Moody's Investors Service tasked the Capstone team to analyze the impact of labor markets on country risk in Latin America and the Caribbean. Using academic literature, the team provided a theoretical framework that focused on two main metrics through which this effect occurs: labor force participation and labor productivity. These two metrics are directly related to economic, fiscal and institutional strength, and therefore to governments’ credit ratings. They are also driven by many variables, including gender equality, population growth, age composition, education, and informality. These can help assess labor market resilience and may help forecast economic trends.
The report also studied whether these labor market impacts are already accounted for in Moody’s framework. An econometric analysis showed that labor force participation and labor productivity, as well as their main drivers, associate positively with Moody’s ratings, suggesting that the client’s current methodology is already incorporating these effects through their indicators.
Finally, the paper used significant variables to determine scores and compare countries with available data. Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Mexico, Peru and Uruguay were ranked from least to most risky in terms of their labor market indicators. Peru, Chile, Uruguay, and Colombia exhibit the strongest regional labor markets, while Bolivia, Ecuador, Argentina, and Guatemala appeared to have the weakest indicators. These scores were weakly aligned with the current sovereign ratings assigned by Moody's, thus suggesting that such information is captured in their methodology.