The calendar began to press

Reducing inflation is an achievement that continues to consolidate. Clearing risks of a new crisis and recovering predictability is a source of relief, but it also creates the right context for other aspirations to gain ground. Among them, improving the functioning of the labor market has become the most prioritized and urgent objective.

Evidence shows that the deterioration of employment and wages is a long-standing phenomenon. The last negative cycle began associated with the acceleration of inflation in 2018. Since Milei's government began, the process has not stopped. The deterioration manifests, on one hand, through a decline in jobs and wages of formal salaried workers, partially compensated by increases in formal self-employment (monotributo).

On the other hand, because the most dynamic components of the labor market are informal salaried employment and, fundamentally, informal self-employment. That is, the phenomenon does not quantitatively manifest in increases in unemployment, but qualitatively in a new decline in the quality of jobs.

The weakness in labor matters introduces a factor of uncertainty in the political arena. Simplified, the question is to clarify how the population weighs the significant achievements in stability against the lack of results in reversing the deterioration of the labor market.

It is obvious that inflation continues to occupy an important place among the population's concerns, but it is also clear that it no longer has the exclusive weight it had during the most critical moments. The question is to gauge the tolerance towards the degradation of the labor market. Not so much because it is considered a new phenomenon, but because there are no signs of reversal.

It is impossible to make forecasts about how the population will interpret this situation and how it may manifest in their preferences for next year's elections. But the possibility that the valuation of stability is being overestimated and the discomfort caused by the lack of resolution of labor issues is being underestimated introduces a factor of uncertainty and disturbance in the electoral transition.

The risks that this could lead to a defeat of the ruling party and, from it, a reversal of the economic course have increasing impacts on financial markets. A sign of how decisions incorporate this risk is the sustained and vigorous demand for dollars by individuals. If, as the electoral schedule progresses, uncertainties about the outcome intensify, their financial impacts, especially on the exchange market, will create challenges that are difficult to manage.

The toolbox is shrinking

To reverse the long and deep deterioration of the labor market, it is necessary to accelerate the process of structural reforms and allow time to advance their implementation and make their results visible. Moreover, most of the pending reforms are technically complex and politically sensitive. This collides with the fact that, the further the electoral calendar advances, the greater the incentives will be to postpone decisions whose benefits are not immediate.

Much of what remains depends on complex political processes that simultaneously affect national and provincial finances. Therefore, the relationship with governors holds special importance. The elimination of the most distorting taxes, the correction of inefficiencies arising from overlapping functions between levels of government, and the resolution of the crisis in the pension system are unlikely to be consistently resolved through unilateral decisions. It is essential to build complex agreements between levels of government.

The challenge is to make the most of the time left before electoral competition takes center stage. Presenting agendas and building agreements now can allow progress on some issues and, above all, send a signal that the groundwork is being better prepared to resume the transformative process with more vigor once the elections are over.

Credit as a Bridge

Not having finished configuring the monetary, exchange rate, and financial regime is also a very limiting factor for the available instruments. If bimonetarism had been institutionalized with a "Peruvian-style" scheme, the expansion of credit would be playing a crucial role both as support for companies in the process of reconversion ---which are the majority--- and as a driving factor for investment and consumption.

Even with these limitations, there are margins for action and recent decisions are aimed at boosting credit recovery. Prudently relaxing the rules that restrict the use of dollar deposits to grant loans in the same currency is an important step in this regard. The decision to use a small fraction of the resources managed by the Sustainability Guarantee Fund to fund banks offering mortgage loans operates with the same orientation. This is an effective way to leverage the banking system's capacity to manage this type of credit, which will help stimulate a sector with idle capacity that is labor-intensive.

However, to give consistency and strength to this strategy, it is essential to take actions aimed at lowering the level and volatility of interest rates, even if this impacts the exchange rate and eventually price indices. In other words, adopting a financial policy that prioritizes stability and moderation of interest rates over the goal of keeping the exchange rate under control.

The electoral calendar has begun to exert pressure. Given how much is at stake in next year's elections, it is foreseeable that it will continue to do so with increasing intensity. The best strategy to tackle the challenge combines pragmatism to achieve a careful balance between stabilization objectives and the recovery of employment and wages, and political skill to form alliances that sustain the reform process.

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