Tuesday, March 24, 2009

Who gets hit the most by slow growth and recession?

This one pager argues that the working poor (the bottom 20th percentile in the income distribution) are hit less intensely than regular workers. Why? Because “wages at the bottom of the distribution are already so low that there is little room for further cuts”. Moreover, a large portion of the poor workers do part-time work, which is a desired over full-time workers by employers in order to put down pressure on payroll.

Zepeda, Alarcon, Soares, and Osorio look at the effect of recession and slow growth on the working poor. They study slow growth in Chile (2000-2003) and Mexico (2000-2004), and recession in Mexico (1994-1996) and its effect on the working poor. In a country where most of the working poor are engaged on agricultural sector and do part-time work to earn an extra income, this feature is kind of expected.

Is this a matter of relief or comfort? Well, not really! The paper does not say that poor do not get hurt; what it says is that the working poor are affected less intensely than full-time wage earners. The working poor might loose income marginally but the fact is that this marginal loss in income means a lot to their share of household income and the corresponding consumption budget. Also, it is generally agreed that poor people have the highest marginal propensity to consume. Social protection, cushioning the loss in marginal income, and social safety are necessary to not only help the poor but also to stimulate local economy.

… that periods of slow growth and recession in Mexico and Chile improved the poor’s relative income. That their labour income does not fall as much as others’ during crises may offer comfort, but even a small decline can exact a heavy toll. Safety nets and emergency assistance help protect minimum consumption levels, but policies to confront economic crises should not be mere mitigation strategies. They should include interventions to strengthen human capacity and improve the poor’s main asset: labour.

In a related IPC working paper the authors look at the changes in labor markets and the dynamics of inequality and poverty in Brazil, Chile, and Mexico. One interesting finding is that the earning per worker is a function of slow-moving changes in the structure of employment and the characteristics of workers and rapid changes in the prices of labor for specific workers. The structure of employment is affected by demographic changes, education, and structural transformation in employment from agricultural labor.

Demographic changes, better education and the decline of agricultural labour are among the most significant changes in the structure of employment, and they contribute to observed changes in earnings. Among the most important changes in prices contributing to the change in earnings are changes in the returns to formal and informal employees relative to the self-employed; changes to full-time employment relative to part-time workers; changes in the returns to urban workers relative to rural workers; and change in the earnings of workers in services relative to workers in agriculture. In general, changes in earnings frequently favoured low-earning workers, mostly because of the change in the returns for their labour. This is in contrast to the changes in the structure of employment, which tended to favour high-earning workers.