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Despite Slower Growth, Latin America Nears Historic Unemployment Lows

October 3, 2012

• Region to grow at 3.0 percent in 2012, in line with sharp global growth decline 
• Reduced earnings inequality, low unemployment and more stable real wages, key features in LAC’s new face

WASHINGTON, Oct. 3, 2012 – This year, the Latin America and the Caribbean region (LAC) will be growing at 3.0 percent, more in line with global trends. But even with Gross Domestic Product (GDP) beginning to slow, the region’s unemployment rate stood at 6.5 percent last year, approaching historic lows and well below its peak of 11 percent a decade ago, according to the latest semiannual report “The Labor Market Story Behind Latin America’s Transformation," by the World Bank’s Office of the Chief Economist for the region.

The report complements, at the regional level, the recently launched World Bank’s World Development Report on Jobs and Development.

Current consensus forecasts envisage that Latin America’s GDP will grow at 3.8 to 4 percent in 2013, after having expanded 6 percent in 2010 and 4 percent in 2011. This new phase reflects a significant slowdown in two of the largest economies in the region. Argentina and Brazil are projected to grow in 2012 by 2 percent or less.

Still, many countries in the region are projected to grow above the regional average, including Bolivia, Colombia, Costa Rica, Chile, Dominican Republic, Ecuador, Mexico (whose recovery lagged behind others in LAC but is now gaining momentum), Uruguay and Venezuela. Panama and Peru continue to be the top growth performers in the region in 2012, with Asia-like growth rates of 8 and 6 percent respectively.

“Global and internal factors are behind the region’s slowdown. On the one end, you find weaker economic activity in important growth pols, such as Europe and China, which has a negative impact in the demand for LAC exports. On the other, many middle income countries appear to have been running at their full growth capacity in 2010-2011,” said World Bank’s Chief Economist for the region, Augusto de la Torre. “To move forward and sustain higher growth levels, countries in Latin America need to address their low productivity.”

The report also takes a deep look at the important role played by labor markets in the region’s transformation in the past decade. Among key findings is the fact that more than 35 million additional jobs were created in the 2000s. Also, traditionally high Informality declined in seven out of the nine countries where it can be measured consistently over time.

Even more significant is the fact that wages were a fundamental factor behind the region's unprecedented inroads against income inequality. The decline represented a fall of four points in the Gini coefficient  (a composite index that measures inequality) of labor income and stands in contrast with growing wage and income inequality in rich countries.

The report highlights three important changes in Latin America’s labor force in recent decades:

  • Composition: A steady rise in female participation started in the late 1970s and continued all the way through the 2000s, albeit at a slower pace. By 2010, 65 percent of women aged 25-65 in Latin America participated in the labor force.
  • Education: The average years of schooling rose by about three additional years since the 1990s, with women surpassing men in education attainment.
  • Wage stability: The region’s long history of wage volatility linked to inflation surprises has come to an end. Even during the recent global crisis real wages remained stable without leading to higher unemployment. Behind this development is the rising credibility of the Central Banks in their conduct of monetary policy.

But, were these changes the reasons behind the region’s decline in inequality? A look at labor force composition and educational level, in particular, suggests that they were not. In fact, both were steadily growing during the 1990s and 2000s even when the region's inequality only started to decline during the 2000s.

“We find the decline in inequality to be related to returns to education, which measure how much people earn relative to their level of education,” said De la Torre.  “The gap between the wages of workers with tertiary and secondary education and of those with primary education or less started to decline in the 2000s, after having been relatively flat or on the rise in the 1990s. While the vast majority of workers with a university degree are still earning significantly more than those without it, they are not earning as much as the used to compared to their less educated peers.” 

The report points to two potentially troubling explanations to this loss in returns for education:

1. The quality of tertiary education may not have kept up with rising demand, as suggested by an observed widening of wage dispersion among university educated workers.

2. Demand for skilled labor in the region is not as high as expected. This could be the result of a commodity bonanza that has promoted the expansion of non-tradable sectors, such as services and construction, that tend to be on average less skill intensive than the non-commodity tradable sectors such as manufacturing.

Both explanations are plausible. And, moreover, they indicate that the tremendous advances in coverage of education should be accompanied now with an emphasis on improving quality. Such investment, as the report concludes, not only would help create more skilled and a better paid labor force, it would also open up the possibility for the region to grow at higher rates.


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