Labor markets in Latin America: a look at the supply-side
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.
Section snippets
Demographic trends and education in Latin America
According to the most recent population statistics, Latin America is the second ‘youngest’ region in the world.5 The average age is approximately 27 years, which is higher than the average for Africa (22 years), and much lower than in Europe and North America, where the mean is between 36 and 38 years.
Since the mid 1960s, the rate of growth of the population in the region has been declining consistently. By 1965 the annual rate
Labor supply and employment
During the 1990s employment growth slowed down in Latin America.9 At first glance this seems rather surprising because the present decade has been one of economic recovery. In this section we show that one of the reasons for this slowdown is the demographic transition described above. Demographic changes have affected employment directly through a decline in the rate of growth of the working age population; and indirectly, through
Demographics, schooling and unemployment
Demographic trends and changes in schooling also affect unemployment rates. This is because people of different ages and educational attainment have different probabilities of finding and staying in jobs. In particular, younger individuals take longer to find jobs when they are unemployed and also are more likely to move from job to job. This is partly a consequence of taking time to find the ‘right’ job (in terms of a match between the job's characteristics and the individual's skills and
Demographics, schooling and inequality
One of the main concerns of Latin Americans today is the limited access to well remunerated jobs. Despite higher growth and lower volatility in the 1990s, wage inequality increased in many countries and household income inequality has not declined at the expected rate. Table 8 demonstrates that the Gini index for wage incomes increased or remained high in all seven of the countries for which we have reliable data in two separate years.
Conclusions and policy implications
This paper argues that apart from being determined by demand and institutional factors, employment growth, unemployment rates, and wage inequality in Latin America have also been affected by two supply factors neglected so far: demographics and education.
Although the supply-factors are definitely not the whole part of the story, we show that by including them in the picture, our understanding of the overall decline in employment, the changing pattern of unemployment, and the rise in wage
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Office of the Chief Economist, Inter American Development Bank. We thank Diana Weinhold for her contribution of background research for and Bill Savedoff, Jere Behrman, Nancy Birdsall, Luis Rene Caceras, Gary Fields, Carol Graham, Ricardo Hausmann, Sam Morley, Ricardo Paes de Barros and an anonymous referee for useful comments and discussion, and Martı́n Cumpa, Marianne Hilgert, Marie-Claude Jean and Naoko Shinkai for excellent research assistance. We also thank Mecovi and especially Jose Antonio Mejı́a for providing data. The views expressed in this document are of the authors, and do not necessarily reflect those of the Inter American Development Bank or its Board of Directors.