Mexico - Labor Market and Productivity Enhancement Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11095-ME STAFY APPRAISAL REPORT EICO LABOR MARKET AND PRODUCTIVITY ENHANCEMENT PROJECT NOVEMBER 23, 1992 Country Department II Human Resources Operations Division Latin America and the Caribbean Regional Office This document has a restricted dutdrlb o d my be ue by recipkies ouly In the perfonsuae of their official dutie Its contets may so odtrwis be dlond wibout World Bn athuIZlO.  CURRENCY EOUIVALENTS Currency Unit = Peso (MEX$) US$1.00 = 3,112 Pesos (July 1992) FISCAL YEAR January 1 - December 31 UNITS OF WEIGHTS AND MEASURES Metric British/US Equivalent 1 kilogram (kg) = 2.20 pounds (b) 1 liter (1) = 0.26 gallons (gal) I cubic meter (m3) = 1,000 liters GLOSSARY OF ACRONYMS CGPEET General Coordination Unit for Labor Market Policies, Studies and Statistics (Coordinaci6n General de Poifticas, Estudios y Estadfsticas del Trabajo) CIMO Multiple Support Service Program to MSMEs (Programa de Calidad Integral y Modernizaci6n) CONACYT National Science and Technology Council (Consejo Nacional de Ciencia y Tecnologfa) CONALEP National System for Vocational and Technical Education (Colegio Nacional de Educaci6n Tanica Profesional) CTM Mexican Confederation of Labor (Confederaci6n de los Trabajadores Mexicanos) DAO Directorate for Occupational Analysis (Direcci6n de Andlisis Ocupacional) DEPE Directorate of Employment Studies and Policies (Direccion de Estudios y PoUlticas de Empleo) DGE General Directorate for Employment (Direcci6n General de Empleo) DSNE Directorate for Employment Services (Direcci6n del Servicio Nacional de Empleo) ENEU National Urban Employment Survey (Encuesta Nacional de Empleo Urbano) MNEA National Institute for Adult Education (Instituto Nacional de Educaci6n para Adultos) INEGI National Institute of Statistics (Instituto Nacional de Estadfsnca, Geografla y Informdtica) MSMEs Micro, Small and Medium size Enterprises NAFTA North American Free Trade Agreement NAFIN National Financing Company (Nacional Financiera, S.N.CC) OECD Organization for Economic Cooperation and Development PACTO Pact for Stability, Competitiveness, and Employment (Pacto para la Estabilidad, la Competnvitdad y el Empleo) PECE Pact for Stability and Economic Growth (Pacto para la Estabilidad y el Crecimiento Economico) PROBECAT Labor Retraining Program (Programa de Becas de Capacitacion para 7rabajadores) SECOFI Secretariat of Commerce and Industrial Development (Secretarla de Comercio y Fomento Industrial) SEE State Employment Service (Servicio Estatal de Empleo) SEP Secretariat of Education (Secretarfa de Educaci6n Pulblica) SET General Directorate for Labor Statistics (Subcoordinaci6n de Estadishcas del Trabajo) SHCP Secretariat of Finance and Public Credit (Secretarfa de Hacienda y Crcdito Piblico) SIAL Information Center on Labor Market Issues (Servicio de Informacion sobre Asuntos Laborates) SNE National Employment Service (Servicio Nacional de Emplco) SPID General Directorate for Institutional Programs and Documentation (Subcoordinaci6n de - Programas Ins*itucionales y Documentaci6n) STPS Secretariat of Labor and Social Welfare (Secretarfa del Trabajo y Pretsi6n Social) UPC Regional Productivity Support Unit (Unidad Promotora de Conmpetiviidad) USI Multiple Service Support Unit to MSMEs (Unidad de Sevicios Integrados)  FOR OMCIL Use ONLY LABOR MARKE AND PRODUCllVITY IAUNCDENT ROS TABL3E OF COQ lI Page LOAN AND PROJECT SUMMARY ....................................... iii ESTIMATED PROJECT COST . ........................................ vi BASIC DATA SHEET ............................................... vii DEFINMTONS ................................................. viii I. INTRODUCTION ............................................... I H. THE LABOR MARKET ........................................... I A. OVERVIEW ..1.......... I B. LABOR MARKET ISSUES ..................... 2 1. Labor Productivity Growth ........ ..................... 2 2. Unemployment and Labor Mobility ........................ 5 3. The Absorpdon Capacity of the Labor Market ..... ............ 7 4. Monitoring and Policy-making Capacity ..................... 8 C. THE ROLE OF THE PUBLIC SECTOR IN PRODUCTIVITY ENHANCEMENT AND LABOR MARKETS . . 8 D. STATUS OF EXISTING LABOR MARKET PROGRAMS . .10 1. Support to Enterprise Training .10 2. Employment Programs .11 3. Labor Market Infbrmation and Analysis .14 E. GOVERNMENT STRATEGY ............... ................. 14 F. BANK EXPEREENCE AND LESSONS LEARNED .................. 15 1. Training Sector Experience in Mexico ...................... 15 2. Lessons Learned from Training Sector Experience Bank-Wide ... .... 16 3. Incorporation of Lessons into Project Design .................. 17 G. RATIONALE FOR BANK INVOLVEMENT ........ ..1............ I This report is based on the findings of an appraisal mission that visited Mexico in June/July 1992. The mission was composed of Mmes./Messrs. Michelle Riboud (Mission Leader/Sr. Economist, LA2HR), Ana Revenga (Economist, LA2C1), Hong Tan (Economist, ENIN), Bo Dahlborg (Sr. Technical Education Specialist, EC3HR), Mauricio Mathov (lnformation Tecinology Specialist, ASTIF), Maria Elena Anderson (Operations Analyst, Consultant), and Muriel Aza (Consultant). Mr. John Innes (LA2HR) finalized the report at headquarters. Messrs. Rainer B. Stbckhan (LA2DR) and Kye Woo Lee (LA2HR) are the Department Director and Division Chief, respectively, for this operation. Peer reviewers for this project were Messrs. Sweder Van Wijnbergen (EC2DR) and Neil Roger (LA2C1). Messrs. Vinh Nguyen, Darren Dorkin, and David Warren (LA2HR) contributed to the report at headquartrs. This document has a restricted distribution and may be used by recipients only in the performance or their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - m. THE PROJECT ............................................ 19 A. PROJECT OJECTIVES ................................... 19 B. PROJECT COMPONENTS .................................. 19 C. PROJECT DESCRITON .................................. 20 1. Productivity Enhancement Component ........ .. ............ 20 2. Labor Market Adjustment Component .. ........... 25 3. Information, Policy and Institutional Stre ening Component .... ... 31 IV. PROJECT COST, PROCUREMENT, DISBURSEMENT AND AUDITS ..... ....... 36 A. PROJECT COSTS ....................................... 36 B. RECURRENT COSTS . ..................................... 37 C. FINANCING PLAN ...................................... 38 D. PROCUREMENT ........................................ 38 E. DISBURSEMENTS ....................................... 41 F. ACCOUNTING AND AUDITING ............................. 42 V. PROJECT IMPLEMENTATION AND MANAGEMENT ...................... 43 A. PROJECT READINESS FOR IMPLEMENTATION .................. 43 B. PROJECT ORGANIZATION ................................ 43 C. PROJECT MANAGEMENT AND COORDINATION ................. 43 D. IMPLEMENTATION SCHEDULE ............................. 44 E. MONITORING TARGETS .................................. 45 F. LOAN SUPERVISION, ANNUAL AND MID-TERM REVIEWS .... ...... 45 VI. PROJECT BENEFITS AND RISKS ....... ....... .. ................... 47 A. PROJECT BENEFITS ..................................... 47 B. IMPACT ON WOMEN .................................... 47 C. PROJECT RISKS ........................................ 47 VII. AGREEMENTS REACHED AND RECOMMENDATION ..................... 48 Recommendation ............................................. 50 ANNEXES (see also detailed Annex List) 1. Draft Sector Policy Statement ...................................... 53 2. Labor Market Statistics .......................................... 61 3. PROBECAT and CIMO Programs ................................... 67 4. Sector Organization ............................................ 80 5. Projec Description ............................................ 83 6. Project Costs . ............................................... 113 7. Disbursement Schedule .......................................... 120 8. Key Monitoring Indicators and Implementation Targets ...................... 122 9. Key Docments Available in the Poject File ............................ 129 MAP - IBRD No. 24094  - iii - MEXIC LABOR MARKET AND PRODUCTIVITY ENHANCEMENT PROJECT LOAN AND PROJECR Br:wn~ Nacional Financiera, S.N.C. (NAFIN) Gur:nt~r United Mexican States Secretariat of Labor and Social Welfare (STPS) Ag= Beiciaries: Entrepreneurs and employees of micro, small and medium-size enterprises (MSMEs), enterprise associations, unemployed and displaced workers, and rural migrants Annl0t: US$174.0 million equivalent Terms: Repayment in 15 years, including five years of grace at the standard variable interest rate. ProjectMThe objective of the proposed project is to assist the Government of Mexico in Obectives: promoting private sector-led growth and in easing the costs of labor mobility and labor market adjustment by: (i) increasing the productivity and competitiveness of micro, small and medium-sized enterprises; (ii) reducing costs incurred by employees and employers of hiring and job search, and providing education and training opportunities for displaced and unemployed workers, with special attention to women; and (iii) improving the availability, timeliness and dissemination of labor market information and, more broadly, the capacity to monitor labor market changes and to design, evaluate and implement relevant policies and programs in the sector. Projet 'The proposed project with a total cost of US$355.9 million would consist of three major esaripti: components: (a) Productivity Enhancement Comonent (28% of total costs, including contingencies) would support activities aimed at increasing the productivity and competitiveness of MSMEs by: (i) extending the coverage of the pilot in-service training program (Multiple Support Service Program to MSMEs, CIMO) initiated under the Manpower Training Project (Ln. 2876-ME in 1987) and expanding the scope of support services provided to MSMEs; (ii) strengthening coordination between CIMO and other institutions rendering support to MSMEs; and (iii) promoting the gradual privatization of CIMO by increasing the involvement of enterprise associations in its financing and operation and gradual transformation of Regional Productivity Support Units (UPCs); (b) Labor Marklet Adustment Co t (61% of total costs, including contingencies) would improve the coverage and efficiency of State Employment Services (SEEs) and provide education and training opportunities for displaced workers, through: (i) strengthening the operation and management of the SEEs, and improving the quality and availability of information on local and regional labor markets; and (ii) providing improved retraining programs for approximtely 300,000 displaced and unemployed workers, meeting stringent selection criteria; and (iii) introducing, on a pilot basis, an education and training program for under-qualified rural migrants who are ineligible for  - iv - the regular reraining program; (c) n& oi and CoXoneQ (11 % of total costs, including contingencies) would improve the availability, timoliness and diswmtion of labor market information, and strengthen institutional capacity to design, operate and evduate labor market policies and programs, including: (i) supporting the development of an information system and the undertaking of in-depth surveys to provide a basis for periodic and systematic labor market data generation and analysis; (ii) promoting an extensive program of studies and resarch on labor market issues, programs and policies; (iii) fostering regular publication and dissemination of labor market information; (iv) instituting a systematic framework for program evaluation; and (v) strengthening STPS's management and technical capacity through human resource development and modernization of data management system. frgjw The project would increae productivity and competitiveness in MSMEs, creating higher earnings and employment opportunities for Mexican workers. About 35,000 enterprises, employing about 1.0 million workers, are expected to be reached. Project benefits, however, would extend beyond the participating enterprises, as the project is intended to have an important demonstration effect. Through the increased involvement of private enterprise in MSME support programs and the promotion of closer inter-institutional links, the project would also foster improvements in the quality of training services supplied to enterprises and a faster rate of adoption of new technologies through provision of a better trained labor force. The labor market adjustment process would be eased as the improved quality of services provided to unemployed and displaced workers would reduce the costs of hiring and job search, improve the job matching process and thus provide better opportunities for employment stability and subsequent wage growth. Approximately 2 million unemployed workers are expected to benefit from placement services over the project life. About 300,000 unemployed workers whose current skills fail to match those in demand would also benefit from the training to be provided. The cost effectivenass of the retraining programs will be enhanced by targeting the training to those groups (workers with at least completed primary education and some work experience) where evaluation has demonstrated the highest rates of return to such training. The results of the evaluation showed a 20 to 30% monthly salary increase for male trainee with some prior work experience. For male target trainees, the evaluation showed that benefits of program participation outweigh the costs of the program within 3 months of starting employment. For younger i--nex nced workers and rural migrants, the project is expected to improve their entry conditions in the urban labor market. In addition to sharing the general benefits of the project listed above, women would benefit from the improvements to be introduced in the training programs and reduction of labor market barriers which hamper the realization of the full benefits of training by females. Finally, the project would enhance the Government's capacity to design, monitor and evaluate labor market policies and programs, thus contributing to a more efficient use of public resources. The main risks are: (a) a possible decline in Government commitment to project objectives after the change in administration in 1994. The risk is small given the existing strong support for current economic policies and the importance given to productivity and mobility issues in light of the North American Free Trade Agreement (NAFTA); (b) insufficient budgetary allocations to guarantee program sustainability beyond project completion. This risk will be minimized by the coverage of trainee stipends and recurrent costs on a declining basis, by increased private sector participation i the fcing and operation of the CIMO program, and by rigorous  - v - monitoring of budgetary allocations during the annual project implementation reviews; (c) slower than expected acceptance by enterprises of the productivity enhancement actions. This risk quite small given growing support by private enterprises of interventions initiated under the ongoing Bank-supported Manpower Training Project and will be further mitigated by strengthened program management and availability of services; and (d) project complexity and the fact that there are many implementing agencies at different levels may limit the achievement of the project objectives. This risk will be mitigated through the early identification and resolution of any problems which develop through close supervision, and the mid-term and annual project reviews.  - vi - ATIpn PROJRT COST Project ConWonents Local Forign Total -USS million Productivity E1L JA 82- Labor Market Adjutment 1212 6 1294 Strengthening of SEEs 36.6 1.1 37.7 Retraining Program 155.3 5.4 160.7 Information, Policy, and Institutional Strengthening 4