The last decade and a half has witnessed profound changes in Latin America’s labor market. Growth in gross domestic product (GDP) per capita has been slower than in developed countries, deepening the divergence in income levels, and the labor force has continued growing at a relatively fast pace. Additionally, the changes brought about by democratization, economic stabilization, and globalization[1] have disrupted the traditional patterns of integration through public and formal employment without producing an alternative channel of social integration through the labor market. And even though unemployment surged to very large numbers in only five countries in the region during this time period, increasing informality and a slow rate of wage growth mean that most jobs being created are “bad” jobs that are precarious and low-paying.
A country’s labor market plays a major role in social inclusion in that country. As labor represents the primary (if not only) source of income for the vast majority of the country’s population, unemployment, bad jobs, or low wages mean material deprivation for workers and their families. Furthermore, employment in the formal sector is a condition for access to social insurance and social security, which link workers with the tax and social services systems, and the workplace provides a social space for participating in social and political organizations, including unions. Not having a job, or having only a precarious job, severs those links and makes the unemployed (or the precariously employed) and their families more vulnerable to the risks that the social security system aims to cover.
The trend toward increasing informality reduces the size of the group of workers who enjoy the protection of the local truncated version of the welfare state and generates new patterns of exclusion. Moreover, since their precarious jobs do not officially exist, these workers are vulnerable to exploitation and unsafe working conditions because they cannot present grievances or engage in union activities. The available evidence does not permit a determination of whether the problem is that employers prefer not to pay into public programs—or rather that workers themselves, pressed by budget constraints or other reasons, opt out of such programs. Regardless of the source, however, low participation is likely to result in poor access to medical care and low levels of coverage against old-age poverty, which, compounded with low wages, places workers in a difficult and vulnerable situation of exclusion.
Currently existing labor market institutions and regulations are often forces of exclusion. Social security taxes that are excessively high, inducing evasion and informality, and rules regarding hiring and firing that are too rigid and create incentives for formal employers to reduce their hiring are, among others, forces of exclusion in the labor market. But the increase in the share of low-wage jobs and the growth of informality create not a more adaptable, better-functioning labor market, but rather one that is hostile to productivity and income growth and increases the vulnerability and exclusion of a growing fraction of workers. Precarious jobs are also characterized by very low productivity and correspondingly low wages, often condemning workers and their families to poverty. Low wages and poverty are different phenomena, but they largely affect similar groups (two-thirds of low-wage workers live in poor households) and move along a common path (the evolution of poverty headcounts is largely determined by the performance of the labor market).
Although the issue of bad jobs has attracted a great deal of attention, most of the research in this area has concentrated on workers whose per capita family income falls below the poverty line. Such an approach, however, fails to distinguish between workers in low-wage jobs and workers in households with low participation rates (i.e., few members in the labor force). This chapter attempts to identify bad jobs through objective and measurable criteria that relate earnings to productivity, independent of family size, as well as to address the relationship between bad jobs and social exclusion.
The risk of holding a bad job is much more widespread today in Latin America and the Caribbean than at the beginning of the 1990s, as shown by the reduced difference in the incidence of low-wage jobs between the mainstream and those population groups traditionally considered vulnerable, such as women, youth, and low-skilled workers. Although the gulf between high- and low-wage jobs is expanding, the difference between the holders of good and bad jobs, in terms of human capital and related characteristics, is narrowing. Furthermore, workers in low-wage jobs are more likely than others to drop out of the labor force, and they have a higher risk of unemployment. Their ability to enjoy all the benefits of the society in which they live and to contribute to that society are thus seriously diminished.
Combating exclusion requires more than a description of the workers who suffer from it in the labor market. The recent increase in the number and incidence of bad jobs occurred while the region’s economies were in a period of dramatic transformation. Conventional wisdom dictates that tight fiscal and monetary policies, along with privatization and trade liberalization, are the main culprits in the disappointing performance of the region’s labor market. A careful consideration of the available evidence shows that the factors behind the increase in the incidence of bad jobs are more complex. Rising unemployment, mediocre levels of growth, and increasing demand among employers for workers with higher levels of education are the most important drivers of bad jobs, dwarfing the impact of other phenomena like changes in the structure of employment and increasing female participation.
WHAT IS A BAD JOB?
Discussion of the concept of “decent work,” led by the International Labour Organization (ILO), has called into question the notion that a job—any job—is a solution to poverty. The ILO-sponsored World Commission on the Social Dimension of Globalization (ILO, 2004) stated that poverty in the developing world is associated not with lack of employment, but rather with the low productivity of existing jobs, and that such low productivity explains a slowing rate of poverty reduction in the 1990s.
There are two main approaches to defining bad jobs (see Márquez and Prada, 2007, and references therein). The first approach, job-based definitions, focuses on jobs with characteristics that lead to working poverty and sluggish wage growth. The second and more common approach, worker-based definitions, emphasizes the characteristics of workers (or potential workers) themselves, including gender, educational levels, and household poverty status.
It is important to remember that not all of the working poor hold low-wage jobs. For instance, a worker in a high-productivity, high-paying job might still be considered working poor if he or she has to support several other members of a household. Identifying low-productivity jobs thus requires measuring productivity independent of family size and structure. The concept of “bad jobs” used here assumes that wages generally reflect productivity; the hourly wage therefore serves as an indicator of productivity.[2] The threshold for defining “working poor” is the wage that would allow a worker in a family of average size and participation rates to earn a per capita family income above the moderate poverty standard of US$2 per day (Duryea and Pagés, 2003).[3]
As shown in Figure 5.1, although workers in low-wage jobs account for almost a quarter of the region’s labor force, almost half of those workers do not live in poor households. Households in which workers have few dependents and/or in which most if not all household members work allow families to escape from or remain out of poverty in spite of having low-wage jobs. Nonetheless, almost two-thirds of the poor work in low-wage jobs that do not allow them to keep or lift their families out of poverty.
Trends
Figure 5.2 displays the evolution of the incidence of low-wage employment in fifteen countries of the region. With the exception of Chile (since 1990), Costa Rica (since 1991), El Salvador (since 1996), Mexico (since 1996), and Brazil (since 1999), the share of workers in low-wage jobs increased throughout the region during the years covered in the figure. The rise was particularly notable in Argentina, which showed an increase from a negligible share in 1992 to 8 percent in 2003. The proportion of low-wage workers also increased substantially in Uruguay after 2000, in Colombia after 1994, in Paraguay after 2000, and in Venezuela after 1998, and particularly after 2001. Trends were less pronounced in Honduras, where the share declined until 1998 and increased afterwards; in Bolivia, where it increased until 2000 and stabilized until 2002; and in Nicaragua, where the three observations available suggest an increase from 1993 until 1998 and a decline from 1998 to 2001.
Figure 5.2 also illustrates that there is a very high correlation between the incidence of low-wage employment and national poverty headcount estimates. This correlation is equal to or above 0.9 in four countries and 0.7 or higher in eight out of ten countries for which national poverty data are available. An important implication of this finding is that in most countries, the evolution of poverty headcounts is largely determined by the performance of the labor market, and in particular by the evolution of earnings. Factors such as income transfers to poor households, changes in participation patterns, and changes in household formation are less important influences on poverty. An important exception is Brazil, where a decline in low-wage employment between 2002 and 2003 coincided with a large increase in poverty.
WHO HAS LOW-WAGE JOBS?
There is a broad consensus on the main characteristics of workers in low-wage jobs. Studies in the United States and in Europe find that workers in low-wage jobs are disproportionately female, young, and without a college education.[4] A similar situation prevails in Latin America.
Márquez and Prada (2007) analyzed the changes in the pattern of incidence of low-wage jobs for different population groups in Latin America, comparing the early 1990s and the period after 1997, including the first years of this century.[5] They found that female workers, in all countries and in both periods analyzed, were more likely to hold low-wage jobs compared to their male counterparts and were thus overrepresented among workers in low-wage jobs. Women, for example, accounted for nearly 45 percent of all workers in bad jobs, even though they constituted only 36 percent of all workers in the sixteen countries for which data are available for the early 1990s. Women remained overrepresented in the low-wage workforce in the late 1990s and the first years of this century, even when the increase in female participation in the labor force between the two time periods is taken into account.
Although there was a higher incidence of low-wage jobs among women in all countries in both periods, in the second period the gap between men and women shrank in ten of the sixteen countries for which data exist. The gender difference increased only in Mexico and El Salvador, remaining largely unchanged in Chile, Costa Rica, and Peru.
Across countries and periods, young workers (aged 15–24) were found to be more likely to hold low-wage jobs than either prime-age adults (aged 25–49) or, with a few exceptions, older workers (aged 50–64). Such a difference is typical and arises because workers’ productivity and hence their wages increase over time as they accumulate human capital and experience (Borgarello et al., 2006; IDB, 2003a). In the early 1990s, young workers represented nearly one-third of the total employed in low-wage jobs, even though they accounted for only 22 percent of the labor force. Younger workers remained overrepresented among low-wage workers in the late 1990s and the first years of this century, though their share in both the low-productivity and total labor forces decreased. These changes reduced the difference in the incidence of low wages between youth and the rest of the population in most countries of the region, with the exceptions of Argentina and Chile.
Not surprisingly, in every country in both periods, the incidence of low-wage jobs was found to decrease as education levels increase. Nonetheless, the results show that the gap between skilled and unskilled workers is closing in most countries of the region.[6] This change, however, is generally not beneficial, as it is the result of an increase in the share of skilled workers in low-wage jobs rather than the share of unskilled workers in higher-paying jobs. Márquez and Prada (2007) found that after each group’s participation in the labor force is controlled for, workers with lower educational levels are more likely to hold low-wage jobs than the rest of the labor force. However, they also report that the likelihood of having a low-wage job increased for workers of all educational levels between the two periods studied, with only isolated exceptions.
When area of residence is considered, Márquez and Prada (2007) found the expected concentration of low-wage jobs in rural areas compared with urban areas. This can be explained by the structural differences in the two labor markets and the relative importance of nonmonetary labor income in rural areas, a factor not considered in Márquez and Prada’s (2007) analysis. The gap in incidence between rural and urban areas is closing in most countries, according to Márquez and Prada’s findings, but widening in Chile, Honduras, and Bolivia. The evolution of this gap in some countries, such as Colombia and Nicaragua, is highly affected by migration from rural to urban areas.
In summary, workers in low-productivity jobs in Latin America are disproportionately female, young, rural, and without a college education—groups traditionally considered vulnerable.[7] Nonetheless, the difference in incidence of low-wage employment by gender, age, education, and geographic area is closing, because workers in other groups are becoming more vulnerable as well. Taken together, these two findings suggest that the incidence of low-productivity jobs is increasing and that low-productivity jobs are becoming a general phenomenon extending well beyond groups traditionally considered vulnerable (women, youth, unskilled workers).
CHARACTERISTICS OF LOW-WAGE JOBS
Individual earnings depend not only on workers’ traits, but also on the characteristics of the firms that employ them. For example, Hachen (1992) and Haveman and Cohen (1994) find that firms with different characteristics vary their wage policies according to firm size, business strategies, production methods, and different sets of regulatory systems, among other characteristics.
Whether one is an employee, an employer, or a self-employed person influences one’s chances of being in a low-wage job. Márquez and Prada (2007) find that in their sample of countries, the share of low-wage jobs held by formal employees and employers is smaller than these groups’ share in total employment. Therefore, these groups have the lowest relative risk of being in a low-wage job.
The risk of having a low-wage job is higher for informal wage earners in Latin America, even though the evolution of this risk has been mixed, decreasing in some countries while increasing in others. The region’s self-employed are more likely than other workers to have low-wage jobs, a tendency that increased between 1997 and 2004.
Salaried employees in low-wage jobs generally lack social security in the form of employment-based pension system affiliation or medical insurance. Between 1997 and 2004, 81 percent of workers holding low-productivity jobs did not participate in employment-based social security (Márquez and Prada, 2007). Again, even if some of these workers have chosen not to participate, their low wages compound their difficulties in planning for retirement and insuring themselves and their families against disability, illness, and death.
In most countries of the region, the share of low-wage jobs among informal wage earners increased in 1997–2004 relative to the early 1990s. This percentage increased in the later period even in Costa Rica and Chile, the countries with the lowest percentage of informal workers in low-wage jobs in the earlier period.
In those Latin American countries where the incidence of low-productivity jobs among all workers decreased between the two periods (Chile, Costa Rica, Mexico, and El Salvador), it also fell for workers without access to social security. In Brazil, Nicaragua, and Peru, the incidence of low-productivity jobs decreased from the earlier to the later period only for formal workers. The difference between the likelihood of being in a low-wage job for an informal and a formal wage earner increased between the two periods for every country except Venezuela, El Salvador, and Colombia (Márquez and Prada, 2007).
Low-wage jobs in Latin America are concentrated in a few industries. In the fourteen countries for which national data are available, low-wage jobs are concentrated principally in the agricultural sector (Figure 5.3), followed by retail trade and services (the last two in varying order across countries). The share of agriculture in low-wage jobs is larger than its share in total employment in all fourteen countries. Either services or retail trade holds a distant second place, depending on the country. As the link with agriculture suggests, low-wage jobs are likewise concentrated in rural areas, which are themselves disproportionately affected by social exclusion.
This panorama changes when the analysis is limited to urban areas (Figure 5.4), which makes it possible to consider more countries (because of greater data availability), as well as to control for the structure of employment in urban areas.[8] Since agriculture provides few jobs in urban areas, services and trade instead represent the majority of low-wage jobs there.
That said, even though agriculture accounts for less than 15 percent of low-wage jobs in urban areas, in the urban areas of almost every country in Márquez and Prada’s study, agricultural workers are still more likely than other urban workers to hold low-productivity jobs. Urban workers in retail trade have become more likely to hold low-wage jobs in every country studied but Mexico. In contrast, employees working in personal and community services are less prone to have a low-wage job than the average worker in the same country. Thus, the high concentration of low-wage jobs in services is driven by the increase in employment in the sector, rather than by a particular increase in the incidence of low-wage jobs in service activities.
Márquez and Prada (2007) also report that low-wage workers in Latin America work on average 4.4 more hours per week than others, though that gap varies considerably from country to country. Within these groups, approximately 10 percent of all employees and nearly 8 percent of workers in low-productivity jobs work less than thirty hours per week. Although in all countries, the majority of the labor force works more than forty-eight hours per week, workers in low-productivity jobs are less likely to hold a full-time job. This suggests that a significant and perhaps growing portion of the region’s labor force holds two or more bad jobs rather than one good job.
In summary, in the countries of Latin America, low-wage jobs are mostly held by informal wage earners and the self-employed. Most of these jobs do not provide access to social security and the associated mechanisms of social insurance. The sector with the highest concentration of low-wage jobs in the region is agriculture, and the incidence of low-wage jobs in rural areas is much higher than in urban areas. In urban areas, though agriculture is still the sector with the highest incidence of low-wage jobs, most low-wage jobs are concentrated in personal services and trade.
THE DYNAMICS OF LOW-WAGE JOBS
The welfare consequences of holding a low-wage job vary according to the pattern of mobility in and out of bad jobs in the economy.[9] Workers in low-wage jobs tend to have a weaker attachment to their present job than their high-wage counterparts; however, transitions out of bad jobs generally do not lead to better jobs, but rather to unemployment or dropping out of the labor force.[10] As a consequence, workers in low-wage jobs have intermittent working lives, with periods of nonemployment between jobs.
As shown by data from Argentina, Mexico, and Venezuela, workers in high- and low-wage jobs differ in two particular ways in their transitions between employment and nonemployment and between employment/wage states within each occupational category (formal and informal wage earner and self-employed) and wage level (high- and low-wage jobs).[11] First, the percentage of workers in low-wage jobs who move to other employment/wage states in each period is higher than the percentage of their high-wage counterparts who move to another state (Figure 5.5).
A second difference is that for a large fraction of workers in low-wage jobs, these movements are towards nonemployment status (unemployment or exiting from the labor force) (Figure 5.6). Workers in low-wage jobs show a much lower attachment to the labor force than their high-wage counterparts. In other words, workers in low-wage jobs (with the exception of those in formal salaried jobs) are more likely to move to nonemployment (exiting the labor force or unemployment) than workers in high-wage jobs. Furthermore, between the two nonemployment options, the more likely course for workers in low-wage jobs is dropping out of the labor force altogether rather than becoming unemployed. In contrast, workers in formal low-productivity jobs are much less likely to drop out of the labor force than informal workers, behavior more in line with their high-wage counterparts. Regarding the pattern of transitions between employment/productivity states, the data show that workers in low-wage jobs who do not drop out of the labor force tend to move between high- and low-wage employment within the same occupational status, as opposed to moving to another occupational status.
This pattern of transitions suggests that most low-wage informal employees and self-employed who leave low-wage jobs in the informal sector do not move to a high-productivity informal job but instead either drop out of the labor force or become unemployed. This confirms observations regarding the weaker labor force attachment of workers in low-productivity jobs.
The relationships between transitions and workers’ characteristics are for the most part unsurprising. Although low-productivity workers’ transitions are generally not affected in a substantial way by age—a possibly unexpected result—women’s attachment to the labor force is overall lower than men’s. Regardless of skill level, workers in low-productivity jobs display weaker labor force attachment than other workers (Márquez and Prada, 2007).
The picture that emerges from these transitions is troubling. Workers in low-productivity jobs, who are often already subject to other dimensions of social exclusion, have unstable work lives and often drop out of the workforce altogether. Although it can be argued that this pattern may be the result of individual preferences, it is likely that many workers are trapped in a life of bad jobs, poor employment opportunities, low and unstable earnings, and no social protection.
WHAT EXPLAINS THE EVOLUTION OF LOW-WAGE EMPLOYMENT?
The increase in low-wage work in Latin America has occurred during a period of wide economic fluctuations and profound structural transformations worldwide. Although the early 1990s were years of relatively high growth, subsequent financial crises (the Tequila crisis in Mexico, as well as crises in Russia, East Asia, Brazil, and Argentina) brought growth to a halt throughout the region. In almost all Latin American countries, economic performance in the late 1990s was at best mediocre, and the economies of some countries, such as Argentina, contracted greatly in the early years of the twenty-first century. Such deep economic fluctuations might explain an upward trend in low-wage employment. It is therefore important to assess whether such wide fluctuations in economic activity actually do account for the increase in low-wage work in Latin America between the early 1990s and the late 1990s/early years of this century.
In addition to being a time of economic turbulence, the 1990s were also years of rapid international trade liberalization. Most countries in the region reduced tariffs considerably, both for intermediate and final goods. The simultaneity of this process with the increase in low-wage and informal employment raises the question of whether increasing international trade is affecting the quality of jobs in the region. Another potential candidate for explaining the increase in low-wage work in the region is the well-documented decline in demand for unskilled labor in both developed and developing economies (see, for example, de Ferranti et al., 2004, and IDB, 2003a).
Two other important transformations may also account for the increase in low-wage work in Latin America. The first is the shrinking ranks of workers in manufacturing jobs and the growing ranks of workers in the service sector. As wages in rapidly expanding sectors, such as retail and wholesale trade or personal and community services, are quite low, the growth of these sectors could account for the region’s growth in low-wage employment. The second transformation is the rapidly growing participation of women in the region’s labor force. As female workers tend to receive lower wages relative to males, and an important fraction of low-wage employment is occupied by women, rapidly expanding female participation could also account for the region’s increase in low-pay work.
The coincidence in time of a large number of factors that can, in principle, be associated with the rising incidence of low-wage work means that it is necessary to determine which of those factors, if any, have been more important than the others.
Economic Fluctuations
The rise in the share of low-wage employment that occurred in the middle and at the end of the 1990s in a number of Latin American countries coincided with a sharp deceleration of economic activity. This is particularly evident in Argentina and Uruguay during the financial crisis of 2001–2002, in Colombia during the period of growth deceleration after 1994, in Mexico during the Tequila crisis (1995), in Panama in 2000, and in Venezuela during 2001–2003 (Figure 5.7). Economic theory would predict an association between economic fluctuations and low-wage employment. Assuming that the supply of labor is fixed, or that it responds positively to higher wages, greater economic growth results in higher demand for low-wage workers and a rise in wages, which in turn can imply a reduction in low-wage employment. Note, however, that if unemployment or underemployment is high, a higher demand for labor may have little effect on wages, as firms can find extra workers without having to raise wages. The link between economic growth and growth in low-wage employment will also be less important if growth is not associated with a higher demand for the goods produced by low-wage workers.
Figure 5.7 shows that the correlation between the incidence of low-wage employment and economic growth is low in most countries. Not all the spikes in low-wage employment in the figure correspond to periods of deceleration in growth, nor does low-wage employment fall quickly when economic activity picks up.
Another indication that economic fluctuations cannot account for the bulk of the growth in low-wage employment emerges from a comparison of the incidence of the latter phenomenon across two years of similar economic performance. The results reported in Table 5.1 indicate that in most countries, the share of low-wage work increases even when data across years of similar economic growth are compared. Thus, the change in the proportion of low-wage employment is very similar whether one compares the average incidence in the period 1990–1997 against the average in the period 1998–2004 or the change in incidence across years of similar growth in each period. The only exception is Brazil, where the original data show a 2 percent increase between the two periods, whereas the cyclically comparable figures show a 1 percent decline.
These findings suggest that the increase in low-wage employment has causes that go beyond fluctuations in economic activity. Although the economic deceleration of the late 1990s was associated with an increase in the incidence of low-wage employment, the incidence of this phenomenon did not decline once economic growth picked up, providing some clues to the seemingly structural nature of the increase. This is not to imply that economic growth and economic fluctuations do not have any effect on low-wage work. Pagés and Prada (2007) assess the average effect of economic growth and unemployment on low-wage employment in Latin America.[12] According to their estimates, a 1 percent reduction in GDP per worker leads to a 1.5 percentage point increase in the incidence of low-wage employment.[13]Similarly, a 1 percentage point increase in the unemployment rate is associated with a 3 percent increase in low-wage employment. To get a sense of the economic relevance of the magnitudes of these percentages, it is useful to compute how much of the (percentage) change in low-wage employment is accounted for by changes in unemployment rates and changes in GDP per worker. The results of this exercise are shown in Figure 5.8.[14] Although in a few countries, most notably Argentina and Colombia, rising unemployment rates account for an important share of the increase in low-wage employment, in the rest of the region’s countries, the effect of unemployment is small. Similarly, with the exception of Colombia and Chile, changes in GDP per worker account for either a negative or a small share of the increase in low-wage employment.
As in developed countries, there is a negative relationship between unemployment rates and the incidence of low-wage work within the sample of Latin American countries (Figure 5.9). Thus, although in a given country increases in unemployment are associated with higher incidences of low-wage work, countries with higher unemployment rates have lower incidences of low-wage employment compared to other countries. Most likely, countries with high unemployment are those whose institutional environment or labor policies reduce the incidence of low-wage work.
In sum, although economic fluctuations have an impact on low-wage employment, they cannot fully explain the large increases in the incidence of low-wage employment in the last decade in many countries of the region. The data also suggest a possible trade-off between lower unemployment and a higher incidence of low-wage jobs across countries.
Trade Liberalization
There is an ongoing debate over the effects of trade liberalization on wage levels, relative wages of skilled and unskilled labor, and worker conditions (see IDB, 2003a, and the references therein).
Traditional trade theory postulates that trade liberalization increases the relative price of unskilled labor in economies with a relative abundance of unskilled workers while producing the opposite effect in economies with abundant skilled labor. If that is the case, given that a large share of low-wage workers are unskilled, in Latin America and the Caribbean trade liberalization would be expected to be associated with a declining share of low-wage work.
These predictions, however, do not square with the empirical evidence. A rapidly expanding literature has documented an increase in the returns to education in the region during the 1990s.[15] Wages of workers with higher levels of education (tertiary) increased at a faster rate than those of workers with secondary education, despite the growing relative supply of workers with tertiary education. At the same time, and consistent with rising demand for skill, the wages of workers with secondary education remained constant relative to the wages of workers with primary education, even though the growth of the population with secondary education outpaced that of the population with only primary education. This increasing demand for education is driven not by the reallocation of employment across sectors—as would be the case if changes in the demand for skill were due to trade—but rather, by an increase in the demand for skilled labor within each sector (de Ferranti et al., 2004; Sánchez-Páramo and Schady, 2003; Attanasio, Goldberg, and Pavcnik, 2004).
A number of studies have proposed alternative channels to those provided by trade theory to explain these facts. One way to reconcile the facts with the theory is that in many Latin American and Caribbean countries, protection tended to be concentrated in sectors with a high relative use of unskilled labor. As protection declined with the progression of trade liberalization, wages in these sectors declined as well, increasing wage differentials between skilled and unskilled labor (Revenga, 1997; Hanson and Harrison, 1999; Attanasio, Goldberg, and Pavcnik, 2004). There is a growing consensus, however, that the influence of liberalization on the wage gap between skilled and unskilled workers has been modest and at most indirect, and that the rise in wage inequality can be better explained by other factors, such as the acceleration in technological change, which in turn leads to higher demand for workers with college education.
If increasing trade openness is associated with a rise in the proportion of low-wage work, this effect might be more visible in tradable sectors such as agriculture and manufacturing than in the service sectors. Table 5.2 presents evidence that this is not the case. The table shows the percentage change in the incidence of low-wage employment among unskilled workers in Latin America from the early 1990s to the early years of this century, distinguishing between a number of tradable (manufacturing, agriculture) and nontradable (construction and all service) sectors.[16] Low-wage work increased in manufacturing more than in other sectors in only two countries (Argentina and Ecuador). In the five countries in which the incidence of low-wage employment increased (Colombia, Ecuador, Paraguay, Peru, and Uruguay), the largest increase occurred in the service sectors, and in particular, in the construction and transportation sectors. Among the countries in which the incidence of low-wage work declined, only in El Salvador did the incidence fall less in manufacturing than in other sectors. In the rest, the incidence fell more in the tradable than in the nontradable sectors (with the exception of Honduras, where the incidence increased substantially in the agricultural sector). Thus, Argentina and Ecuador were the only two countries where the incidence of low-wage work increased more in manufacturing than in the rest of the economy. This evidence, however, does not rule out the possibility that trade liberalization is affecting wages in all sectors; after all, changes in one sector can quickly spread to others. Pagés and Prada (2007) assess this issue by examining the relationship of low-wage employment to trade liberalization, using a measure of liberalization that summarizes changes in tariffs and tariff dispersion across countries of the region (Lora, 2001). They also control for technological change, as well as economic fluctuations and factors that affect female participation, in order to disentangle various causes of the rise in low-wage employment. They find that, with all these other factors controlled for, trade liberalization reduces the incidence of low-wage employment.[17]
There is therefore little evidence that trade liberalization has a direct adverse effect on low-wage employment. As will be discussed later in the chapter, however, trade liberalization may have an indirect adverse effect. This relates to the role of increased trade openness in facilitating imports of more modern capital and machinery, which in turn may facilitate the substitution of machines for low-wage workers, while increasing the demand for high-skilled workers who operate such technology. This effect would go in the direction of increasing the relative demand for skilled versus unskilled labor. The next section turns to the changing demand for skill and its effects on low-wage employment.
Skill-Biased Technological Change
As stated above, the consensus has been shifting toward another explanation for the increasing wage gap between skilled and unskilled labor. Most studies attribute this increasing gap to technological changes, such as the emergence of information technology, that favor the demand of highly skilled workers. However, even if trade cannot directly explain the observed patterns in skill demand, a number of studies have found an indirect association between trade and increasing demand for skill: industries that became more exposed to foreign competition as a result of trade liberalization in the region in the 1990s underwent a faster process of retooling and a higher increase in the demand for skilled labor. De Ferranti et al. (2003) explain these patterns by stating that increasing trade liberalization through the 1990s prompted firms to invest in new technology as competition in the goods market increased and, at the same time, declining tariffs made imports of foreign technology and capital goods more affordable. This, in turn, would have prompted a substitution of machines for low-skilled workers, and an increase in the demand for high-skilled workers who could operate more sophisticated technology.
If the shifting demand for skill caused the rise in low-wage employment in the last decade and a half, one would expect a greater increase in such employment among unskilled workers. Figure 5.10 shows, however, that the proportion of low-wage employment has increased at a higher rate among the skilled. This is particularly the case in Argentina, Nicaragua, Colombia, and Paraguay.
Another indication that the incidence of low-wage employment increased more rapidly among skilled workers is that the share of skilled employment increased faster among low-wage than among overall employment in the 1990s and early years of this century (Figure 5.11). It is unclear what was driving this phenomenon. Attanasio, Goldberg, and Pavcnik (2004) report an increase in the variance of earnings of skilled labor in Colombia during the 1990s, and Pagés, Pierre, and Scarpetta (2007) report the same phenomenon for a wider group of countries from the early 1990s to the early years of the twenty-first century. Increasing demand for some professions requiring a college-level degree may be driving up the wages of some workers while driving down the wages of workers who hold a college-level degree but do not have the skills appropriate for these high-demand professions.
Another possible explanation may reside in the rapid increase in the number of universities in Latin America during the last fifteen years. If the degrees awarded by some institutions have little value in the market, an increasing number of university-educated workers may end up in low-paying jobs. This suggests that skill-biased technological change is, at best, only part of the story. Instead, the results presented here indicate that factors that require further exploration are causing an important rise in low-wage work among workers who traditionally are less vulnerable to this phenomenon.
Nonetheless, and despite the recent increase, the incidence of low-wage work among skilled workers is much lower than among the unskilled. For example, at the end of the 1990s, the incidence of low wages among college-educated workers in Latin America was, depending on the country, between 5 percent and 25 percent of that among workers who had completed only primary education. Because of this disparity, the rise in low-wage employment among the skilled accounted, on average, for only 4 percent of the overall increase in low-wage employment in the region in the 1990s. The countries in which the incidence of low wages among the college-educated accounted for a higher share of the increase in low-wage work overall are Bolivia and Argentina, where it explained, respectively, 9 percent and 7 percent of the total increase.[18]
Pagés and Prada (2007) explore the importance of technological change and, in particular, the effect of openness in facilitating the spread of technological change to Latin America and thereby on the evolution of low-wage employment. With other possible determinants of the evolution of low-wage work (economic fluctuations, trade liberalization, and supply shocks) controlled for, technological change is found to have a positive and statistically significant effect on low-wage employment.
In sum, trade has had two differentiated and opposite effects on low-wage employment in Latin America. On the one hand, a direct effect, possibly through an increased demand for unskilled labor, has led to a reduction in low-wage work. This is also reflected in the fact that, depending on the country considered, low-wage work increased less (or declined more) in the tradable than in the nontradable sector over the last fifteen years. On the other hand, trade may also have facilitated the importation of better technology, which in turn may have led to an increase in the demand for skilled labor and a decline in the relative demand for workers with lower levels of educational attainment. The second effect is likely to have been the dominant one in most countries.
The Rising Importance of the Service Sector
Since the early 1990s, most Latin American and Caribbean countries have experienced a decline in agriculture and manufacturing employment, while employment in the service sector has expanded considerably. The exceptions to this general trend are El Salvador, which saw a relative increase in employment in manufacturing between the early 1990s and the early years of this century; Bolivia, in which agricultural employment increased; and Nicaragua, in which agricultural employment increased and service sector employment declined (Figure 5.12).
To assess how much of the change in the incidence of low-wage employment is explained by this phenomenon, it is useful to decompose those changes into three components: how much of the overall change is accounted for by the rising incidence of low-wage employment within each sector of activity (the “within effect”); how much is owing to the shifting weight of the different sectors (the “shift effect”); and finally, how much is accounted for by a cross-term that assesses whether the sectors that expanded in terms of employment were also the sectors in which the incidence of low-wage employment increased (the “cross-effect”). The results of such a decomposition for countries in Latin America, presented in Figure 5.13, indicate that most of the increase in low-wage jobs in the region derives from increases in the share of low-wage jobs in each sector (the “within effect” in Figure 5.13).
Sectoral shifts (changes in the weight of each sector in total employment) are found to account for a negligible part of the rise in the incidence of low-wage employment but to account for some of the reduction in the countries in which the incidence has declined. Thus, with the exception of Peru and Bolivia—where these effects are somewhat more important—sectoral shifts account for a minor share of the total increase in low-wage work in Latin American countries. Yet they contribute to a larger share of the total change in countries that have experienced a decline in low-wage employment. This is particularly the case in El Salvador and Honduras, where sectoral shifts explain close to 50 percent of the decline. In fact, with few exceptions, sectoral shifts tend to reduce the incidence of low-wage work. This reduction is mostly driven by changes in the share of agricultural employment in total employment (Figure 5.14). Since wages in agriculture are lower than in other sectors, a reduction in the share of employment in this sector contributes to a decline in low-wage employment. This phenomenon accounts for about 10 percent of the decline in the share of low-wage employment in Costa Rica, Honduras, and Mexico and a higher percentage of the decline in El Salvador. An increase in the share of employment in agriculture also accounts for about ten percentage points of the increase in the incidence of low-wage work in Peru and Bolivia.
In comparison, changes in the share of other sectors in total employment account for a very small percentage of the total change in low-wage employment (Pagés and Prada, 2007). Thus, for example, although in all but two countries studied, an increasing share of retail and wholesale trade sectors in total employment is associated with an increase in the share of low-wage work, the changes are of very small magnitude. Results from Pagés and Prada (2007) also indicate that sector shifts are not statistically significant in explaining changes in low-wage employment.
Increasing Female Participation
Finally, supply shocks can also, at least in principle, account for the increasing share of low-wage employment in Latin America in recent years. While steady improvements in educational attainments in the region would have gone in the direction of reducing the share of employment in low-wage jobs, the substantial increase in female participation could have produced the opposite effect, as women tend to earn lower wages than men.
To investigate the quantitative importance of these composition effects, it is possible again to decompose the total increase in low-wage employment into a shift effect, which measures how much of the total increase is accounted for by increasing female participation; a within effect, which reflects whether low-wage employment increased for both males and females; and a cross-term effect, which measures whether female participation has increased in countries where low-wage employment has also increased.
Figure 5.15 presents the results of this decomposition. It is evident that the large rise in female participation in Latin America can account for only a very small fraction of the increasing share of low-wage employment. Moreover, the rising participation of women does not imply a faster increase in the proportion of low-wage employment for women as compared to men. On the contrary, Figure 5.16 shows that the share of low-wage employment increased more for men than for women in most countries of the region between 1990–1997 and 1998–2004. In fact, in at least three of the region’s countries, the share of low-wage employment increased for males while it decreased for females, suggesting poorer outcomes for male workers. Further evidence of these better outcomes for women is that the proportion of women in employment increased faster during the period in most of the region’s countries than the proportion of women in low-wage jobs (Figure 5.17).
Still, increasing female participation may have depressed wages for both men and women. In that case, increasing female participation could have led to lower wages and a rising share of low-wage employment for women and for men. Pagés and Prada (2007) examine this issue and find that variables associated with increased female participation, such as lower fertility rates, lead to an increase in low-wage work. This effect, however, is very small. A decline in fertility of one standard deviation leads to an increase in low-wage work of 0.16 percent.
CONCLUSIONS
Politicians, employers, and workers in Latin America may share few complaints, but they are unanimous in their concern about the performance of labor markets in the region. The public’s preoccupation with this issue is revealed on a daily basis in the press, and surveys such as Latinobarometer show that loss of employment and low wages are among the most pressing problems for the region’s population.
For a growing share of that population, the labor market in the last decade and a half has not been part of a path of social integration, but rather a source of social exclusion. The labor market not only has acted as a resonance box in which discrimination and inequality in the acquisition of human capital is translated into earnings differentials, but also has excluded workers from employment and from well-paying jobs. The fact that social insurance and social protection are linked to formal employment has made the surge of unemployment and the explosion in the number of low-wage jobs the principal source of exclusion for the region’s population, exclusion that is affecting groups usually considered protected by labor regulations (male, prime age, skilled workers).
The deficiencies of labor markets’ performance are rooted in a multiplicity of factors that have affected the pattern and speed of growth in the region. Rising unemployment, mediocre economic growth, and increasing demand for education, prompted by increasing imports of capital goods and technology, all contributed to swelling the share of low-wage employment over the last decade and a half. In comparison, the effects of the changing structure of employment and the increasing participation of women in the labor force have been small, and in some instances, such as the declining share of agriculture in total employment, they have actually gone in the direction of reducing low-wage work.
The dynamics of low-wage work track the dynamics of poverty and exclusion. This has a number of implications for economic and social policy in the region. First, it implies that labor market developments, and in particular developments in the low-wage labor market, determine to a very large extent developments in poverty. Second, it also means that employment is not sufficient to escape poverty: many jobs do not pay enough to lift a standard-sized family out of poverty.
This implies that other policies will have to meet this need. Two groups of policies must be considered. The first group is concerned with increasing labor earnings. Better education policies for school-age children and access to adult education, for those past school age, are an important part of the package. Training policies, while providing some benefits in term of earnings, are in comparison much less effective and often end up helping only those with a comparatively better education. On the demand side, policies to promote the growth of higher-paying activities and rising minimum wages have some potential; however, such policies may also lead to unemployment, another form of exclusion in the labor market. The pertinence of their implementation has to be studied carefully in each case, and once in place they must be monitored carefully to ensure that the benefits outweigh the costs.
The second group of policies deals with government transfers and other public programs geared to increasing nonlabor earnings of poor families, whose visibility and importance is rapidly increasing in the region. These policies are important tools for alleviating the material deprivation that families suffer and can be very effective in raising their incomes and boosting their consumption of human-capital-building services (health and education in particular). However, government transfers act on the outcome (income) that families and workers receive from having a low-wage job or being unemployed. To the extent that the more complex dynamics that affect the pattern and speed of growth and generate the increase in the share of low-wage jobs in total employment remain unchanged, the more educated and healthier children of the beneficiaries of these transfers will end up working in the same low-wage jobs that excluded their parents in the first place (Levy, 2006)
