Argentina’s ban on layoffs is causing more problems than benefits

16, December

According to a report by Spain’s El Economista, Argentina’s general ban on firing workers during the ...

According to a report by Spain’s El Economista, Argentina’s general ban on firing workers during the pandemic seems to be creating more problems than it solves in what was already one of the world’s worst labor markets.

Latin America’s third-largest economy has an inflation rate close to 40%, its central bank is dangerously short of dollars, and there is almost constant talk of currency devaluation. The government is trying to restructure the $44 billion it owes the International Monetary Fund following the collapse of a lending program last year.

Most emerging economies are finding it difficult to find cash for pandemic relief programs, including measures to protect jobs, as wealthier countries have done. It is especially difficult for Argentine President Alberto Fernandez, whose government celebrates its first anniversary Thursday.

His administration is implementing stimulus programs that broadly resemble those deployed in other countries, including an Ertes program to subsidize businesses that keep their workers. But money has had to be printed to finance them — about $1.76 trillion pesos ($21.5 billion) so far — and that fuels fears of even higher inflation next year.

The government is pulling businesses and informal workers out of two warrant programs as dollar reserves are depleted, a reason why it has decided to go for other measures to protect jobs. Since March, Argentina has prohibited companies from laying off workers, a ban that no other major country has maintained for so long, and recently extended the measure to 2021. It also requires companies to pay double the regular severance if a worker is fired “without just cause,” according to a government decree.

Bankrupt companies
Some economists say the policies endanger the jobs they are trying to protect and that the government may face pressure to reverse them during talks with the IMF. Unable to lay off workers, companies have resorted to suspensions, which during the ban on layoffs shot up to 10 times from pre-pandemic levels, effectively postponing future job cuts.

“They are going to have a lot of formal job destruction next year,” says Eduardo Levy Yeyati, former chief economist of the Central Bank of Argentina and a member of the Brookings Institution. The government “is going to have to let the workforce be reduced because, if not, a lot of companies are going to go bankrupt.

Unemployment in Argentina, as in most countries, has skyrocketed this year. But the official rate of 13% does not include 2.5 million workers, one-fifth of the registered workforce, who have left the formal labor market altogether. If those people were also counted, the unemployment rate would be over 28%, according to a new report from Argentina’s Catholic University. There is also a large informal sector, as in many Latin American countries, and employment is also collapsing: it fell 35% in the second quarter of this year, according to government data.

“Always in these measures of raising prices or restrictions on layoffs, the argument is always, to what extent they can help you today, but they can generate negative incentives for hiring tomorrow,” says Argentine labor economist Roxana Maurizio, a consultant to the UN’s International Labor Organization.

In a way, the debate is part of a larger one that has been going on for decades in Argentina. Critics accuse left-wing populist governments, like Fernandez’s coalition, of implementing policies, from price controls to trade protections and labor rules that give broad powers to unions, that placate their voter base at the expense of the overall economy.

All gone
The Argentine left, in turn, can point to the failures of right-wing governments such as the one that was in power during the four years up to 2019. It reduced spending, implemented market-friendly policies and obtained a record IMF bailout, and yet it experienced economic collapse.

Claudio Moroni, Fernandez’s labor minister, acknowledges that the country’s current unemployment crisis may be the worst in its history, but says the ban is not to blame. “Attributing the problems of the Argentine economy to the design of the labor market is an excess, it is excessive,” Moroni said in an interview. “We have minimized the effects of the pandemic.

There was a glimmer of hope in the September data released last week, which showed that the private sector added 6,500 jobs, the first monthly increase in two years. Even so, private employment in 2020 is still down by more than 200,000, and there are other reasons to think the problem could get worse.

The World Economic Forum ranks Argentina 136th out of 141 countries in terms of labor flexibility
The number of companies had declined in the midst of a three-year recession, and Argentina now has about 42,000 fewer private sector employers than at the end of 2017, according to government data. The rate of Argentines entering the workforce is at its lowest level on record according to Maurizio, the ILO economist. The World Economic Forum ranks Argentina 136th out of 141 countries in terms of labor flexibility.

There is probably not a policy change that can do much for Sergio Bono. The 56-year-old pilot worked at Latam Airlines until the airline pulled out of Argentina this year, citing the country’s anti-business climate and powerful unions. “I was doing what I loved, I was in a very good company, I was doing the most a pilot can do,” says Bono, who last flew an Airbus 320 in March. “I had a salary that for the environment in Argentina was very good. Everything disappeared in three months”.