Macro Policy and Employment Problems in Latin America

Despite macroeconomic stabilization and structural reforms, employment problems have persisted in Latin America. The 1990s have seen a slowdown in the rate of job creation, unemployment rates have stagnated at about 10%; informal sector employment has expanded, and increases in real wages have been particularly favorable to skilled workers. The purpose of this article is to explain this apparent labor paradox. The main conclusion is that economic cycles explain the fluctuations of employment and unemployment rate (around their structural levels), while price stabilizations and structural reforms have affected the composition of labor demand and relative wages. The transmission mechanism connecting the new macro policies with the labor results has been as follows: (1) Stabilization and reforms produced capital inflows and an appreciation in the foreign exchange rate; it has cut the user cost of capital and increased the productivity of the factors. (2) Consequently, relative prices evolved in favor of the nontradable sectors, and stocks of physical capital, as a percentage of GDP, have risen. The mechanism has had four effects on labor: (1) The role of employment in nontradables has risen in response to the signals from relative prices and the more intensive use of machinery in tradable sectors. (2) Informal sector employment has grown due to the nature of the jobs in nontradable sectors and the relative decline in the demand for unskilled labor. (3) Demand for labor has shifted toward skilled workers because of the increase in stocks of machinery, the adoption of new technologies, and the expansion of the nontradable sectors, which use skilled workers more intensively. (4) Lastly, wage differentials have increased because of the rise in relative demand for skilled labor. Structural reforms, particularly the " opening up " of the region's economies, have not had the effect of raising demand for and relative remuneration of unskilled labor as had been hoped in the light of conventional theories of competitive advantages in international trade. These results raise a variety of policy questions: (1) Since workers are now more exposed to factors of unstability, there is a greater demand for macro stability and social protection. How is the demand to be satisfied? (2) In Latin America's tax structures payroll taxes and fiscal incentives for investment are commonly found together. Are these structures suitable to promote unskilled labor demand and reduce wage differentials? (3) Should public expenditure in higher education be expanded in order to address …