Latin America overcomes poverty with better wages

June 8, 2015


  • More pay but not more jobs. That could summarize the Latin American boom from the perspective of the region’s poorest inhabitants.

More than a decade of rising commodity prices increased wages and living standards of millions of Latin Americans, including the poorest 40 percent of the population. Many actually managed to escape poverty.

Nevertheless, according to a new World Bank report, this phenomenon does not mean more job opportunities. Wages in countries in the region that are not commodity exporters grew much less or actually declined. Moreover, the labor participation rate of the poorest 40 percent of the population fell by 1.6 percentage points whereas it increased 4.4 percentage points among the wealthiest 60 percent of the population.

The report, part of the Poverty and Labor Brief (i) series, also includes the latest regional statistics on poverty and income inequality.

The report found that, after more than a decade of steady decline, 2013 was the third year in a row of stagnating inequality. As GDP per capita has declined, so has the pace of poverty reduction, as compared with the first decade of the century.

“The rise in labor income was the main driver of poverty reduction,” says Louise Cord, manager in the Poverty Global Practice for the World Bank’s Latin America and the Caribbean Region. “As commodity prices fall, structural changes will be needed to create better jobs to sustain and strengthen social and economic gains.”

The report found that poverty in Latin America and the Caribbean, defined as living on less than US$4 per day, decreased from 25.3 percent in 2012 to 24.3 percent in 2013, while extreme poverty (US$ 2.50 per day) fell from 12.2 percent to 11.5 percent. Progress in poverty reduction, even at a slower pace, was not uniform, with Central America and Mexico performing below other sub regions.

The Unskilled Benefit

Since the early 2000s, the wages of the unskilled -- those most likely to be poor and whose households account for half of the region’s poor -- grew significantly across most of the region and faster than for other groups. On average, unskilled workers experienced annual increases in their labor income of over 4 percent, while low-skilled (workers who completed primary but not secondary school) and skilled workers registered an increase of 2 percent.

The report found that improvements in job quality of unskilled workers were relatively small.  Shifts of unskilled workers to more productive sectors or better quality jobs were relatively minor across the region.

It seems that the commodity boom was the major driver of these changes.

South American countries that export commodities recorded real wage increases across all levels of labor and sectors – not only in trade – whereas in countries without commodity increases, wages stagnated or fell across all sectors and skill levels.

More Education is Key

To meet the United Nations’ goal of  eliminating extreme poverty by 2030, experts believe that the region must focus on increasing skills and improving human capital, which will effectively help reduce poverty.

 “The region has invested heavily in upgrading skills through education,” according to the report. “Throughout the income distribution, workers are becoming more skilled, and this shift has contributed to the region’s poverty and inequality reduction.”

Throughout the region, governments have helped raise labor income and improve labor market outcomes by enacting different programs and policies, including the provision of day care and early education to increase female labor force participation, training programs, formality incentives, and minimum-wage legislation.