Market Institutions, Labor Market Dynamics, Growth and Productivity: Argentina

This paper seeks to shed light on how manufacturing job flows and productivity in Argentina were affected during the 1990s by economic reforms in general and particularly by: a) financial shocks, b) labor reforms that change non-wage labor costs, c) trade reforms that alter tariff dispersion, d) institutional features that affect the working of the credit, labor and goods markets. To this end, a “Constrained Panel Data Near Vector Autoregression†analysis is applied to a sample of 20 manufacturing industries for which data on jobs and productivity are available for the 1990-2001 period on a quarterly basis and different tests for the effect of reforms on job flows and productivity are performed. The main findings are that: - Shocks to the user cost of capital lower job creation, net employment growth and productivity and raise destruction. Increases in non-wage labor costs lead to bigger job destruction and reallocation and to smaller net employment and productivity. Lower sectoral tariffs raise job destruction, reallocation and productivity and reduce net employment growth. - Industries with bigger access to banking credit are more hard hit by financial shocks, but are are able to raise more their net employment growths in response to reductions in non-wage labor costs and sectoral tariff hikes. The presence of workers with larger bargaining power leads to bigger declines in job creation, net employment growth and job reallocation in response to negative profitability shocks. More open industries restructure more and experience smaller productivity declines in response to negative profitability shocks. These sectors raise net employment growth more when non-wage labor costs are reduced. - Increased reallocation within the manufacturing sector as a whole is seen to contribute to bigger increases (or smaller declines) in productivity in response to the different shocks. Although a majority of industries also display a positive contribution of reallocation to productivity in response to most shocks, there is substantial heterogeneity of behavior at this level. - The reforms in the areas of trade policy (formation of Mercosur) and labor taxes and regulations (lower taxation and more flexibility) after 1995, together with the increased reliance on banking credit, changed the nature of the responses of job flows to the different policy and cyclical shocks. - During 1995-2001 destruction rises more in response to negative profitability shocks, reflecting the more flexible labor regulations. This bigger labor market flexibility also appears to have led to a bigger synchronization of creation and destruction in response to non-wage labor shocks. The bigger reliance on banking credit and the bigger sensitivity to losses of international competitiveness due to Mercosur made net employment growth and reallocation decline more in response to adverse shocks to the cost of capital.