important for determining the distribution of profits (ILO, 2015 and 1985).
The evidence for the countries of the region for which longitudinal information is available indicates that a significant portion of the transitions between jobs is not conducive to (formal) jobs that pay higher wages or provide greater protection against risks. Using two variables, income and access to social benefits (formality), as proxies for job quality, it can be determined whether the shift from one job to another has resulted in greater welfare for the work-er. Some 38% to 47% of the transitions between jobs in Argentina, Brazil, and Mexico unequivocally improve the conditions of workers (whether be-cause of higher wages with the same benefits or an improvement in both di-mensions); some 40% to 55% of transitions worsen them (see Figure 2.20);
and some 6.6% to 12% show losses and gains. In other words, a very high proportion of job-to-job transitions entail losses to workers in the wages or benefits dimension, with no improvement.8
Moreover, although only partial information is available, workers do not ap-pear to be reallocated from less-productive to more-productive units. One of the arguments for a mobile market is that mobility reflects the efficient real-location of factors from less-productive to more-productive jobs. Taking the size of the firm as a proxy for productivity (Pagés, 2010), only about 20% of
8 Although there may be non-pecuniary aspects of the job that make the switch beneficial to the worker (distance to the workplace, hours, possibility of future promotion, etc.).
the transitions between jobs correspond to a shift from smaller to larger firms (see Figure 2.21). Many of the transitions occur between jobs of similar size or from larger to smaller units.
In the vast majority of cases, transitions from smaller to larger firms occur when a worker shifts from an informal to a formal job. In 60% of the cases in Argentina and Brazil and 70% in Mexico, transitioning from an informal to a formal job implies that the worker will end up working in a more productive unit. In contrast, more than 50% of the workers who move from a formal job to an informal one end up in a smaller unit, often as self-employed workers.
Source: Prepared by the authors, based on the panels of Argentina (EPHC, 2003-13), Brazil (PME, 2002–13), and Mexico (ENOE, I Trim. 2005-III Trim. 2012).
Note: For details on the panels, see Table A.1 in the appendix of data sources.
45.6 47.5
38.8
7.9 11.7
6.6
46.5 40.8
54.6
ARG BRA MEX ARG BRA MEX ARG BRA MEX
60 50 40 30 20 10 0
Higher Higher and lower Lower
Higher income (Informal ->formal transitions) Lower income (Formal->formal transitions) Higher income only (Formal->formal transitions) Lower income (Informal ->informal transitions) Higher income only (Informal ->informal transitions) Lower income (Formal->informal transitions) Figure 2.20 Percentage change in employment
based on the quality of the worker’s transition
Source: Prepared by the authors, based on the panels of Argentina (EPHC, 2003–13), Brazil (PME, 2002–13), and Mexico (ENOE, I Trim. 2005 to III Trim. 2012).
Note: For more details on the panels, see Table A.1 in the appendix of data sources.
F = formal; I = informal
< > =
F-I I-F Situation(I-I/F-F) All transitions
< > =
< > =
80 70 60 50 40 30 20 10 0
80 70 60 50 40 30 20 10 0 9080 7060 5040 3020 100 Argentina
Brazil
Mexico
Variation over the previous yearVariation over the previous yearVariation over the previous year
Figure 2.21 Percentage of worker transitions to larger firms by type of transition
Box 2.5. Wage setting
What affects wage levels? From a theoretical standpoint the wage should fall be-tween the value of the productivity of the worker–employer match (above which the employer is not interested in hiring the individual) and the reserve value of the worker (below which the individual is not interested in working). In any case, the wage divides the value of the worker–employer match. This division is the product of a negotiation between the worker and the employer (or collective bar-gaining between unions and businesses) in the case of workers employed by others and of the benefi ts derived from individual activity in the case of self-em-ployed workers.
Many labor market models use the equilibrium wage concept developed by late Nobel Prize-winner John Nash. In this equilibrium wage setting (in the context of a wage negotiation) is the product of what each party can obtain if an agreement is not reached, plus a proportion of the benefi t derived from the employment re-lationship. Thus, both parties are aware that if no agreement is reached, the va-cancy will not be fi lled; neither the worker nor the employer will get the benefi t of a match, and each will have to bear the cost of a continued search. This means that the wage negotiation is linked to factors intrinsic not only to the match but to the economic situation (for example, how easily the worker can get another offer and the fi rm another candidate). In addition, these costs create incentives for the parties to reach an agreement. How much of the benefi ts of the relationship accrue to each party depends on its bargaining power. In the extreme case in which workers have no bargaining power, the wage is equal to what the worker would get without an agreement—that is, the value of looking for another job or working in the informal sector.
It should be noted that the higher the value of the match, the higher the wage.
Thus, a more productive match, an increase in the price of the product, or higher sales will result in higher wages. Similarly, factors that can have a negative im-pact on job creation, such as higher non-wage or dismissal costs, can also have a negative impact on wages because they decrease the value of the match and, with it, the value of what there is to distribute between workers and fi rms. Further-more, labor policies have also been adopted to infl uence wage setting, imposing wage fl oors (minimum wages) or affecting workers’ bargaining power with fi rms.
Ultimately, the main determinant of worker remuneration is the productivity of the match; however, labor regulations, non-wage costs, taxes, dismissal costs, and minimum wages can change this. Since these factors are relatively stable in the long term, the evolution of the productivity of the match(es) is the main determi-nant of wage growth in the long term.
Table 2.5.1 Factors aff ecting wage levels
Factors that raise wages Increase in the productivity
of the match Increase in worker
bargaining power Low unemployment
Wage subsidies, minimum wages
Factors that decrease wages Taxes on the value
of the match Reduction in bargaining power High unemployment
environment
Source: Prepared by the authors, based on panel data.
Note: Country averages for unemployment, inactivity, or informality levels may vary because the fi gure restricts the sample to workers who were active for at least a period of the panel. For details on the panels, whose durations are indicated in parentheses, see Table A.1 in the appendix of data sources.
ARG COL
(1 year) (3 years) (2 years) (1,5 years) (1,5 years) (5 years) (2,5 years) (1 year) (3 years) (2 years) (1,5 years) (1,5 years) (5 years) (2,5 years)
BRA MEX PRY PER VEN ARG COL BRA MEX PRY PER VEN
Women Men
10090 8070 6050 4030 2010 0
10090 8070 6050 4030 2010 0 Unemployed at least once
Unemployed or inactive at least once In an informal job at least once
Figure 2.22 Percentage of active workers aged 25–45 who have been unemployed or inactive or who have worked in the informal sector during the course of a panel
High turnover levels mean that the vast majority of the region’s workers will, in a relatively short period, experience an episode of informality, unemploy-ment, or inactivity. Longitudinal surveys that look at men and women in their prime (ages 25 to 45) who had had at least one job or were looking for one during the panel find that 20% to 40% of the men had been unemployed or inactive (for a year and a half to five years) at least once, and more than 50% had had at least one informal job. The panels show higher mobility for women: between 40% to 60% had experienced an episode of unemployment or inactivity, and more than 50% had had at least one informal job. In Peru, 80% of men and almost 90% of women in a five-year period were working in an informal job (see Figure 2.22).
Conclusions
This chapter presents arguments about the singularity of the labor market as not only the place where returns to work are allocated but the environment where much of the social contract is developed. Thus, the labor market plays a pivotal role in productivity and economic performance, as well as individual welfare.
The chapter also argues that while normal market economy is associated with high job and worker flows, in the Latin American experience these flows largely give rise to the creation of informal jobs. Although informality stems from a combination of many factors, it reflects the tension between the pro-ductivity of the employer–worker match and the cost of formality. In certain countries in the region, these two variables are out of balance.
In addition, the region is characterized by an equilibrium marked by a lack of ongoing investment in employer–worker matches. A cause, and at the same time an effect, of this situation is the fact that workers do not stay long in a job, and there is constant reallocation of workers among jobs. Therefore, while turnover is essential to value creation in market economies, the pat-terns observed in the region yield neither greater worker welfare nor higher productivity in the countries