Abstract
This note documents disparities in labor market outcomes in Ecuador during COVID-19 using quarterly micro labor force survey data from December 2019 to June 2021. We find evidence that the unskilled and minority groups were hit hardest by the pandemic, with unskilled women with young children subject to a double whammy amid school closure. While headline employment numbers have improved one year into the pandemic, the quality of jobs remains weak and the recovery in formal employment timid. The SIP discusses policy options to promote formal employment, level the playing field among labor market participants, and limit pandemic scarring on Ecuador’s social and human capital.
Labor Market Disparities in Times of Covid-19: Emerging Scars and Policy Options1
This note documents disparities in labor market outcomes in Ecuador during COVID-19 using quarterly micro labor force survey data from December 2019 to June 2021. We find evidence that the unskilled and minority groups were hit hardest by the pandemic, with unskilled women with young children subject to a double whammy amid school closure. While headline employment numbers have improved one year into the pandemic, the quality of jobs remains weak and the recovery in formal employment timid. The SIP discusses policy options to promote formal employment, level the playing field among labor market participants, and limit pandemic scarring on Ecuador’s social and human capital.
A. Backdrop
1. The Ecuadorian labor market was characterized by high rigidity going into the COVID-19 pandemic. Macroeconomic distortions included a mostly discretionary setting of the minimum wage and the rigid labor arrangements. For instance, the minimum wage has outpaced productivity growth in recent years and is now double the level in Colombia and 75 percent higher than in Peru (text charts).
Real Labor Productivity and Real Minimum Wage
(2003 = 100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC. BCE. ILO and Fund staff calculations.Real Labor Productivity and Real Minimum Wage
(2003 = 100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC. BCE. ILO and Fund staff calculations.Real Labor Productivity and Real Minimum Wage
(2003 = 100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC. BCE. ILO and Fund staff calculations.
Minimum Monthly Nominal Salary
(In US$)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Source: National authorities and Haver.Minimum Monthly Nominal Salary
(In US$)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Source: National authorities and Haver.Minimum Monthly Nominal Salary
(In US$)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Source: National authorities and Haver.
Labor Income and Government Cash Transfers
(Average labor income in $US; cash transfers in % of labor income)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Source: INECLabor Income and Government Cash Transfers
(Average labor income in $US; cash transfers in % of labor income)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Source: INECLabor Income and Government Cash Transfers
(Average labor income in $US; cash transfers in % of labor income)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Source: INEC2. The pandemic widened disparities among labor market participants and compounded pre-existing labor market weaknesses, putting a premium on la Ley de Oportunidades Laborales being prepared by the authorities. As of December 2020, the pandemic had pushed an additional 1.5 million Ecuadorians into poverty (compared to December 2019), with about [one) million persons falling into extreme poverty. While the shoring up of cash transfers supplemented household income (text chart), microdata suggests that the pandemic has wiped out many years of progress in reducing labor income inequality in Ecuador. There has also been a wide regional disparity in employment outcomes, with the poverty rate in rural areas double that of urban areas, compounding pre-existing spatial employment vulnerabilities (SIP on spatial distribution of employment, social protection, and climate vulnerabilities).
3. This SIP documents systematic disparities in labor market outcomes among Ecuadorians during COVID-19 and explores policy options to limit pandemic scars on the country’s social and human capital. Using quarterly vintages of micro labor survey data from December 2019 to June 2021, we make a deep dive into the various facets of the impact of COVID-19 on the labor market in Ecuador. The SIP documents labor market disparities not only at the pandemic trough in the Spring of 2020—as most existing studies have done—but also during the subsequent recovery more than a year into the pandemic. Among other peculiar features of the analysis, the paper examines the extent to which school closure has disproportionately affected labor markets outcomes for persons with young children. Furthermore, a regression analysis is used to assess how systematic the observed patterns are. The note also analyzes the adjustment mechanisms that households have developed to cope with the pandemic. It argues that while those mechanisms have helped contained the impact of the COVID-19 shock on livelihood at a critical juncture, they are resulting in pandemic scars, including persistent informality and low-quality jobs, fueled by preexisting labor market rigidities. Finally, and more importantly, the SIP explores policy options to reform the labor market and limit COVID-19 scars on the social and human capital of Ecuador, and therefore safeguard the country’s growth potential (see potential growth SIP).
4. More broadly, the note is a contribution to the growing literature on the socio-economic impact of COVID-19 and attendant policies. Existing papers on the micro impact of COVID-19 on the labor market have mostly covered advanced economies (see, e.g., Adams-Prassl et al., 2020, Fabriozio et al., 2020, among others), reflecting micro data constraints in developing countries. Notable exceptions are Al Masri et al. (2020) and Alvarez and Pizzinelli (2021) who use micro data for Brazil and Colombia respectively. Moreover, many of the existing studies have focused on the crisis trough. Our analysis complements existing studies by providing evidence for another developing country and by extending the analysis to the recovery phase, which should ultimately inform policies towards economic reactivation in Ecuador, beyond immediate crisis management. This is also one of the few papers that analyze how the presence of young children in households affect the labor market outcomes of parents amid school closure. Moreover, we estimate the determinants of labor income and how they’ve evolved through the pandemic, controlling for endogenous selection into employment (see Lonkeng (2021), forthcoming IMF Working Paper, for details). We are not aware of another study that has implemented this approach in times of COVID-19 and in the context of a developing country.
B. Impact of COVID-19 and Households Adjustment Mechanisms
5. The pandemic has had a devastating impact on the Ecuadorian labor market. Like in many other countries, COVID-19-related supply disruptions led to a massive drop in employment and exits from the labor force in the Spring of 2020 (by about 30 and 20 percent respectively). Since then, aggregate employment numbers and labor force participation have gradually recovered to pre-pandemic levels (text chart). However, the number of hours worked per employee has plateaued, after the rapid yet partial recovery in 2023:Q3, in line with GDP dynamics. This was due to increased reliance on part-time work as adjustment mechanism to COVID-19, including possibly as economic agents leveraged the flexibility in work arrangements provided by la Ley Humanitaria adopted in the wake of the pandemic.
Aggregate Employment, Labor Force and Hours Worked
(Index, Dec. 2019 = 100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC and author’s calculationsAggregate Employment, Labor Force and Hours Worked
(Index, Dec. 2019 = 100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC and author’s calculationsAggregate Employment, Labor Force and Hours Worked
(Index, Dec. 2019 = 100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC and author’s calculations6. A deep dive into micro data suggest that the unskilled and minority groups were hit hardest, with the negative impact persisting through the economic recovery. While employment and labor force participation have gradually recovered to pre-pandemic levels among persons with college education (“high-skilled”) after the initial collapse, the recovery has been very partially among the less educated (persons with basic education or less) and minority groups (Figure 1). The persistent employment impact among the unskilled might be partly explained by the fact that they exited the labor force in larger numbers from the crisis onset, further eroding their already limited human capital. Also, sectoral data suggest that wholesale & retail trade and accommodation & food services (all high contact activities) accounted for about 30 percent of women employment prior to the pandemic, suggesting that they were more at risk of losing their jobs during COVID, all else equal, given the aversion to contact. There was a wide regional disparity in activities going into the pandemic, with touristic areas like Galapagos more exposed.
Ecuador: Disparity in Adequate Employment and Labor Force in Times of COVID-19
(Education and ethnicity dimensions, index, Dec. 2019=100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC survey data and author’s calculations.1/ The Spring 2020 labor survey did not collect information on ethnicity.Ecuador: Disparity in Adequate Employment and Labor Force in Times of COVID-19
(Education and ethnicity dimensions, index, Dec. 2019=100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC survey data and author’s calculations.1/ The Spring 2020 labor survey did not collect information on ethnicity.Ecuador: Disparity in Adequate Employment and Labor Force in Times of COVID-19
(Education and ethnicity dimensions, index, Dec. 2019=100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC survey data and author’s calculations.1/ The Spring 2020 labor survey did not collect information on ethnicity.7. Workers with young children reduced market work amid school closure, with unskilled mothers continuing to carry a heavier burden of home-based childcare. We use the information on the structure of households in the labor survey micro datasets to identify children below the age of 12 and trace the impact of their presence on the employment outcomes of their parents, given extended school closure (schools have remained closed in Ecuador through Summer 2021).2 The presence of children in households during school closure particularly affected the unskilled, with unskilled women bearing the heavier burden of home-based care (Figure 2). There are two points worth noting. First, the stronger adjustment among the unskilled may partly reflect their lower opportunity cost of employment as they earn less from labor (see Mincer wage functions in Section V). Second, the left panel chart in Figure 2 together with the middle and right panel charts suggest that women were only disproportionally affected by the presence of children to the extent that they were unskilled, a nuance to the unconditional findings on gender in Fabrizio (2021) based on the U.S. labor market. These peculiar findings for Ecuador have important policy implications (see Section IV).
Ecuador: Adjusting to School Closure: Gender and Skill Dimensions
(Index, Dec. 2019=100; Share of full-time workers in each sub-group)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC labor survey data and author’s calculations.Ecuador: Adjusting to School Closure: Gender and Skill Dimensions
(Index, Dec. 2019=100; Share of full-time workers in each sub-group)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC labor survey data and author’s calculations.Ecuador: Adjusting to School Closure: Gender and Skill Dimensions
(Index, Dec. 2019=100; Share of full-time workers in each sub-group)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC labor survey data and author’s calculations.C. A Primer on Pandemic Scars one Year into COVID-19
8. While the endogenous mechanisms developed by households helped cushion the impact of the COVID shock at a critical juncture, they are resulting in persistent informality and weak job quality. While the shoring up of government cash transfers provided much-needed relief to households (text chart), they were not enough to entirely cushion the impact of the pandemic on Ecuadorians.3 Faced with the dire reality of COVID-19, households—some of which are “hand-to-mouth”—had to develop new ways to generate subsistence income to cope with the new reality and save their families’ livelihoods. While these rescue mechanisms helped navigate the crisis in its early stage, informality is persistent and the quality of jobs is weak. The share of adequate employment (full-time job earning at least the minimum wage) indeed remains well-below pre-pandemic levels and the recovery in formal employment has been very timid (text chart).
Higher Informality and Lower Quality Jobs
(Index, Dec 2009=100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC and author’s calculations.Higher Informality and Lower Quality Jobs
(Index, Dec 2009=100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC and author’s calculations.Higher Informality and Lower Quality Jobs
(Index, Dec 2009=100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: INEC and author’s calculations.9. The slow recovery in formal employment after bottoming out in Spring 2020 is a shared feature of the economic recovery across Latin America but is more acute in Ecuador (text chart). Moreover, there might have been a vicious circle whereby rising informality as a mechanism for households to save their families’ livelihoods has undermined lives through faster virus spread due to work-related mobility, especially among vulnerable groups.
Formal Employment in Latin America During COVID-19
(Index, Feb. 2020 = 100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: IESS (or Ecuador and COVID-19 Observ3torio Labors I (IaOB) for others.Formal Employment in Latin America During COVID-19
(Index, Feb. 2020 = 100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: IESS (or Ecuador and COVID-19 Observ3torio Labors I (IaOB) for others.Formal Employment in Latin America During COVID-19
(Index, Feb. 2020 = 100)
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Sources: IESS (or Ecuador and COVID-19 Observ3torio Labors I (IaOB) for others.10. The expansion of coverage of low-income families under social assistance program and shoring up of payouts mitigated the impact of the COVID-19 shock. The increase in both the extensive margin (coverage) and intensive margin (payouts) of social assistance programs, especially in the Spring of 2020 and December 2020, supplemented household income (Figure 3). There is, however, scope to improve the regional coverage of social assistance programs going forward (SIP on spatial distribution of employment, social protection, and climate vulnerabilities). Moroever, going forward, social protection should be complemted with structural labor policies to level the playing field among labor market participants and generate high-quality jobs that benfit all Ecuadorians (see Section VI).
Ecuador: Cash Transfers—Coverage and Payouts
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Ecuador: Cash Transfers—Coverage and Payouts
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
Ecuador: Cash Transfers—Coverage and Payouts
Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A002
D. Policy Implications and Possible Extension
11. The COVID-19 pandemic has made the need to make the labor market more flexible, and ultimately foster the creation of formal jobs, more pressing for Ecuador. Persistent informality in the recovery phase of the pandemic is a source of concern both because of the associated low productivity and the vulnerability of informal sector workers who typically lack access to social security. At the same time, by providing subsistence income to households, the informal sector serves as a cushion against shocks, as evidenced during COVID-19. A viable approach to reducing informality should therefore recognize that informality is an endogenous response to prevailing economic conditions and policy distortions. In this regard, options to limit informality include lowering barriers to formalization, an income tax policy that does not unduly discourage the creation of formal jobs, and the establishing schemes to improve employees-employers matching, including through specialized training. Additionally, the government should adhere to the recently adopted mechanism for setting the minimum wage that ties changes to the minimum wage to macroeconomic parameters such as inflation and productivity to support competitiveness and policy predictability.
12. Tackling the rooted causes of labor market disparities would support the authorities’ quest for job-rich growth that benefits all Ecuadorians. The finding that the recovery in employment is translating into weak job quality, especially among minority groups and the unskilled, suggests a rising class of “working poor”, calling for continued expansion of coverage of social assistance programs to reach low-income families. From a medium-term perspective, and considering that the unskilled and minority groups have been hit hardest by the pandemic, it would be important to expand education and training to level the playing field among labor market participants and limit pandemic scars on the country’s human and social capital.
13. Flexible work arrangements and better childcare options can improve the employment outcomes of parents, especially mothers. The increased reliance on part-time jobs by persons with young children as adjustment mechanism, if causality is established (¶14), would suggest that there is merit to have flexible work arrangements as adopted in la Ley Humanitaria in the wake of the pandemic. Promoting father leave policies could also level the playing field between married mothers and fathers on the labor market. Improving access to market-based childcare when the pandemic wanes could incentivize market work. These measures should be complemented with deliberate effort to promote flexible work arrangements on the employer side and continued income support by the government to vulnerable households while the pandemic lasts.
14. It will be equally critical to continue tracking labor market developments to inform policy in an ongoing basis. This would allow policymakers to assess the changing structure of the economy, identify emerging labor market scars and adjust social protection and labor policies commensurately. Also, an impact evaluation of the labor market measures adopted under la Ley Humanitaria would inform labor market reform going forward.
References
Adams-Prassl Abigail, Teodora Boneva, Marta Golin, Christopher Rauh (2020), “The large and unequal impact of COVID-19 on workers”, Voxeu
Alvarez Jorge and Carlo Pizzinelli (2021), “COVID-19 and the Informality-driven Recovery: The case of Colombia’s labor market”, IMF WP (forthcoming) (International Monetary Fund: Washington D.C.)
Bluedorn John, Francesca Caselli, Niels-Jakob Hansen, Ippei Shibata, and Marina M.Tavares (2021), “Gender and Employment in the COVID-19 Recession: Evidence on She-cessions”, IMF WP/21/95 (International Monetary Fund: Washington D.C.)
Fabrizio Stefania, Diego Gomes, Mariana Tavares, “Covid-19 She-Cession: The Employment Penalty of Taking Care of Young Children,” IMF Working Paper WP/21/58 (International Monetary Fund: Washington D.C.)
Heckman, James (1974), “Sample Selection Bias as a Specification Error”, Econometrica, Vol. 47, No, 1 pp. 153–161, The Econometric Society
Lonkeng, Constant (2021), “Labor Market Disparities in Times of COVID-19: Patterns and Policy Options for Ecuador”, IMF WP (forthcoming) (International Monetary Fund: Washington D.C.)
IMF (2021): World Economic Outlook, April 2021 (International Monetary Fund: Washington D.C.)
Mincer, J. (1974), “Schooling, Experience and Earnings”, New York: National Bureau of Economic Research
Prepared by Constant Lonkeng (WHD)
We constructed a dummy variable (“children”) that takes the value 1 if there is at least one young child in the household and the value 0 otherwise. This variable is included as control in the regression analysis in Section V.
The relaxation of eligibility criteria for unemployment benefits in the wake of the crisis complemented government’s cash transfers, but information on those benefits is not available from the labor force surveys used in this note.
