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The labor market in Colombia: Structural features and the role of wages in the post-pandemic inflationary surge

Author

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  • José Pulido
  • Hernando Vargas-Herrera
  • Juan J. Ospina-Tejeiro

Abstract

We provide an overview of the primary structural features of the labor market in Colombia and survey the margins of adjustment of the market during the pandemic. Given the decline of real wages amid the post-pandemic inflationary surge, mainly due to the formal wage rigidity in the short run, we investigate whether the dynamics of nominal wages and their expected adjustments to catch up with prices could fuel the post-pandemic inflationary escalation. For this, we estimate the long-term relationship between wages, prices, and labor productivity using a small open economy framework. We find that up until the third quarter of 2022, wages were not among the primary drivers of the observed inflation escalation. However, wages have typically contributed to restoring long-run equilibrium. Thus, their adjustment towards equilibrium, which can occur through indexation, could imply risks for the convergence of inflation to the target. These risks are significant if the observed sources of the inflationary surge persist. **** RESUMEN: Examinamos las principales características estructurales del mercado laboral en Colombia y sus márgenes de ajuste durante la pandemia. Dada la caída de los salarios reales en medio del brote inflacionario que ocasionó la pandemia, debido a la poca capacidad de los salarios nominales para ajustarse en el corto plazo, evaluamos si la dinámica observada y prevista de los salarios nominales para compensar los ajustes en los precios puede retroalimentar la escalada inflacionaria. Para ello, estimamos la relación de largo plazo entre precios, salarios y productividad laboral utilizando un marco de economía pequeña y abierta. Encontramos que, hasta el tercer trimestre de 2022, los salarios no estuvieron entre los principales impulsores de la escalada inflacionaria. Sin embargo, los salarios típicamente han contribuido a restaurar el equilibrio a largo plazo. Por lo tanto, su ajuste hacia el equilibrio, que puede ocurrir a través de la indexación, podría implicar riesgos para la convergencia de la inflación a la meta. Estos riesgos son significativos si persisten las fuentes observadas del brote inflacionario.

Suggested Citation

  • José Pulido & Hernando Vargas-Herrera & Juan J. Ospina-Tejeiro, 2023. "The labor market in Colombia: Structural features and the role of wages in the post-pandemic inflationary surge," Borradores de Economia 1232, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:1232
    DOI: 10.32468/be.1232
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    References listed on IDEAS

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    1. Ana Iregui & Ligia Melo & María Ramírez, 2012. "Wage Adjustment Practices and the Link between Price and Wages: Survey Evidence from Colombian Firms," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 76, pages 17-53.
    2. Jhon James Mora & Juan Muro, 2014. "Informality and minimum wages by cohort in Colombia," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, August.
    3. Leonardo Fabio Morales & Carlos Medina, 2017. "Assessing the Effect of Payroll Taxes on Formal Employment: The Case of the 2012 Tax Reform in Colombia," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2017), pages 75-124, November.
    4. Cristina Fernandez & Leonardo Villar, 2017. "The Impact of Lowering the Payroll Tax on Informality in Colombia," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2017), pages 125-155, November.
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    More about this item

    Keywords

    Labor market; employment; wages; prices; pandemic; Mercado laboral; empleo; salarios; precios; pandemia;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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