Experts consider the impact of trying to limit dismissals by law
Sunday, May 8, 2016
Double severance: how effective was it after 2001 crisis?
Double severance was first implemented in the first quarter of 2002 and lasted until the third quarter of 2007 (both pink). In between, the severance was reduced to 150 percent in the first quarter of 2005.
By Fermín Koop
Opposition seeks to reinstate previously-used measure to avoid more layoffs
Despite the national government’s staunch rejection, opposition parties are seeking to rapidly move forward with a so-called “anti-layoffs” bill as a way to save jobs amid an economic recession — an initiative already implemented between 2002 and 2007 in Argentina after the political and economic crisis.
The Senate has approved a draft that stipulates double severance payments for private and state employees in the case of layoffs over a 180-day period from the day of its passing. At the same time, if a worker is fired without cause, he or she will be entitled to ask the Labour Ministry to return them to their jobs.
The bill follows the same characteristics of the so-called 2002 “economic emergency” law, which suspended layoffs without cause for 180 days starting on January 6 and implemented a double severance. Nevertheless, the deadline was then extended until 2007 but reducing the amount of the severance, first to 180 percent 2004 and then to 150 percent in 2005.
It was an extraordinary measure after a 300 percent devaluation of the peso, that led to a 100 percent increase in prices during the first months of 2002. Purchasing power and consumption dropped, leading to growing unemployment — which for example reached 21.5 percent in May 2002.
The number of registered private workers rose from 3.5 million in 2002 to 5.6 million in 2007, a 60 percent increase. Analyzed by quarters, unemployment continued to grow until the third quarter of 2002 but then the trend reversed uninterruptedly.
But the growing employment can’t be isolated from other economic factors, experts agree. For example, the country’s GDP rose more than eight percent between 2003 and 2007.
“No objective analyst can say unemployment dropped just because of the measure. Other factors were also a factor such as the growing prices of commodities, the country’s economic recovery and the increasing labour demand by small- and medium-sized companies,” Javier Lindenboim, an economist specialized in labour and head of the UBA Employment, Population and Development Center (CEPED), told the Herald.
“The double severance payment acts as a deterrent for unemployment. But it doesn’t create jobs or protect workers, it only gives them some extra pesos,” he added.
Leaving aside the other economic factors, economists Hernán Ruffo, Lucas Ronconi and Martín González Rosada analyzed the effects of the measure by itself and concluded it reduced the length of unemployment for workers looking for informal jobs, while increasing the length for those going from unemployment to registered or freelance jobs.
Workers reached by the double severance had 30 percent less chances of being sacked back then, the three economists said.
“Employment was set to grow, with or without double severance,” Plan Fenix economist Ariel Setton told the Herald. “Argentina had fallen into a pit back then, leading to growing unemployment and poverty. It’s far from the current economic scenario.”
The measure ended in September 2007 through a decree signed by late president Néstor Kirchner, who considered the objective of the law had been fulfilled. Back then, unemployment had dropped below two digits to 8.5 percent.
“In 2002, the priority was to stop the bleeding that led to the unemployment being close 25 percent. When the measure was first applied, Argentina had already started to grow. Claiming that the double severance increased employment doesn’t have any logic. In the best case scenario, it can mitigate the fall,” Eduardo Levy Yeyati, head of the Elypsis consultancy and university professor, told the Herald.
Same project, different scenario
Experts agreed the economic scenario is entirely different from the last time the measure was implemented, with many claiming it wouldn’t be necessary to do it all over again. Other initiatives could be implemented instead such as increasing the unemployment insurance, frozen at 300 pesos for the last 10 years.
“Argentina isn’t facing an employment crisis. In fact, employment has been on the rise. The measure was implemented in 2002 amid an economic crisis. Doing the same in an stable economy isn’t necessary and is a bad sign,” González Rosada, economist at the Di Tella University, told the Herald.
There are no official figures of the current level of unemployment as the INDEC statistics bureau stopped reporting labour data last year. On its last report for 2015 second quarter, INDEC said unemployment was at 5.9 percent — 1.6 percent lower than the same period last year and the lowest figure of the last 28 years.
The national government recently reported 3,219 jobs were created between December and February based on data from the Labour Ministry, a figure under scrutiny considering 11,000 state workers were laid off. On the other hand, CTA union said 68,000 jobs were lost and the CEPA economists centre said the figure actually reaches 141,000 layoffs.
“Increasing the layoff costs reduces both the destruction and creation of employment,” Levy Yeyati said. “It could be an useful measure to stop the layoffs at the expense of employers. But if creating jobs is the real objective, the best option would be reducing labour taxes.”
The draft that stipulates the double severance was sent last week to the Lower House, which already started discussions about it. Nevertheless, it could take some time before it turns into a law as some parties are asking for changes in order to provide benefits for the small- and medium-sized businesses sector. If that’s the case, the bill will have to go through the Senate again.
Approximately 70 percent of all employment in Argentina is attributable to the small- and medium-sized sector.
“The bill doesn’t set any differences between large and small- and medium-sized companies. It’s not the same applying the measure to a small auto parts firm already affected by the hike on public utilities than to Techint,” Matias Carugati, chief economist at Management and Fit consultancy, told the Herald. “Small firms could end up closing their doors because of the initiative.”
While questioning the bill, the national government set the eye on alternative initiatives to boost employment, rejecting the claim of an employment crisis.
President Mauricio Macri sent a bill to Congress to grant companies tax breaks when hiring 18 to 24 year-old workers, seeking to encourage them to hire young people. At the same time, the government will seek to increase the unemployment insurance to 3,000 pesos a month as well as the minimum wage, which would be raised 30 percent.
“If the goal is to create new jobs, you have to encourage companies to do so by, for example, not forcing them to pay employer contributions of new employees during a year,” Fausto Spotorno, economist and director of the Economic Studies Centre at the Orlando Ferreres consultancy, told the Herald. “Trying to freeze layoffs actually leads to more layoffs.”