Wage Inequality in Latin America: Understanding the Past to Prepare for the Future Julian Messina and Joana Silva

Wage Inequality in Latin America: Understanding the Past to Prepare for the Future Julian Messina and Joana Silva

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 US (Billions) Gini points, average Latin America s remarkable story It is possible to grow with equity 3000 2500 57 56 55 2000 1500 1000 54 53 52 51 50 500 49 Real GDP (USD) Income Inequality

Key findings Wage inequality fell throughout Latin America unique in the World Why? Growth Education Other Forces The future with lower growth Slower wage inequality reduction Further progress will require extra work

Latin America s reduction in wage inequality in the 2000s Facts

LAC sharply reduced wage inequality, going against the global trend Wage inequality across regions relative to 2002 Regionwide phenomenon (in 16 out of the 17 countries)

Index of real hourly wage Gini points, average Index of real hourly wage Gini points, average How did wage differences between workers narrow? Wage inequality and real wages 1.8 52 1.8 52 1.6 1.4 1.2 50 48 46 44 1.6 1.4 1.2 50 48 46 44 1 42 1 42 0.8 40 0.8 40

Share of change in total log wage variance, percent Wage gaps fell between low and high-skilled workers, but also between workers with the same skill level Decomposition of Changes in Wage Inequality in Latin America into Within- and Between-skill groups 60 50 52% 48% 40 30 20 10 0 Change in variance of wages within-skill groups Change in variance of wages between-skill groups More than half of the inequality reduction occurred between workers with the same skill level who worked in different firms

To summarize Stronger reduction in South America Faster wage growth for low than high skilled workers More equal wages across firms (within skill groups)

Latin America s reduction in wage inequality in the 2000s Causes

1. Growth Pattern (not just level) of growth mattered Real exchange rate appreciation in South America caused by the commodity boom and other forces Contributed to the reduction in wage inequality within skill groups

Growth in South America fueled employment in both the tradable and nontradable sector Change in Domestic Demand and Terms of Trade, 2005 2011 Employment Growth, by Sector Type, in South America, 1994 2013

Growth, through real exchange rate appreciation, led to more equal wages across firms Two channels Expansion of the nontradable sector, where wages are more similar across firms Decline in export participation reduced wage dispersion across employers

2. Education It wasn't just growth Remarkable expansion of access to education More equal wages by skill

Large expansion of access to education Skilled to unskilled labor supply, 1980 2010 Skilled workers: Those who have at least completed high school Unskilled workers: Those with primary education or less In 25 years, Latin America achieved close to full gross enrollment of girls in high school. Today the average education level of the labor force is 9 years, in 1990 it was 6 years.

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Wage ratio between workers with varying education levels Education ties together the reduction in inequality in low and high growth countries Returns to education in Latin America and the Caribbean, 1993-2013 4.4 3.9 3.4 College to primary or less 2.9 2.4 1.9 1.4 College to high school High school to primary or less Difference in pay between less and more educated workers fell as bottlenecks in access were removed, but remains very high

3. Other forces Informality and minimum wage Played a secondary role Had a non-negligible impact, but only in some countries

The role of informality and minimum wage Reduction in informality Equalizing in the 2000s in Argentina, Brazil, Mexico and Peru, but not in Chile and Uruguay Rising Minimum wage Reduced inequality in Brazil, but only during the boom Not an important factor in Bolivia, Colombia, Mexico, Paraguay, Peru and Uruguay

To summarize Economic growth and better access to education were the primary drivers Other forces (informality and minimum wage) had a smaller role

Is the economic slowdown increasing wage inequality?

Gini points, average Slowed wage inequality reduction after the mid- 2011 slowdown in growth Wage and Total Income Inequality in Latin America, 2002-2015 56 54 56 52 50 50 48 49 49 46 44 42 40 43 42 Total income inequality Wage inequality

Colombia Bolivia Peru Paraguay Uruguay Ecuador Brazil Argentina Honduras Dominican Republic Panama Guatemala Mexico El Salvador Nicaragua Costa Rica Change in wage inequality (annual Gini points) Because of the economic slowdown, further progress will require extra work Annual Changes in Labor Gini Index, 2012 15 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0-1.2 South America Mexico and Central America Reduction in countries in South America now looks very similar to that of Mexico and Central America

How to prepare for the future?

The future: How will wage inequality drivers evolve? Education expanding, fueling equalization New pattern of slower growth will slowdown wage inequality reduction Two effects of real exchange rate adjustment Higher demand in the tradable sector New exporting opportunities Less space for minimum wage hikes 23

Towards growth with equity: A two-pillar approach Don t hinder productivity growth Remove policies that protect inefficient firms (e.g. corporate subsidies) Reform antitrust and competition policies Don t fear technological change Continue to expand the coverage and quality of education and training Improve public schools attended by the poor Enhance quality (not just access) Training

Link to the report: https://openknowledge.worldbank.org/handle/10986/28682 Thank you!