On the Challenge of Job Creation in the Dominican Republic

By Odalis F. Marte

Creating jobs in a developing country may not be an easy task given the multi-faceted constraints, especially when it comes to poor policy management and market imperfections. In the case of the Dominican Republic (DR), unemployment is on the rise, particularly for young and unskilled people. This can be attributed in large part to the lagged effects of the international financial crisis having an impact on the economy through diverse channels such trade, investment, remittances and tourism.

External shocks, coupled with domestic policies that are simply not doing enough in terms of job creation, pose an important challenge to the DR. In this regard, the World Bank’s MILES Framework (Macroeconomic policies, Investment climate institutions and infrastructure, Labor market 

regulations and institutions, Education and skills, and Social Protection) can provide a comprehensive outline to address some of the main issues surrounding the job market.  Under this assessment, the macroeconomic policies (both monetary and fiscal) should work in order to boost declining aggregate demand, thus fiscal policy should remain expansionary and short-term job policies, such as crisis-hit-targeted subsidies for hiring, can be considered as a way to ease the pain of the unemployed.

In recent years, the DR has tried to keep aggregate demand afloat by increasing government expenditure in public works, specifically between 2008 and 2012. Nonetheless, consolidated public debt has increased from 32.2% of gross domestic product (GDP) in 2007 to 42.1% of GDP in 2012, according to figures of the Central Bank of the Dominican Republic. This trend has attracted attention because the economy has been subject to a fiscal reform, on average, every two years since 2000 (At the end of 2012 a tax reform package was approved that combined an increase in taxes with a reduction in spending, 

which is expected to lead to a fiscal consolidation of 4% of GDP for 2013).

Monetary policy can play a role working to help maintain price and financial stability, along with adequate exchange rate flexibility to help the economy absorb external shocks that minimize volatility in economic activity.

Continuing with the MILES Framework approach, an important factor to take into consideration is the investment climate for businesses including risks, costs and barriers to competition. These factors include property rights, rule of law, macroeconomic stability and fair competition. The 2014 Doing Business publication (http://www.doingbusiness.org/data/exploreeconomies/dominican-republic?topic=getting-credit) suggests that the DR has just fell in key areas such as starting a business, dealing with construction permits, getting credit, and registering property. It suggests that the DR fell many positions; the DR was just praised as a major reformer by the Doing Business publication a few years ago. That result should be taken as a challenge for microeconomic policies oriented to boost a business friendly environment for the private sector to invest.

Regarding labor market regulation, the DR government has engaged in talks with the private sector in order to explore ways to make the labor market more flexible. This represents a formidable task, particularly given the power of the unions and their tendency to oppose possible reductions of certain benefits for the employed.

In the case of education and efforts to raise the skills in the labor supply, recently the government decided to start implementing a law that would oblige it to spend up to 4 percent of GDP on education for the poor. In the first year of implementing this strategy, the DR proved to have a lack of managerial ability to spend a large increase in budget for building new schools and hiring new teachers. Nonetheless, by 2014 it is expected there it will be possible to comply with the Education Law.

In terms of social protection, the DR has a way to go, but has experienced important advances in the last ten years. For example, while the country has been relatively successful in extending social protection coverage, it has not had as much success in targetingemployment programs throughout disadvantaged communities.