Impact of the Financial Crisis on Employment

Overview

• The global economic downturn has resulted in an employment crisis: Global unemployment increased by 8.4 million in 2008 (7.4 percent) and global job losses could hit 50 million in 2009.
  
  
• Although the impact varies across countries and regions, evidence suggests that globally the largest impact has been in export-oriented sectors—i.e. mining, garment—and urban communities.
  
  
• It also suggests that globally, job losses in the wage sector have been contained through increased internal flexibility (e.g., administrative leaves, shifts to part-time workloads).
  
  
• The shift from higher to lower productivity jobs is expected to result in nearly 233 million more working poor (from 2007 to 2009), around 100 million of whom will be in South Asia.
  
  
• Current trends may jeopardize future improvements in the quality and quantity of employment, as well as growth and poverty reduction.

Today a rigorous assessment of the full impact of the financial crisis on employment opportunity in developing countries remains challenging and somewhat premature as (i) employment and wages are known to react slowly to shocks and (ii) data on key labor market indicators are collected less frequently than for other economic variables.

However, signs are emerging of significant job loss and of growing shortages of productive employment, which are aggravated by the reduction of emigration flows. In 2008, global unemployment increased by 8.4 million and global job losses could hit 50.4 million for 2009, according to the International Labor Organization (ILO).[i] Although the highest impact is expected in the developed world, an additional 23 million people are expected to become unemployed in the developing world, 12.8 million of whom will be in East Asia (up 1.5 percentage points to 5.8 percent), 4.9 million in South Asia (up 0.6 points), and 3.7 million in Latin America (1.2 points). The ILO estimates also suggest that, with 45 million new entrants to the jobs market annually, 300 million new jobs would need to be created globally during the next five years to return to pre-crisis levels of employment. [ii] 

But the magnitude and characteristics of the impact vary considerably across countries and regions. Preliminary survey evidence from Eastern Europe and Central Asia (ECA) indicates that on average, in the 27 ECA countries for which data are available, registered unemployment increased by approximately 20 percent from March 2008 to March 2009. However Russia, Turkey, and the Baltic states have been hit particularly hard with increases of more than 200 percent in Latvia and Lithuania, 300 percent in Estonia, and more than 60 percent in Turkey. In contrast, registered unemployment declined in Belarus, Tajikistan, Kosovo, Serbia, and several other ECA countries. Similarly, large cross country differences are reported in Latin America. There the crisis has affected mostly formal wage employment in Brazil and Chile while in Colombia it has been reflected in a decrease in net job creation of non-salaried jobs (e.g., employers, self-employed, and unpaid workers). Finally its severe impact has been felt both the informal and formal sectors in Mexico.

Globally job losses in the wage sector have been contained through increased internal flexibility(e.g., administrative leaves, shifts to part-time workloads) to reduce labor cost with minimum loss accumulated human capital. In Russia, for example, nearly 2 million individuals were on administrative leave or employed in part-time work in early 2009, which is 10 times more than the previous year.

Anecdotal evidence from other regression suggests that export-oriented sectors—i.e. mining, garment—and urban communities are most vulnerable to the downturn.

• Mine and smelter closures resulted in job losses in the Democratic Republic of Congo (100,000), South Africa (40,000, nearly 10% of the workforce), Zambia (3,000), Chile (2,000) and Mongolia (1,700).
  
  
• The garment industry has laid off 30,000 workers in Cambodia (10 percent of workforce).
  
  
• In India, the Ministry of Labor indicates that more than 500,000 jobs were lost during the last three months of 2008 in export-oriented sectors alone, including gems and jewelry, autos, and textiles.
  
  
• In China, according to the Academy of Social Sciences, 670,000 labor-intensive small- and medium-sized firms closed down before the last Lunar New Year in the cities of Guangzhou, Dongguan, and Shenzhen.[iii] As of April 2009, an additional 25 million migrant workers have been laid off and returned to rural parts of China since the onset of the financial crisis.[iv] 
  
  
• In Indonesia, December 2008 figures from the Department of Manpower estimated that nearly 40,000 workers have been or are expected to be laid-off.
  
  
• In Madagascar, decline in dynamic, labor-intensive sectors such as tourism and textiles has led to a reported loss of 35,000 jobs in urban areas since January 2009.

In addition, according to the International Labour Organisation, the number of workers categorized as working poor (using the US$1.25 per day poverty line) is estimated to increase by 233 million between 2007 and 2009. This is an increase of 7.2 percentage points, with 103 million additional working poor in South Asia and 36 million in Sub-Saharan Africa. With the US$2 per day poverty line, the additional number of working poor rises to 1.2 billion (up 1.5 points), with the largest increase in East Asia (67 million), followed by South Asia (52 million). 

Current trends are mostly consistent with lessons from past crises when extraordinarily high levels of labor reallocation to lower productivity activities have driven down aggregate real wages.Recent financial crises have typically first hit the higher productivity sectors—urban-based exporters, construction, and manufacturing. As employment in these sectors contracted, laid-off workers moved to low-productivity sectors and informal activities such as agriculture, subsistence self-employment, and small and medium enterprises (SMEs), which act as “shock absorbers.” [v] The inflow of additional workers further depresses the already low returns to labor in low-productivity and informal sectors and reduces the average wage in the economy, spreading the pain broadly across the economy. In Indonesia, for example, the construction sector initially bore the brunt of the crisis, contracting by 37 percent, but by the end of the crisis mean earnings across the economy had declined by an estimated 40 percent, with only self-employed men spared from the declines.[vi] Similarly, urban households with workers in financial services and construction suffered the greatest income declines (48 percent and 35 percent, respectively) during Mexico’s 1994/1995 peso crisis, but even rural farm workers saw a 17 percent loss in income.[vii] 

Current trends may jeopardize future improvements in the quality and quantity of employment, as well as growth and poverty reduction. Experience from previous crises has shown that, while earnings and employment tend to fall precipitously in response to growth deceleration, recovery occurs gradually.[viii] In addition, small firms created during times of crisis tend to be less productive and profitable than pre-existing counterparts.[ix] Moreover, cross-country evidence suggests that a slowdown associated with a 1 percent reduction in the share in employment of manufacturing may increase poverty by as much as 5 percent.[x] 

Countries are responding to this threat with a combination of programs to assist job creation and retention, support employment and earnings in high-productivity sectors, and increase and create safety net programs.[xi], [xii], [xiii] Brazil, China, Thailand, and India, for instance, have established policies that prioritize credit and subsidies to higher productivity sectors and SMEs. In addition, Bangladesh allocated US$14.6 million to provide credit to SMEs through private commercial banks. Expansion and/or creation of public works programs can be seen in Argentina, Chile, Pakistan, and Zambia. Colombia dedicated C$250 billion (0.7 percent of GDP) to train 250,000 vulnerable individuals between 18 and 30 years of age. In Cambodia, the government extended a tax holiday through 2012 on corporate income tax payments for foreign direct investors. China allocated US$14 billion of its stimulus package for rural projects, to provide jobs for laid-off migrant workers returning to their home villages. Similarly, Mexico has allocated US$4.4 billion in emergency infrastructure spending for 2009, and the Dominican Republic has adopted a US$400 million public works plan for 2009. In the Philippines, the government sharply upscaled a conditional cash transfer program, from 20,000 participants in 2007 to 360,000 at the start of 2009.  

Media Contact:
Alejandra Viveros, (202) 473-4306, aviveros@worldbank.org

Updated September 2009