Economy Politics

Labor and pension reform lead Macri’s 2020 agenda

25th July 2019

By Natalio Cosoy

Labor and pension reform lead Macri’s 2020 agenda

In Argentina’s election cycle, labor and pension reform are like the elephant in the room that the government would rather not discuss, but which is still perennially present.

They both have been on President Mauricio Macri’s table since his 2015 victory and are a demand from businesses and the International Monetary Fund (IMF), which in 2018 granted Argentina its largest loan: $57.1 billion to plug massive holes in public finances that could not be covered with private credit.

</p> <p>The government knows they are not the most popular proposals, but the possibility of their approval after a <a href="https://gettheessential.com/politics/2019/07/25/macri-cambiemos-pichetto-argentina-senate-congress-election-majority-pension-labor-reform">new Congress</a> is sworn in is already driving market’s hopes up. For those who promote them, labor and pension reforms –as well as a more comprehensive tax reform if possible– are long overdue, and they expect that Macri&#8217;s administration would move forward with them in 2020 if he is reelected on October 27.</p> <p>Pension reform would allow for a further reduction in public spending in the long run, as pensions take around 50% of the national budget. Labor reform could also trigger growth and investment, its proponents argue.</p> <p>&#8220;As macroeconomic stability becomes more entrenched, policy efforts will need to focus more on reinvigorating plans for structural reforms,” David Lipton, IMF’s Acting Managing Director and Chair, said last week.</p> <h2><strong>Young vs. old</strong></h2> <p>But it is not just about balancing the budget.</p> <p>&#8220;We tend to think of the reforms as a fiscal stabilization requirement, which they are,&#8221; Eduardo Levy Yeyati, dean of the School of Government at Universidad Torcuato Di Tella, told <em>The Essential</em>. &#8220;But there is a development perspective that is at least as relevant.&#8221;</p> <p>&#8220;There is a divide between the future-of-work and the present-of-Argentine-work debates,&#8221; explained Levy Yeyati. &#8220;We need to cater to the demands of the future, while addressing basic deficits of the present.&#8221; In that sense, he believes the country should be spending more on the young and less on the old.</p> <h2><strong>Brazil dashed forward</strong></h2> <p>Investors interested in Argentina are pointing at Brazil as the example to follow.</p> <p>The Brazilian Congress has already <a href="https://www.bbc.com/news/world-latin-america-48936892">made steps forward</a> to pass a pension reform pushed by Jair Bolsonaro’s Economy Minister Paulo Guedes, which raises the retirement age and increases workers’ pension contributions, with the aim of saving the equivalent to $263 billion over the next decade.</p> <p>Bolsonaro&#8217;s predecessor, Michel Temer, already managed to reform labor rules giving more freedom to hire, prioritizing the negotiations between employee and employer (instead of industry-wide ones), and reducing redundancy payments by 30 percent.</p> <p>In Argentina, however, things have not proven so easy.</p> <h2><strong>Questions and rejection</strong></h2> <p>Attempts at a more modest pension reform in late 2017 ended with street protests and police violence, and although the bill ended up passing through Congress it did so at a high political cost for Macri’s government, whose approval ratings started moving down since those days.</p> <p>The law modified the way in which pension payments are automatically adjusted to compensate for inflation (they now grow at a slower pace than before the changes) and allowed –but did not mandate– workers to postpone retirement until reaching the age of 70. Currently, the retirement age for most workers is set at 60 years old for women and 65 for men.</p> <p>The government also tried twice to push a labor reform bill, but had to backtrack after resistance from unions and an inability to gather enough legislative backing. Unions and lawmakers rejected the proposals for easing hiring and firing, as well as one that sought to create a fund (to which employees would also have had to contribute to) to pay for redundancies instead of them being covered by each employer individually.</p> <p>And it was not just the Argentine unions arguing against it. A 2017 panel organized by the ILO said deregulation and pro market labor reforms that aim at increasing competitiveness, especially in the context of an economic crisis, have had a severe impact on economic equality and social cohesion, by eroding legal protection to the rights of workers at an individual and collective level.</p> <p>Even Levy Yeyati, who advised Macri’s government between 2016 and 2017 (he now has no role or formal link to it) was skeptical, saying the proposal was “rather backward looking, with a supply-side bias,&#8221; because &#8220;it was assumed that the problem to create formal jobs lies in the labor costs, although the evidence is not clear on this.&#8221;</p> <h2><strong>Full or partial reforms</strong></h2> <p>&#8220;The labor reform has many components: flexibility (within and between jobs), professional training to reduce the loss of human capital, and formalization of unregistered jobs to balance social security numbers,” Levy Yeyati explained.</p> <p>In his view, the latter two components are connected: Argentina cannot create new stable, formal jobs, in part, due to a growing mismatch between the skills on supply and the skills that the market is demanded. And no social security reform will pay off without newly registered jobs.</p> <p>As for flexibility, Levy Yeyati says it is more controversial and resisted because, to work effectively, “it depends on the other two elements, plus a good unemployment insurance system.” With all those things in place, it could replace job stability with income stability.” But even still, “it is not obvious that it will create new jobs.”</p> <p>At this point, a push to formalize employment and develop training schemes might be an easier sell. Earlier this year, Dante Sica, Argentina&#8217;s Production and Labour Minister, took part in the International Labour Organization&#8217;s 108th Session of the International Labor Conference, where he said: &#8220;Argentina faces a two-pronged challenge: to be able to adapt to changes in technology, but also an inherited heavy rucksack on our backs, a great debt: the need to (formalize) more than 4 million workers which are (unregistered).&#8221;</p> <h2><strong>Formalization and single-industry agreements</strong></h2> <p>Sica has been playing a balancing act, where he suggests to businesses that a labor reform is in the pipeline, while assuring those who oppose it that it is not part of this year&#8217;s government plan. He has also been careful to highlight the formalization and training elements of any potential reform.</p> <p>Levy Yeyati believes that is exactly what the government will do while it tries to negotiate the rest of the reform.</p> <p>A February 2019 document by Sica&#8217;s Ministry named &#8220;Laws for a productive transformation&#8221; said 71 percent of small and medium sized companies (Pymes) that have up to five employees do not register them before the country’s social security agency, and proposed tax cuts and rebates to encourage that they properly hire their staff. Pymes hire between 50 and 70 percent of Argentina&#8217;s working force (depending on the source consulted for the data).</p> <p>Meanwhile, in the past couple of years the government did manage to reach localized agreements, such as the one reached between oil and gas businesses and unions, which aimed at developing the Vaca Muerta shale formation in Neuquén province. It mainly introduced some flexibility to the collective bargaining agreement, lowering the cost of labor.</p> <p>&#8220;That would be a reasonable model for sectors with good upside, where results are easy to monitor, and workers are homogeneous (few unions)&#8221;, said Levy Yeyati. &#8220;But most sectors are now facing contraction and a secular decline (deepened by the recession) in labor participation and there is very little to give in exchange, due to fiscal constraints.&#8221;</p> <h2><strong>Going through Congress</strong></h2> <p>For a full reform, the government will need to pass through Congress. And even if it does well in this year’s election, that will not be an easy feat: in 2017 and 2018, when Macri struggled to pass milder reforms, it had just come out of a successful midterm.</p> <p>The then-leader of the Peronist opposition in the Senate, Miguel Ángel Pichetto, said a labor reform of that kind would not pass in the upper house, although he did support the changes to the pension system. Pichetto is now Macri&#8217;s vice-presidential candidate and, if elected, will preside over a more favorable Senate, as that is one of the roles of the vice president in Argentina. It will be interesting to see what he says if that comes to be.</p> <p>

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Natalio Cosoy

Natalio Cosoy is the Argentine correspondent for France 24 in Spanish and has worked for the BBC, the Deutsche Welle and the Washington Post.
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