IMF recommends addressing skills mismatch between labor force and new jobs – MercoPress
Uruguay: IMF recommends addressing skills mismatch between labor force and new jobs
Last week, we released an opening statement by the IMF on the state of the Uruguayan economy in which it praised the government’s handling of the pandemic, highlighting Uruguay’s strong institutions, the functioning of democracy and a high degree of social cohesion.
However, the IMF report also points to pre-existing macroeconomic imbalances, recalling that the Uruguayan economy had stagnated since 2015, at the end of the last surge in commodity prices, with a secular decline in employment.
Indeed, the IMF statement argues that the pandemic situation has exacerbated some of Uruguay’s pre-pandemic structural imbalances. The contraction of the economy and the necessary stimulus measures have further weakened public finances and exacerbated medium-term sustainability risks, although efforts have been made to contain spending unrelated to the pandemic. The pandemic is also likely to have a visible impact on human capital, particularly in the lowest income deciles – due to loss of schooling – exacerbating pre-existing problems with education. Probably, the larger impact on young workers has also exacerbated the pre-existing high youth unemployment rate, and the leap in digitization and teleworking is having a transformational effect on jobs, accelerating the obsolescence of low-skilled jobs and l mismatch of existing skills among the working population. and new jobs.
In the short term, efforts should shift towards rebuilding the political space while providing targeted support to the sectors still affected. The authorities’ consolidation plan for 2022, in line with the expected recovery, is welcome. A targeted extension of the short-time working allowance should provide additional support to workers in affected lagging sectors, while a phasing out would encourage a full return to work and facilitate labor reallocation if necessary. . This move towards policies favoring job creation is welcome.
In the medium term, further fiscal consolidation would help put public debt back on a solid downward path. Short-term fiscal risks are contained, as financing needs are manageable and market financing remains on favorable terms, and the envisaged consolidation plan should stabilize the debt-to-GDP ratio in the medium term. However, the debt trajectory stems from assumptions of stable macroeconomic conditions and leaves limited space to respond to future shocks. Thus, additional budgetary efforts would be necessary to put the debt back on a firm downward trajectory and rebuild the political space.
Improving the fiscal framework and pension reform would further strengthen confidence in the sustainability of public finances. The new budgetary framework and the recent creation of the Committee of Experts and the Advisory Budget Board are very important steps in ensuring budgetary discipline. In addition, adherence to the rule during the pandemic demonstrated the authorities’ strong commitment to fiscal sustainability. Further improvements to the framework, such as moving to 5-year rolling limits, introducing an explicit debt target and formalizing an escape clause with corrective mechanisms, would help ensure that the new rule ensures budgetary discipline over time and between administrations. Advancing pension reform is also essential to ensure fiscal sustainability, although the associated financial savings may take time to materialize.
Monetary policy may need a tightening to bring inflation back within the target range as the economy recovers. Under difficult circumstances, monetary policy adequately supported the economy during the pandemic while gradually shifting inflation and inflation expectations towards the target range. To build credibility and keep inflation within target range over time, it may be necessary to act quickly as the recovery takes hold. In the meantime, a well-communicated policy strategy, which indicates the expected path for monetary policy, should help sustain recent gains in re-anchoring inflation expectations. The sustained fall in inflation remains a necessary condition to reduce dollarization and help boost credit and investment.
The phasing out of credit support measures would prevent misallocation and fiscal costs. The extension of the SIGA guarantee lines will adequately support companies in the sectors still affected. However, as uncertainty about the recovery dissipates, tightening eligibility criteria and conditions will be essential to avoid misallocation of capital and limit potential fiscal costs. The stress tests – which the BCU has been carrying out since the start of the pandemic, as well as the assessments of the possible impact of the measures adopted – do not reveal any significant risks. It is important to continue to closely monitor potential risks to financial stability, particularly due to exposure to sectors heavily affected by the pandemic, as support measures are lifted.
Policies to promote employment and address skills mismatches in the workforce are welcome. Employment assistance for vulnerable groups and differentiated wage setting guidelines for the sectors concerned strike the right balance between resuming employment and protecting the purchasing power of workers. Further decentralization of wage negotiations could further support employment and limit the long-term effects of the pandemic. In addition, a multidimensional strategy is needed to address the structural human capital issues exacerbated by the pandemic. The leap in digitization during the pandemic has accentuated the skills mismatch, highlighting the urgency of effective (re) training programs, especially for low-skilled workers, to facilitate rapid re-entry into the labor market. Education reform also needs to move forward quickly to tackle high dropout rates and ensure that formal education is responsive to the needs of an increasingly IT-based economy.
At the same time, the new trade agreements under consideration could lead to important advances in trade integration. also commendable.