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Montevideo, March 31st 2023 - 22:45 UTC



Uruguay: IMF recommends addressing skill-mismatch between the labour force and new jobs

Tuesday, October 12th 2021 - 09:32 UTC
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The Uruguayan economy had been stagnant since 2015, at the end of the last commodity price boom, with a secular fall in employment. The Uruguayan economy had been stagnant since 2015, at the end of the last commodity price boom, with a secular fall in employment.

Last week we published an IMF preliminary statement on the situation of the Uruguayan economy in which it praised the government's handling of the pandemic underlining Uruguay's solid institutions, well-functioning democracy and a high degree of social cohesion.

However, the IMF report also points out pre-existing macroeconomic imbalances, recalling that the Uruguayan economy had been stagnant since 2015, at the end of the last commodity price boom, with a secular fall in employment.

In effect, the IMF statement argues that the pandemic situation exacerbated some of Uruguay's pre-pandemic structural imbalances. The contraction of the economy and the needed stimulus measures have further weakened public finances and exacerbated medium-term sustainability risks, although there was an effort to contain non-pandemic related spending. The pandemic is also likely to have a visible impact on human capital, especially at the lowest income deciles—due to lost schooling—compounding pre-existing problems in education. Likely, the higher impact on young workers has also exacerbated pre-existing high youth unemployment, and the leap in digitalization and teleworking is having a transformational effect on jobs, speeding the obsolescence of low-skilled jobs and the existing skill mismatch between the labour force and new jobs.

In the near term, efforts should shift towards rebuilding policy space while providing targeted support to still-affected sectors. The authorities’ consolidation plan for 2022, in line with the expected recovery, is welcome. A targeted extension of the partial unemployment benefit should provide further support to workers in affected lagging sectors, while a gradual phasing out would incentivize a full return to work and facilitate labour reallocation where needed. This shift towards policies to foster job creation is welcome.

Over the medium term, additional fiscal consolidation would help put public debt on a firm downward path. Near term fiscal risks are contained—as financing needs are manageable and market financing remains at favourable terms—and the envisaged consolidation plan is expected to stabilize the debt-to-GDP ratio over the medium term. However, the debt trajectory derives from assumptions of stable macroeconomic conditions and leaves limited space to respond to future shocks. Thus, additional fiscal efforts would be needed to put debt on a firm downward path and rebuild policy space.

Refinements to the fiscal framework and pension reform would further bolster confidence in public finances’ sustainability. The new fiscal framework and the recent creation of the Committee of Experts and Advisory Fiscal Council are very important steps towards ensuring fiscal discipline. Moreover, compliance with the rule during the pandemic has shown the authorities’ strong commitment to fiscal sustainability. Further refinements to the framework—for example, moving to 5-year rolling limits, introducing an explicit debt target, and formalizing an escape clause with correction mechanisms—would help ensure that the new rule delivers fiscal discipline over time and across administrations. Advancing with pension reform is also key to secure fiscal sustainability, even if the associated financial savings may take time to materialize.

Monetary policy may need a tightening bias to bring inflation within the target range as the economy recovers. Amid challenging circumstances, monetary policy adequately supported the economy through the pandemic while gradually steering inflation and inflation expectations towards the target range. Building further credibility and durably steering inflation into the target range may require acting promptly as the recovery takes hold. In the meantime, a well-communicated policy strategy—that signals the expected path of monetary policy—should help sustain recent gains in re-anchoring inflation expectations. Durably lowering inflation remains a necessary condition to reduce dollarization and help boost credit and investment.

Timely phasing out credit support measures would prevent misallocation and fiscal costs. The extension of SIGA guarantee lines will adequately support companies in still-affected sectors. As uncertainty about the recovery dissipates, however, tightening eligibility criteria and conditions will be key to prevent misallocation of capital and limit potential fiscal costs. Stress-tests—which the BCU has been conducting since the start of the pandemic, together with assessments of the possible impact of adopted measures—do not point to significant risks. It is important to continue monitoring closely possible financial stability risks—especially stemming from exposure to sectors highly affected by the pandemic— as support measures are unwound.

Policies to foster employment and address skill mismatches in the labour force are welcome. The employment subsidy for vulnerable groups and the differentiated wage-setting guidelines for affected sectors strike the right balance between employment recovery and protection of workers’ purchasing power. Further decentralizing wage negotiations could further support employment and limit the long-lasting effects of the pandemic. In addition, a multi-dimensional strategy is needed to address the structural problems in human capital exacerbated by the pandemic. The leap in digitalization during the pandemic has accentuated the skill mismatch, highlighting the urgency of effective (re)training programs—especially for low skilled workers—to facilitate a rapid re-insertion into the labour market. Education reform should also proceed speedily to tackle high dropout rates and ensure that formal education is adapted to the needs of an increasingly IT-based economy.

At the same time, new trade agreements understudy could lead to important advances in trade integration, Finally, Uruguay’s commitment to environmental objectives—as well as the advances to incorporate environmental aspects in the design of economic policy in general and fiscal policy in particular—are also commendable.

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