Latin America’s Poverty Gains Due More to Higher Wages than Better Jobs

June 3, 2015

Wages in Countries without Commodity Booms Stagnated or Fell

WASHINGTON, June 3rd, 2015 – The commodity boom of the last decade helped raise wages for the less well off in Latin America and the Caribbean, but did not necessarily generate better job opportunities. What’s more, wages in those countries in the region that are not commodity exporters grew far less or actually decreased.

Those are among key findings of a new World Bank report, Working to End Poverty in Latin America and the Caribbean: Workers, Jobs, and Wages, released today at the Council of the Americas. The report, part of the Poverty and Labor Brief series, also provides the latest poverty and income inequality numbers for the region using comparable household and labor force surveys.

The report finds that, after more than a decade of steady decline, 2013 was the third year in a row with inequality stagnating. As GDP per capita slows, so has the pace of poverty reduction, compared to the first decade of the 21st century.

“In recent years, the momentum has waned for social gains in Latin America and the Caribbean,” said Louise Cord, Manager for Latin America and the Caribbean in the World Bank’s Poverty Global Practice.  “With the commodity boom fading, redoubling regional efforts to promote more inclusive growth and to reduce poverty is critical. This report highlights the need to ease the constraints that the poor face in labor market participation and to continue improving their access to high-quality education and to higher-productivity sectors.”

The report finds that poverty in Latin America and the Caribbean, defined as living on less than US$4 a day, decreased from 25.3 percent in 2012 to 24.3 percent in 2013, and extreme poverty ($2.50 a day) fell from 12.2 to 11.5 percent. Progress in poverty reduction, even if at a slower pace, was not uniform, with Central America and Mexico performing below other sub regions. In fact, poverty reduction in Mexico and Central America has been less than half the average reduction seen in the entire region for the past decade.

Labor market earnings have been the most important drivers of poverty reduction in Latin America.  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, playing a big role in the region’s poverty reduction. On average, unskilled workers experienced annual increases in their labor income of over four percent, while low-skilled (workers who completed primary school but not secondary), and skilled workers registered an increase of two percent.

On the other hand, labor market participation for the unskilled and the least well off – the bottom 40 percent -- was not a driving force behind poverty reduction.  In fact, despite increases in education, labor force participation —being employed or actively looking for work—did not increase, except for working-age women, while it fell for unskilled men in the region.  Overall, labor force participation for working aged men and women in the bottom 40 percent fell by 1.6 percent between 2003 and 2013, while rising by 4.4 percent for workers in the top 60 percent.

“The reasons behind this disparities in entering the job market can be many, anything from an increase in female headed-households to an increase in transfers that make workers more willing to wait for better paid jobs,” said Cord. “But this could also mean that finding a job is becoming harder for unskilled men.”

The report finds 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. Rather it has been external factors, namely the global commodity boom, which were associated with wage increases in the region. Commodity exporting countries of South America saw real wage gains in all skill levels and sectors —not just trade—; while countries without commodity booms saw wages actually stagnate or fall for all sectors and skills.

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.

The report found that, if set correctly, the minimum wage can operate as a strong signal for higher wages even in the informal sector, where many of the poor work. However, setting it too low or too high can weaken its effect on both formal and informal sectors.

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