Macroeconomic adjustment and the labor market in four Latin American countries

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Macroeconomic adjustment and the labor market in four Latin American countries

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Lopez, Ramon E.
Riveros, Luis A.

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Ramon Lopez

Abstract

Implicit in standard macroeconomics of adjustment is the assumption of well-integrated labor markets that are responsive to relative prices. But segmentation of the labor market is usually said to be an important source of labor market rigidities. In particular, if segmentation involves different degrees of real wage rigidity among different groups in the labor force, nominal devaluation may be ineffective and inequitable in its impact. This paper uses a model of labor market segmentation in which regulations are necessary to distinguish between the formal and informal sectors. Using standard econometric techniques to estimate four simultaneous equations, the authors examine the effect of devaluation on relative wages in four countries. They found that formal wages are more responsive than informal wages to inflation and that devaluation of the exchange rate, by increasing the wage gap, is a source of sluggish labor mobility. In addition, they found that expanding wage differentials during adjustment imposes a greater burden on the poorest workers, making adjustment policies less politically sustainable. Finally, they found evidence to support the hypothesis that nominal devaluation would probably be ineffective with a segmented labor market.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 335.

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Date of creation: 31 Dec 1989
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Handle: RePEc:wbk:wbrwps:335

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Bromley, D.W. & Cernea, M.M., 1989. "The Management Of Common Property Natural Resources - Some Conceptual And Operational Fallacies," World Bank - Discussion Papers 57, World Bank.
Trela, I. & Whalley, J., 1989. "Unravelling The Threads Of The Mfa," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 8904c, University of Western Ontario, The Centre for the Study of International Economic Relations.
Other versions:
- Trela, I. & Whalley, J., 1989. "Unravelling The Threads Of The Mfa," Papers 448, Stockholm - International Economic Studies.
Goto, Junichi, 1988. "Effects of the multifibre arrangement on developing countries : a survey," Policy Research Working Paper Series 102, The World Bank. [Downloadable!]
Hamilton, Carl, 1986. "An Assessment of Voluntary Restraints on Hong Kong Exports to Europe and the USA," Economica, London School of Economics and Political Science, vol. 53(211), pages 339-50, August. [Downloadable!] (restricted)

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Fiszbein, Ariel, 1992. "Do workers in the informal sector benefit from cuts in the minimum wage?," Policy Research Working Paper Series 826, The World Bank. [Downloadable!]
Ricardo J. Caballero & Mohamad L. Hammour, 1995. "On the Ills of Adjustment," NBER Working Papers 5198, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Ricardo J. Caballero & Mohamad L. Hammour, 1995. "On the Ills of Adjustment," Working papers 95-21, Massachusetts Institute of Technology (MIT), Department of Economics.
- Caballero, Ricardo J. & Hammour, Mohamad L., 1996. "On the ills of adjustment," Journal of Development Economics, Elsevier, vol. 51(1), pages 161-192, October. [Downloadable!] (restricted)
Stevenson, Gail, 1992. "How public sector pay and employment affect labor markets : research issues," Policy Research Working Paper Series 944, The World Bank. [Downloadable!]

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