markets recover more slowly and can often take years to bounce back from sharp downturns (Rogoff and Reinhardt, 2009). In the meantime, the nature of the labor market adjustment determines winners and losers. For example, employment declines tend to concentrate losses among an unlucky few, while earnings declines spread losses more evenly amongst the workforce.

_The appropriate mix of policies to respond to the crisis depends partly on the nature of the labor market adjustment._ Income replacement programs such as unemployment insurance or public works are most effective in mitigating the impact of job loss. In contrast, when the labor market adjustment occurs through earnings, then income maintenance program—such as cash transfers or income tax credits— become particularly important. Targeting the working poor through income support programs is therefore a priority in these circumstances.<sup>25</sup>

**Most policies adopted in response to the crisis concentrated on employment generation.**<sup>**26**</sup> During this crisis, support to SMEs was implemented by a larger share of developing countries than any other type of policy.<sup>27</sup> The follows a pattern seen in past crises, as employment generation programs were implemented in response to past crises in Argentina, Mexico, Korea, and and Thailand. Meanwhile, wage subsidies were implemented in response to past crises in Costa Rica, Argentina, and Malaysia. Public works programs have also been implemented in response to crises, as in Indonesia in 1998. None of these programs, however, directly benefited the informal sector workers, and relatively few provide income support to workers who maintained their jobs.<sup>28</sup>

_The emerging evidence presented in this paper suggests that effective policy packages should support earnings and household income._ Responses taken in European OECD countries -- such as partial unemployment insurance, expanding cash transfers to poor workers, and temporary wage subsidies–may be priority interventions in those countries where hours and earnings adjustments dominated.

25 Surprisingly little is known about how well passive and active labor market program work during severe downturns, despite the large literature on the impact of active and passive labor market programs on labor market outcomes (Betcherman et al 2004; Fretwell et al 1999; Auer et al 2005), 26 For more detail see Paci et al 2011 27 This is according to a survey of policy responses to the crisis in 52 developing countries conducted by the World Bank and the International Labor Organization. See Robalino, Newhouse, and Rother (forthcoming) for details.

> 28 Argentina and Mexico concentrate on employment generation while Brazil had a large unemployment insurance scheme (Marquez 2000). Costa Rica and Argentina also had wage subsidy programs.  Argentina’s _Jefes_ program promoted employment in Argentina’s private sector, to recover lost jobs in companies with sufficient capacity (Marshall 2004). In Mexico, though there were not many legal reforms of labor market policies, changes took place largely through collective bargaining.  Social security reform was implemented in 1995, but did not involve changes in employer level contributions (Marshall 2004). In Korea, job creation and a Wage Claim Guarantee was the thrust of the policy response to the East Asian Crisis (Phang and Kim, 2001). They also had a job training program to encourage reemployment (Hur 2001). An Employment Insurance Scheme that was active from 1995 was extended to cover all enterprises in 2008 (Phang and Kim, 2001). Even in Thailand the emphasis of labor market policies in response to the crisis was direct job creation rather than self-employment. Informal workers were not protected, but likely to benefit from ―income support activities‖ such as tax reductions on VAT, price supports for rice, etc. (Betcherman and Islam 2001). In Indonesia, public works were mainly to provide emergency income and create social capital, with ultimate goal to create a total of 226 million person-days of employment. While Malaysia already had a public works program in place, they initiated wage subsidies in August 1998. In response to the 1997 crisis, The Philippines initiated an Emergency Loans program, while providing wage subsidies and training (Betcherman and Islam 2001).

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