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Labor Market and Macroeconomic Dynamics in Latin America Amid COVID: The Role of Digital Adoption Policies

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  • Nuguer, Victoria
  • Finkelstein-Shapiro, Alan

Abstract

We study how policies that facilitate firm digital adoption shape the labor market and economic recovery from COVID-19 in a search and matching framework with firm entry and exit where salaried firms can adopt digital technologies and the labor market and firm structure embodies key features of Latin American economies. Using Mexico as a case study, we first show that the model quantitatively replicates the dynamics of the labor market and output at the onset of the COVID recession and in its aftermath, including the sharp decline in labor force participation and informal employment that is unique to the COVID recession. We then show that a policy-induced permanent reduction in the barriers to adopting digital technologies introduced at the trough of the recession bolsters the recovery of GDP, total employment, and labor income, and leads to a larger expansion in the share of formal employment compared to the no-policy scenario. In the long run, the economy exhibits a long-run reduction in total employment and labor force participation, but higher levels of GDP and labor income, greater average firm productivity, a larger formal employment share, and a marginally lower unemployment rate.

Suggested Citation

  • Nuguer, Victoria & Finkelstein-Shapiro, Alan, 2022. "Labor Market and Macroeconomic Dynamics in Latin America Amid COVID: The Role of Digital Adoption Policies," IDB Publications (Working Papers) 12232, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:12232
    DOI: http://dx.doi.org/10.18235/0004226
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    1. De La Peña, Rogelio & García, Ignacio, 2023. "Untangling crises: GFC and COVID-19 through the lens of a DSGE model," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(2).

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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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