Jobs at risk as Latin America’s downturn deepens

November 5, 2015

Laid-off outsourced worker, who was contracted to work for Petrobras, wears a mask of former Brazilian president Luiz Inacio Lula da Silva during a protest against recent layoffs, in front of the Petrobras headquarter in Rio de Janeiro, Brazil

Millions of Latin Americans risk losing their jobs as a consequence of the region’s economic downturn. Job losses are already piling up in Brazil, mired in its worst recession in generations, and look increasingly likely in other countries, according to a research report by UBS.

Companies in Latin America usually take longer to lay off workers during a downturn than in other regions because of relatively tough labor rules. Costs of rehiring and training are high, which helps protect employees in the early stages of an economic slowdown. But signs that firms have no longer been able to keep their workers have mounted, meaning the wave of job losses that started in Brazil is set to spread across the region.

The unemployment rates of Chile, Colombia and Peru, still very low by historical standards, look increasingly incompatible with the weak pace of growth of those economies.

And in Brazil, where it has already jumped to 7.6 percent since a record low of 4.3 percent last year, joblessness could top 11 percent in 2016 and keep rising in 2017, UBS economists Rafael de la Fuente and Thiago Carlos wrote in a report titled “Is Unemployment the Next Shoe to Drop?”

Latin America is currently underperforming global growth by the largest margin in the past quarter century and its economies are expanding at rates well below potential.

Is it really conceivable that unemployment can stay at these low levels for much longer? We doubt it.

In this chart, Brazil’s unemployment rate in is orange, Chile’s in pink, Colombia’s in green and Mexico’s in blue:

joblessLatam

Economically, the job losses can be justified as a mere cyclical adjustment. Competitiveness will be restored, with cheaper labor giving Latin American companies a more solid footing in global markets. Inflation pressures will ease, giving central banks some respite after recent rate increases.

But high unemployment can always be potentially disruptive, more so in a region where nearly 170 million people still live in poverty and rising middle classes remain so vulnerable. Presidents have grown increasingly unpopular, fueling political instability, while consumption has started to falter.

In other words, the economic downturn caused by the drop in price of the region’s commodities exports would reach a whole new level, getting to a page yet to be turned in Europe and only partially overcome in the United States seven years after the latest financial crisis. It will feel real for Latin America’s half billion population, which only recently started to get used to steady economic progress after decades of sheer uncertainty.

Mexico is the exception, but only because labor markets there have never fully recovered from the 2009 crisis and still show some slack. Just as in the United States, real wage growth has been too weak for many years as migration to the U.S. has slowed since 2009. Mexicans have returned home or just simply decided to stay south of the border, leaving the country’s labor market with many more workers than it can employ.

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