The Impact of COVID-19 on the Labor Market in Guatemala

12.14.2020 | David Casasola

Una versión de esta publicación en español está disponible aquí.

Economic challenges and the impact of COVID-19

Prior to the onset of COVID-19, Guatemala already had economic and social challenges requiring significant coordination of efforts to solve them. The pandemic aggravated these challenges and brought greater urgency to tackle them. In economic terms, the country’s main challenge remains the lack of income-generating formal jobs. Prior to the pandemic, there was a deficit of 3.2 million jobs, estimated by subtracting the number of formal jobs accounted for by the Guatemalan Institute of Social Security (IGSS) [1.4 million] from the total number of people working as employees or seeking employment [4.6 million]. As Chart 1 shows, since 2012 the deficit of jobs has been increasing.

Chart 1: Evolution of Labor Supply and Demand

Source: Own elaboration from the ENEIs and the Bank of Guatemala.

 

Undoubtedly, the highest cost of the pandemic around the world is the loss of human life and the pain and suffering of those who lost a loved one or who experienced the disease’s worst symptoms. By the same token, there are the monetary costs of combating the pandemic, including additional expenditures on medicines, materials, and equipment, both at the individual and government level. And there are also the additional resources needed to bring financial relief to the population that has lost, partially or totally, the means to make a living.

In this context, one of the main costs of the pandemic, which is generally overlooked, is the value of the economic activity that did not take place or could have been done differently. This includes the resources employed to protect the income of formal and informal employees, construction and equipment of new hospitals, procurement of medical supplies and materials, and, among many others, hiring additional staff. In other words, the alternative uses that those resources might have had, had the pandemic not existed. While it is extremely difficult to quantify this cost, these resources could have been used for other purposes.

On a more practical level, the main costs of the pandemic, so far, have been as follows: destruction of formal employment, with the consequent disappearance of steady income for hundreds of thousands of Guatemalans; the termination or reduction in the activities of certain economic sectors, which in addition to causing sales slumps and inability to meet their obligations, also entails the idleness of some of the investments in machinery, equipment and physical facilities; reduction of exports; and a deep weakening of tax income. As for the first of these costs, as shown in Table 1, IGSS membership reported a reduction of almost 118,000 formal private sector jobs between late January and the end of September 2020. That is, a contraction of about 11% in formal private employment. When compared to the average annual formal job creation capacity in recent years (10,000), this contraction equals losing ten or eleven-year job creation gains. In addition, there is the devastating impact the crisis is surely having on micro and small businesses, which are productive units highly vulnerable to economic swings.

Table 1: Loss of Formal Employment During COVID-19:

IGSS affiliates in 2020 January September Difference
Public Sector 290,711 330,341 39,630
Private Sector 1,059,153 941,457 -117,696
Total 1,349,864 1,271,798 -78,066

Source: Own elaboration with information from MINECO’s Weekly Economic Report

 

Another major impact that COVID-19 will generate, connected to the labor market situation, is the increase in poverty levels in the population. Falling labor incomes will have a more severe impact on vulnerable population groups, especially those that generate income in informal occupations, where there are no social safety nets available while the usual income-generating channels are reestablished. Estimates by ECLAC (2020) show that in Latin America, poverty will increase by at least 4.4%, the equivalent of an additional 28.7 million people in poverty (reaching 214.7 million people living in poverty in Latin America). Of the total number of new poor, 15.9 million will find themselves in extreme poverty. In Guatemala’s case, ECLAC estimates that extreme poverty could increase between 1.6% (288,000 people) and 1.4% (252,000 people). Similarly, poverty can increase between 2.3% (414,000 people) and 1.7% (306,000 people).

Measures to mitigate negative economic impact

As the COVID-19 vaccine arrives, it is necessary to strike a balance between controlling the contagion rate and preserving existing economic opportunities. To this end, it is essential to ensure that health protocols continue to be followed, especially during the year-end’s festivities.

Although the type of productive reorganization that many economic sectors must experience to continue operating is still unknown, it is clear that most will not be able to operate under the same conditions and levels as before. In addition, the pandemic has also hit our main trading partners and the prices of vital export products. This situation requires reviewing all available economic policy instruments to deal with external shocks affecting the economy, supporting companies and sectors that have been most affected by social distancing, and facilitating their restructuring.

Minimizing the loss of formal employment requires mechanisms to support the labor market’s adjustment to the negative conditions that will prevail for a time in the economy. This requires facilitating telework, making working hours more flexible, expanding the area of private negotiation for working conditions, and allowing, as far as possible, adjustments in wages to support companies in maintaining employment levels. It is vital that any decision on the minimum wage considers the conditions of employment, the level of contraction of economic activity, and the deflationary pressures that may exist.

Technical training centers must evolve to reach their services virtually. Priority should be given to certification processes in programs that increase employability in activities that can be performed remotely (programming, technical support, call centers, digital marketing, etc.). In addition, changes should include new incentive schemes subject to performance targets and in line with international standards, customs system reform to shore up the export orientation of the strategy; prioritization of productive infrastructure works for strategic sectors; government interventions focused on strategic geographical areas, with high logistical potential or raw materials. It is equally important to make the most of economic integration opportunities with the rest of Central American countries and identifying spaces that the country can occupy in the reconfiguration of global value chains. Additionally, it is necessary to focus reforms and incentives on priority sectors, ensuring capacities to compete internationally, in specific areas offering optimal conditions to promote formal employment generation, investment attraction, regulatory compliance, and competitive labor costs.

###

David Casasola is a researcher at the National Economic Research Center, CIEN, and the Research Director of the Global Entrepreneurship Monitor of the University Francisco Marroquín. This article is part of a series of the Future of Work initiative of the Latin America and the Caribbean department of CIPE.