exacerbated these inequalities, given that learning losses have been acute among children from low-income families with less access to distance learning (World Bank 2022a). Improving skills absorption by poor students may therefore have outsized positive effects on future productivity, which could help to mitigate some of the inequality-increasing consequences of pandemic-related learning losses.

Reforms in several areas beyond the scope of the scenario analysis could also boost potential output growth by raising productivity growth. Labor markets in LAC have long been less flexible than in other EMDE regions. Reforms to deregulate labor markets, including regarding inflexible wage-setting processes, hiring and firing constraints, and aligning compensation with productivity, would likely pay productivity dividends. Improving educational quality could raise productivity generally; there is evidence of positive growth externalities from higher skill levels in Latin America (Ferreyra et al. 2017; Ferreyra and Roberts 2018). LAC has relatively high enrollment rates in tertiary education, which is heavily subsidized in many countries, yet a larger proportion of firms in LAC cite skills shortages as their biggest obstacle than in the average EMDE. This may reflect the distribution of subjects studied (the relative paucity of science, technology, engineering, and mathematics majors), low graduation rates, and inadequate accountability in the university sector (World Bank 2021h). Beyond traditional education, active labor market policies to encourage the reskilling and reabsorption of workers could help mitigate a long-term trend in LAC of workers that are displaced out of high productivity industries transitioning into lower productivity work, thereby constraining overall labor productivity growth (Dieppe 2021).

Addressing the challenges associated with widespread informality could lift productivity (La Porta and Shleifer 2014; Ohnsorge and Yu 2021). Indeed, research has found that a drop of 1 percentage point in the informal share of the LAC economy has been associated with a 0.5 percentage-point narrowing of the gap between TFP in LAC and the United States (IDB 2013). Together with better-functioning labor markets, policy interventions that simplify business licensing and tax procedures and increase access to social security systems would also help reduce informality (Garcia-Saltos, Teodoru, and Zhang 2016; OECD 2017). At the same time, policy makers should be wary of tax and regulatory schemes that inadvertently encourage firms to stay small. Larger firms can, for example, face higher effective tax rates, which may discourage expansion. Meanwhile, schemes that favor smaller firms may result in excessive capital allocation to low-growth businesses. These factors may contribute to persistently low TFP growth (IDB 2018).

In addition, there are important opportunities to spur innovation in LAC, which underperforms other EMDE regions (World Economic Forum 2017). For example, policyled efforts to ensure the education system encourages innovation, promote collaboration between firms, universities, and research institutes, and increase access to finance for innovation could all be beneficial (Vostroknutova et al. 2015). Creating incentives for firms to invest in internal research and development may boost productivity. Latin American firms that invest in R&D have been found to be better able to produce product innovations than those that do not, and firms that innovate are found to have significantly