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© 2023 International Monetary Fund
WP/23/23
IMF Working Paper
Western Hemisphere Department, Latin-Caribbean Division
How to Mitigate the Impact of Economic Downturns on Labor Markets: Evidence from Nicaragua
Prepared by Sandra Marcelino and Mariana Sans*
Authorized for distribution by Bas Bakker
February 2023
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: This paper studies the drivers of the labor market performance in Nicaragua with a particular focus on informality, to identify vulnerable groups during economic downturns; and estimates the speed of adjustment of employment to shocks. The paper compares this experience with the ones in other CAPDR countries (Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Panama). Our findings are that while the high countercyclical informality in Nicaragua has been the active margin of adjustment during economic downturns mitigating unemployment, the trade-off has been a lower speed of adjustment to shocks hampering the country’s ability to revert to its potential. Policy recommendations relate to mitigating the impact of downturns on employment in Nicaragua, easing adjustments and inequalities in the labor market to hasten the employment recovery and thus, support growth.
| JEL Classification Numbers: | E2, E24, E32, J4, |
| Keywords: | Labor Markets; Informality; Okun’s Law; Nicaragua |
| Author’s E-Mail Address: | smarcelino@imf.org and msans@umd.edu |
| JEL Classification Numbers: | E2, E24, E32, J4, |
| Keywords: | Labor Markets; Informality; Okun’s Law; Nicaragua |
| Author’s E-Mail Address: | smarcelino@imf.org and msans@umd.edu |
Title Page
WORKING PAPERS
How to Mitigate the Impact of Economic Downturns on Labor Markets?
Evidence from Nicaragua
Prepared by Sandra Marcelino and Mariana Sans2
Contents
I. Introduction
II. Labor Market Indicators
III. Characterization of the Labor Markets in Nicaragua and CAPDR
IV. Labor Market Dynamics and Speed of Adjustment
V. Conclusion and Policy Recommendations
Annex I. Appendix
References
FIGURES
1. Labor Market Indicators in Nicaragua
2. Nicaragua: Labor Market Characteristics
3. CAPDR: Economic Activity and Employment
4. CAPDR: Unemployment Rate
5. CAPDR: Informality
6. Nicaragua: Employment Growth
7. Nicaragua: Labor Force Participation
8. Nicaragua: Vulnerable Groups in the Labor Force
9. CAPDR: Unemployment Decomposition
10. Unemployment and GDP Growth
11. Informality’s Responsives to GDP Changes
12. Labor Force Participation’s Responsiveness to GDP Changes
13. Coefficient of Speed of Adjustment
14. Speed of Adjustment vs Informality Rate
15. CAPDR: Output per Worker
TABLES
1. CAPDR: Selected Labor Market Regulations
A1. Informality Responsiveness to GDP Changes
A2. Common Correlated Effect ECM of Employment
Mariana Sans is a Ph.D. Graduate student at Maryland University who was a research assistant at the Fund while this Working Paper was being prepared.
The views expressed in this paper are those of the authors and do not necessarily represent those of the Central Bank of Nicaragua, the International Monetary Fund, its Board or Management. We thank the Research Department of the Central bank of Nicaragua for their collaboration, Samuel Pienknagura for sharing data and codes, Bas Bakker, Mariya Brussevich, Alina Carare, Carlos van Hombeeck, and Chris Papageorgiou for helpful comments. All remaining errors are under the full responsibility of the authors.