Sun, Nov 05, 2017 - Page 7 News List

There could be benign reasons for Latin America’s jobless growth

By Ernesto Talvi

After a sharp and continuous slowdown that began in mid-2013 and ended in the last quarter of 2015, economic growth in most Latin American countries has officially returned. However, a corresponding decline in unemployment is nowhere in sight.

In fact, unemployment in much of the region has continued climbing during the last seven quarters. Why?

Latin America’s jobless recovery is of great concern for many, and with good reason. During the first seven quarters of the previous recovery, which began in 2004, average unemployment decreased by 0.2 percentage points for every percentage point of GDP growth.

This time, unemployment over the last seven quarters has actually increased by 0.3 percentage points for each percentage point of growth, resulting in a total rise in unemployment of almost one percentage point since the end of 2015.

One common explanation for the apparent decoupling of growth and employment is that technological advances, such as automation and robotics, have resulted in capital substituting for labor across the region’s economies. As innovations in production have reduced the number of workers needed to generate a unit of output, the traditional correlation between output and employment has been severed.

It seems like a compelling theory, but in Latin America’s case, it is also likely the wrong one. We do not need the rise of robots to account for the growth-unemployment paradox.

If the technology hypothesis were true, we would expect to see an increase in productivity-enhancing capital expenditures during the current period relative to prior recoveries, but the data show the opposite.

During the first seven quarters of this rally, the region’s average investment decreased by 2.2 percent for each percentage point of growth; in the past, average investment increased by almost 2.3 percent.

However, if labor-substituting technology does not explain Latin America’s current jobless growth cycle, what does? Two possible answers stand out.

First, the current recovery is much slower and shallower than previous ones, which means that jobs are not being created as fast and at sufficiently high numbers to keep up with labor market entrants. In fact, average annual growth in Latin America was a meager 1.4 percent during the first seven quarters of the current recovery, compared to 5.4 percent following the previous one.

The problem with this explanation is that it does not account for the lack of investment.

A second possible answer is what I call the “capacity glut” hypothesis. In the decade before mid-2013, Latin America grew at a breakneck pace — about twice its historic average. Until the boom’s end, consensus forecasts predicted that the bonanza would continue.

At the time, this seemed a reasonable assumption. China’s voracious appetite for commodities dramatically altered perceptions about the global economy’s trajectory. However, to paraphrase Mafalda, the iconic protagonist of Argentine artist Quino’s signature cartoon series, the future is no longer what it was.

In 2013, amid waning Chinese demand, commodity prices fell. Since then, average economic growth in Latin America has slowed to about a quarter of previously projected rates. Firms that predicted a continuing boom — and therefore invested in expanding production and increased their workforce — were left with excess capacity relative to actual demand.

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