About three quarters of the remittances flow to the

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Unformatted text preview: rally, the cyclical patterns can be more complex depending on the nature of the economic shock. From 1988‐91 in Mexico, the informal sector expanded during the boom in non‐tradables‐construction, services, transport, a pattern also found in Brazil and Colombia at various times (Fiess et al 2008). However, the present shock is originating from the exterior largely through demand for exports which tend to be more formal sectors. The more straightforward interpretation as a negative shock to the formal sector is appropriate. 116 • That said, informality cannot be considered a criterion in itself for social protection expenditures. In good times, opinion surveys in both countries confirm the view gleaned from the transition patterns above that a substantial majority consider self‐employment an attractive sector to enter. In times of crisis, the relative share of involuntary entrants rises, but a sizable share remains voluntarily informal (see annex II). The informal salaried in both good and bad times are substantially less voluntary than the self employed (see Perry et. al 2008). Policy • Policies seeking to preserve jobs by raising the costs of firing are unlikely to have first order effects since formal sector separations are not the primary drivers of unemployment and informality growth. In fact, they may further depress hiring in the formal sector by increasing the long run labor cost. • Targeting should be based more on family income than on registered job loss. Unfortunately, because of the CCT’s reliance on means testing for targeting, sudden falls in family income with moderate duration may be missed by infrequent periodicity of means testing. That said, the fact that in Mexico, children do drop out of school when a parent loses a job suggests a need for the kinds of incentives that CCTs offer. • A self targeting system such as envisaged in workfare programs such as Trabajar or the PET can obviate the need for means testing. For instance, setting the program wage sufficiently low means that only those truly in need will apply for the program. • The choice of types of works programs, whether simple with low materials content or more sophisticated infrastructure projects with a lower budget share transferred to workers depends substantially on the local context and bjectives of the government.153 Annex 1: Details on adjustment mechanisms Fujita and Ramey (2007) offer a means of decomposing movements of labor market aggregates, such as the unemployment rate, or the share of formal employment into the principle contributions of flows to and from different sectors. Table 1 reports this breakdown for Brazil and Mexico, across a long period, and during times of crisis. In general, between 85 and 80% of movements in the unemployment rate are driven by inflows from informality (I). Outflows reductions in outflows to formal jobs (F) contribute roughly 20%; to informal salaried work, relatively little, and to self employment (S), essentially zero. 153 See Ravallion (1999) and Maloney (2000) 117 Table 1: Relative Contribution of Flows to Aggregate Movements in Unemployment and F...
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This document was uploaded on 11/14/2013.

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