Labour markets played an important role the transformation and advance of the Latin American economy in the past decade as more than 35 million additional jobs were created in that period plus the fact that high informality declined in seven out of nine countries of the region.
These are some the key findings from the World Bank’s Office of the Chief Economist for the region report on: “The Labour Market Story Behind Latin America’s Transformation” released this week and which also underlines that wages were a fundamental factor behind the region's unprecedented inroads against income inequality.
The decline represented a fall of four points in the Gini coefficient (a composite index that measures inequality) of labour income and stands in contrast with growing wage and income inequality in rich countries.
The report highlights three important changes in Latin America’s labour force in recent decades: Composition: A steady rise in female participation started in the late 1970s and continued all the way through the 2000s, albeit at a slower pace. By 2010, 65% of women aged 25-65 in Latin America participated in the labour force; Education: The average years of schooling rose by about three additional years since the 1990s, with women surpassing men in education attainment; Wage stability: The region’s long history of wage volatility linked to inflation surprises has come to an end. Even during the recent global crisis real wages remained stable without leading to higher unemployment. Behind this development is the rising credibility of the Central Banks in their conduct of monetary policy.
But, were these changes the reasons behind the region’s decline in inequality? A look at labour force composition and educational level, in particular, suggests that they were not. In fact, both were steadily growing during the 1990s and 2000s even when the region's inequality only started to decline during the 2000s.
“We find the decline in inequality to be related to returns to education, which measure how much people earn relative to their level of education,” said chief economist Augusto de la Torre.
“The gap between the wages of workers with tertiary and secondary education and of those with primary education or less started to decline in the 2000s, after having been relatively flat or on the rise in the 1990s. While the vast majority of workers with a university degree are still earning significantly more than those without it, they are not earning as much as the used to compared to their less educated peers.”
The report points to two potentially troubling explanations to this loss in returns for education: 1, the quality of tertiary education may not have kept up with rising demand, as suggested by an observed widening of wage dispersion among university educated workers. 2, demand for skilled labour in the region is not as high as expected. This could be the result of a commodity bonanza that has promoted the expansion of non-tradable sectors, such as services and construction that tend to be on average less skill intensive than the non-commodity tradable sectors such as manufacturing.
Both explanations are plausible. And, moreover, they indicate that the tremendous advances in coverage of education should be accompanied now with an emphasis on improving quality. Such investment, as the report concludes, not only would help create more skilled and a better paid labour force, it would also open up the possibility for the region to grow at higher rates.