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156 roughly speaking three groups can bedistinguished

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Unformatted text preview: anta Fe Road Infrastructure (P099051). Energy estimates are from the UNEP (2008), Peru ‐ Rural Electrification (P090116), and Brazil ‐ Cana Brava hydropower plant. Authors’ calculations. 114 7. HOW WILL LABOR MARKETS ADJUST TO THE CRISIS? A DYNAMIC VIEW William Maloney March 2009* Abstract Tracking flows of workers among different sectors of employment during economic downturns can shed light on the mechanism of labor market adjustment and inform the design of safety net programs. Though patterns may differ across recessions, we find that the generally countercyclical rise in unemployment and informality is driven primarily by a reduction in hiring in the formal sector, rather than increased labor shedding. Further, changes in the rate of separations from informality are the largest determinant of changes in unemployment. Both suggest that safety nets should focus less on formal job loss per se and more generally on movements in family incomes, perhaps revealed through self targeting mechanisms. Past crises suggest that as GDP falls unemployment and informality will rise. For Brazil and Mexico the elasticity of the unemployment rate with respect to output averages roughly ‐4.5; for unemployment and the elasticity of the share of the labor force in informal employment averages about .2. Understanding the flows of workers among sectors that generate these movements in aggregates can help understanding the mechanisms of adjustment of labor markets during crisis, and inform the design of safety net programs. At any moment in time, changes in any labor market indicator, such as the unemployment rate, or the share of formal employment, is driven by changes in flows into and out of those employment states from and to other states. A change in the unemployment rate, for example, could be supported with a variety of combinations of flows. In the US literature, for example, Shimer (2007) and Hall (2005) among others have argued that most new unemployment is caused by employers ceasing hiring, rather than firing workers. The reason for this is an active subject of debate. Following workers as they move among sector across several periods of economic downturn in Brazil and Mexico suggests several stylized facts about how Latin America’s labor markets adjust to macro economic shocks.151 • Consistent with the US literature, the share of formal employment is procyclical with an elasticity of approximately .2‐.3. That is, while not always the case, formal employment generally falls during recessions. This occurs primarily because of a reduction in hiring and hence greater difficulty of finding formal jobs from inactivity, unemployment and informal jobs rather than because of increased separation from formal jobs. *LCR Crisis Briefs Series. 151 See Bosch and Maloney (2008) for details. 115 • Transitions between informality and formal employment, in fact, slow down during downturns. Conversely, in recoveries, flows increase in both directions suggesting incre...
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