Itaú BBA - CHILE – Historical job destruction unfolded in April

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CHILE – Historical job destruction unfolded in April

Maio 29, 2020

Labor market loosening would persist after April as social distancing measures continued and growth prospects faltered.

The labor market is unraveling as the economy confronts the coronavirus shock. In quarter ended in April, the unemployment rate rose 1.9pp over twelve months to reach 9.0%, within the Bloomberg market consensus of 9.1% and our 8.7% call. In the Santiago Metropolitan area, the country’s economic hub (and most affected by the social distancing measures) the labor market loosening was somewhat deeper with the unemployment rate up 2.0pp to 9.4%. While, the unemployment rate is rising, the main takeaway from the April data is the significant number of job losses (680k; -7.6% yoy). A notably higher rise of the unemployment rate was only avoided by a slump in the labor force (5.7% yoy down). Complementary information provided by the Labor Ministry shows that layoffs increased 11.3% yoy in April, following the 36.8% rise in March. Overall, the underlying dynamics of the labor market show reduced spending potential that along with downbeat sentiment would curb a consumption recovery ahead.

The rate of job destruction was the sharpest in the past thirty years. The 7.6% yoy employment drop far exceeds the 3% fall in mid 1999. Meanwhile, the 5.7% decline in the labor force is also unprecedented, leading the participation rate to fall 4.8pp to 57.9%. The number of inactive persons (not included in the labor force) rose 15.4% yoy, fully explained by those considered as being potentially active in the labor market (something that hints to rising unemployment ahead).

The bulk of job losses was linked to independent laborers, as initial government measures to protect employment focused on firms. Independent employment shrunk 19.4% yoy (4.1% drop in 1Q20), driven by the self-employment category. Meanwhile, waged employment declined 3.5% yoy (+2.4% in 1Q20), with the private salaried drop (3.6% yoy) offsetting the public sector job gains (+2.7% yoy).

Labor market loosening would persist after April as social distancing measures continued and growth prospects faltered. With the unemployment rate likely surpassing double-digits in coming months, and underlying signals portraying an even more dire situation, policy makers will likely be prepared to adjust their responses in an effort to prevent a more permanent shock to the economy.

Miguel Ricaurte
Vittorio Peretti

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