Europe suffered the largest declines in growth. Latvia and Lithuania in particular suffered tremendous economic disruptions, as growth rates in these countries slowed by roughly 20 percentage points in 2009, compared to the average growth rates in the two prior years. Turkey, Romania, Bulgaria, and Mexico also suffered severe slowdowns in growth, due to a decline in exports to Western Europe and the US. In contrast, a larger group of seven countries, including the non-Mexican Latin countries, Poland, Jordan, the Philippines, and South Africa were only moderately affected. Finally, Indonesia and Egypt escaped the brunt of the crisis, as growth only fell around 2 percentage points.

_The size of the adjustment in employment and unemployment may be related to countries’ labor market institutions._ Employment losses varied considerably across countries. Poland, Costa Rica, and Bulgaria, for example, experienced unexpectedly large employment losses, given their moderate decline in growth, while Romania and Turkey experienced larger slowdowns in growth but substantially smaller employment reductions (Figure 1).<sup>26</sup> These patterns suggest that countries with more rigid labor markets fared somewhat better in maintaining employment during the crisis. For example, employment and wage employment growth fell relatively little in Turkey and Romania, even though Turkey is probably among the most regulated labor markets in the OECD, with a low _Doing Business_ ranking in employing workers, and 40 percent of Romanian workers belong to a union.<sup>27</sup> Costa Rica and Bulgaria, where employment fell more, have relatively free labor markets among countries analyzed here: both countries score relatively highly on the Fraser index of labor market freedom, and only 13 percent of Costa Rican workers belong to a union (Freeman, 2009).<sup>28</sup> If labor markets with high firing costs responded to the crisis by reducing hours rather than shedding employment, employment loss may have been smaller in more rigid countries.<sup>29</sup> This is line with evidence that employment during the crisis fell slightly less in countries with higher firing costs (Khanna et al, forthcoming) and other studies also casting doubt on the link between existing measures of institutions and worse employment outcomes (Baker et al., 2004, Freeman, 2005).

_Employment declines translated more into increased unemployment than reduced participation (Figure 1)._<sup>30</sup> However, the extent of this adjustment also varies across countries. Bulgaria and Poland, for example, experienced greater employment losses than would be expected based on the severity of the shock. While Bulgaria’s employment losses were largely explained by an increase in nonparticipation, large employment losses in Poland were entirely linked to unemployment increases. These patterns may

> 26 This is consistent with findings from previous studies. See World Bank (2010a). Two letters in Figures represent each country: AR (Argentina), BG (Bulgaria), BR (Brazil), CH (Chile), CR (Costa Rica), EG (Egypt), ID (Indonesia), JO (Jordan), LT (Lithuania), LV (Latvia), ME (Mexico), PH (Philippines), PL (Poland), RO (Romania), SA (South Africa), and TR (Turkey).

> 27 Turkey ranked at 145 out of 183 countries in ‘employing workers’ in _2010 Doing Business,_ which reflects labor market rigidity with substantial hiring and firing costs.

> 28 Labor market rigidity measures should be interpreted with caution because they may mask complex dynamics within the labor market. For example, Costa Rica experienced particularly large employment slow down among traditionally vulnerable group such as youth and least educated, which is in line with World Bank (2010b). This may suggest labor market flexibility or lack of protection, is concentrated among vulnerable group of workers.

> 29 Unfortunately, hours information on these rigid countries mentioned is not available.

> 30 Note by definition that the share of employed, unemployed, and out of labor force workers sums up to one, and the changes of each share sums up to zero.

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