WASHINGTON — Open economies provide more jobs and allow for a better recovery than closed ones in the long run, according to new research presented at the World Bank Monday.
At a conference about Trade and Employment in Post-Crisis, held jointly by the World Bank Group’s Global Trade and Financial Architecture Project and the International Labour Office, experts discussed the role of open markets and its implications to growth and job creation ahead of the Group of 20 leaders’ summit in Seoul in November.
“It’s in labor markets where people feel the pain of economic shocks, and it’s in labor markets where such pain must be mitigated,” said Jose Manuel Salazar-Xirinachs, executive director of employment sector of ILO at the conference.
Open economies may exacerbate the jobs situation and lead to a sharper unemployment in labor growth during the first year of a domestic crisis compared to closed economies, according to a report from Elisa Gamberoni of the World Bank, Erik von Uexkull of the ILO, and Sebastian Weber of the Graduate Institute for International Studies in Geneva. However, those economies are able to bounce back more rapidly and strongly in the second year.
The findings come after analyzing 42 countries — 20 industrial and 22 developing — that were selected because they had complete labor data for at least 10 consecutive years during the period of 1985 to 2008. No African countries fit this data requirement.
The team also investigated how global and domestic crises affect countries with high severance pay and high unemployment benefits.
“Countries with high severance pay experience a significantly smaller contraction in employment growth during both domestic crisis and global crisis,” Uexkull said. “From the findings, we do conclude that labor market institutions that affect the cost of laying off workers are in fact very effective in influencing the way companies adjust to shock.”
The reverse is true for unemployment benefits, where high unemployment benefits mean a stronger reduction to employment growth.
However, the team warned that the best way to avoid unemployment shocks is to ensure that a global downturn doesn’t turn into a domestic downturn.
“A global downturn is bad, but a domestic debt or banking crisis is much, much worse in terms of the impact on the labor market,” Uexkull warned.