Changes in Labour Market Conditions and Policies, and Their Impact on Wage Inequality during the Last Decade

Abstract

Labour market incomes have been a major contributor to the important fall in inequality in Latin America during the 2000s. Indeed, they were the main contributor in the countries where inequality fell more dramatically. The favourable international economic environment and the continuity of the demographic transition have had positive effects on labour market outcomes but are beyond the control of Latin American governments. Yet, the chapter shows that the recent changes in labour market policies appear to have made a definite contribution to the decline in income inequality. Real minimum wages increased in many countries, and rose significantly in some of the countries that managed to reduce inequality more dramatically. We find some evidence that these developments are no coincidence. Besides, collective bargaining, although still largely undeveloped (partly due to legal hurdles), has also helped to reduce wage inequality. Moreover, the drive towards formalization of employment and the issuing of written contracts has also helped in present day China, as shown, inter alia, by Freeman in Chapter 13. The productive approach to informality, with its focus on self-employment and micro-enterprises, emphasizes the need to transform the productive structure. Yet, active labour policies, especially training and employment services, have expanded in the last decade, and hold the promise of addressing some of the challenges emphasized by the productive approach. Therefore, recent progress in employment formalization and the strengthening of labour institutions must be positively assessed, a fact that becomes even more relevant in the current context of economic globalization (Berg and Kucera 2008). While progress was real in the last decade, one should not overlook the structural problems still afflicting Latin American labour markets. The 800-pound gorilla of informal employment (Freeman 2009) still looms large in the region, and much of wage inequality is linked to a large gap between formal and informal wages. Formal and informal workers are not alike, but we have proved that the formal?informal wage differential cannot be fully explained by worker attributes. In other words, the labour market is segmented, and this exacerbates endowments inequality. Informality also feeds inequality by narrowing the scope of contributory social protection. The legal approach now emphasized by ILO focuses on the institutional dimension of non-registered work. As shown in this chapter, a large number of non-registered workers are employed in the formal sector, a fact consistent with the legal approach. We have also shown that policy and political will can raise formality significantly, as Berg (2010) argues, and that this can be accompanied by dramatic falls in inequality.