Second quarter official unemployment increased slightly to 9.5 percent

A few thoughts:

1. The recent historical trend (last 15-20 years) shows unemployment generally increasing since 2007, the low point, but also shows that it twice peaked higher during the Chinchilla administration than it has so far during the Solís administration. It was also a on the high side (around 6%) between 1998 and 2006. Whatever is going on now can only with great difficulty be pinned on Solís.

2. The relationship between government debt and unemployment is far from clear. Government debt was at its lowest in 2007 when the unemployment rate was also the lowest, but as a percentage of GDP government debt was almost as high during the early 2000s as it is now, although the unemployment rate was lower then. Moreover, we have to be careful about imputing causality. It’s possible for example that the low unemployment rate in 2007 resulted in increased tax revenues that reduced government debt that year.

3. Major taxes–chiefly the sales tax, the income tax, and corporate taxes–have been the same for many years. A change in the tax code therefore can’t explain changes in the unemployment rate.

4. Major policies aimed at attracting businesses and stimulating foreign trade don’t appear to have had much postive effect on employment. Tax free zones were initiatives of the 1980s and 1990s, and unless companies who moved to these zones started moving out in 2008, perhaps when their tax incentives expired, this can’t explain the increase in unemployment from 2008 onward. CAFTA-DR wasn’t approved by referendum until October 2007–right about when the unemployment rate started to increase–so if anything it supressed employment in Costa Rica.

5. There’s certainly no evidence that Costa Rica’s politicians have become more corrupt or its bureaucracy more frustrating since 2007, so this wouldn’t seem to explain variations in the unemployment rate over time.

What’s then left to account for the rise in unemployment over the last 8 years?

One conjecture is demography. Perhaps the composition of the labor force has changed over recent years and these changes account for current unemployment?

Actually, this conjecture isn’t a bad one. Children born during or just before the economic crisis of the 1980s completed fewer years of schooling and no doubt suffered nutritional deficiencies and all the rest of the problems that attend poverty than even those born before them. These kids are now in their 20s through 40s–prime working years–and on the average are less well-prepared for jobs than more fortunate others. Indeed, the analyses of Costa Rica’s unemployment problem always point out that jobs go unfilled because employers can’t find qualified workers.

Add Nicaraguan immigrants, the numbers of whom skyrocked during Nicaragua’s 1990-2006 “structural adjustment” phase, before they began to fall off after the reelection of Daniel Ortega. These Nicas are typically willing to work hard for low wages, and compete directly with the Ticos who are no better qualified for jobs.

However, while the struggles of this “lost generation” of Ticos and competition from Nicaraguan immigrants probably explains a good bit of Costa Rican unemployment, it wouldn’t seem able to account for annual changes in the unemployment rates. There’s no reason, after all, to believe that these factors weren’t also operating in 2007, when the unemployment rate was at its lowest level in around 20 years.

Another conjecture is therefore that for one reason or another business investments changed. And boy do we have evidence that this is the case.

Check this out:

https://ase.tufts.edu/gdae/Pubs/rp/DP13Paus_CorderoApr08.pdf

According to it, in 1998 69% of foreign investments in Costa Rica were in industry, while only 4% went to the financial services sector and zero investments were made in real estate. Eight years later, in 2006, foreign investment in industry was down to 30% of the total, but up to 23% in financial services and 25% in real estate.

Well, which of these recipients of foreign investments creates the most jobs? Plainly industry does. Financial services hire a few (but not many if those likely to be unemployed were it not for those jobs) and real estate provides jobs for next to nobody after the construction crews depart.

It therefore looks like Costa Rica has experienced a massive shift in where foreign investment dollars are directed, and this shift explains the stubbornly high unemployment rate of recent years.

If this is correct, Costa Rica’s primary challege would seem to be to stop wooing any old foreign investments, but instead to woo investments that promise to create jobs, and to distinguish the two in tax and other policies. Specifically, more gringos building retirement homes and more credit card issuers aren’t really helping the country’s unemployment problem (as neither frankly are most of the investments in the now open telecom industry), even though these foreign investments are included in the overall tally of foreign investments. Costa Rica needs to target the helpful job-creating investments, probably with tax incentives, and forget the rest.

Of course, Costa Rica also needs to do better with adult education and training, and this initiative may require pro-labor changes in labor law. Currently, low-level employees in Costa Rica have a devil of a time continuing their education because the standard full-time job is 48 hours a week, part-time jobs barely exist, and employers at places like grocery stores typically change their employees’ schedules weekly. Even if they’re ambitious enough to take classes in addition to their jobs and often two-bus commutes to and from, as many are, employees’ weekly schedule changes at work prevent them from enrolling in adult education classes. Workers who want to continue their educations simply need to be able to do that.

Anyway, I can’t see how taxes or Solís explain anything about Costa Rica’s unemployment problem. Government debt might explain some of it, but since that debt was almost as high during the early 2000s as it is now, yet the unemployment rate was lower then, it’s a stretch to maintain that government debt is dragging down employment now.

Of course, the government does have to get a handle on debt, and therefore get a tax policy that addresses it Letting the debt soar just increases taxes and otherwise drains money from the economy over the long run, and this drags down the economy, so these debt and tax issues have to be addressed. However, the causes and cures of the unemployment problem would seem to be largely unrelated to debt and tax issues–for now.