Labor markets in Latin America: a look at the supply-side

Abstract

This work asks whether there is a supply-side story to be told about labor market outcomes in Latin America. We present stylized facts about the connection between the demographic transition and changes in education (the size and quality of the labor force), with labor supply, inequality, and unemployment. The main conclusion is that the neglected topics of demographics and education improve our understanding of the overall decline in employment, the changing pattern of unemployment, and the rise in wage inequality. By adding them to the well-established demand and institutional factors behind these outcomes, we can obtain a clearer picture about labor markets in Latin America.

Introduction

One of the main concerns of Latin Americans today is the lack of adequate employment opportunities. This concern is based on the widespread perception that not enough employment is being generated, and that few individuals have access to well-remunerated jobs. The perceptions find some support in several statistical sources. For instance, ILO (1997) shows that during the 1990s the rate of growth of employment in most Latin American countries slowed down, while unemployment rates declined in only a few countries. Also, there is some evidence that the distribution of wages has deteriorated in the region.²

Most of the debate on employment, unemployment and inequality has concentrated on the demand side of the problem — particularly, on determining the extent to which these changes are associated with stabilization policies and economic reform.³ There has also been growing interest on the role played by labor market institutions.⁴ These approaches are important for understanding the changes in labor market outcomes in the region, but there are other major transformations taking place in Latin America that have not been part of the discussion. Specifically, not much has been said about the role played by changes in the determinants of labor supply.

This paper argues that the (so far neglected) factors affecting labor supply have also been behind the reductions in employment growth, the changes in unemployment and the increases in wage inequality in Latin America during the 1990s. By adding them to the well-established demand and institutional factors driving these outcomes, we can obtain a clearer picture about labor markets in Latin America.

The two main forces driving labor supply in the region have been demographics and education. The major transformation in demographics is the aging of Latin America. The reduction in population growth since the mid-1960s has triggered sharp changes in the age composition of the population in subsequent decades. With regard to education, younger generations are increasingly more educated than older ones, but progress has nevertheless been strikingly slow. Perhaps the most important transformation in education is that the variance of schooling within countries has been expanding in recent years.

The rest of this paper is organized as follows. Section 2 describes the key trends in demographics and education in more detail. Section 3 discusses the impact of these two variables on labor supply and employment, while Section 4 looks at the implications for unemployment. Section 5 studies the connection between these determinants of the changes in labor supply and income inequality. Finally, in Section 6 we conclude by pointing out the policy implications that follow when the supply-side is taken into consideration.