Chile's labor markets in an era of adjustment

In the 1970s, Chile underwent profound structural changes in market regulation, public sector policies, and foreign trade. These changes produced notable economic strain and high open unemployment. After the financial crisis of the 1980s the Chilean economy adjusted successfully and resumed economic growth. The author describes the important role labor markets played in the adjustment process. Expenditure-switching and expenditure-reduction policies are important in interpreting the observed performance of labor market variables. The author econometrically estimates an analytical model to study the impact of those policies on wages, unemployment, and investment. The author concludes that segmentation of the Chilean labor market, combined with an inadequate institutional framework for the labor market and a distorted real exchange rate, have been at the root of the persistent open unemployment problem. He also notes that because of existing labor market segmentation, macro policies have probably increased the wage gap between the formal and informal labor markets. A final conclusion is that a more adequate regulatory framework for the labor market was probably instrumental in achieving a more equitable and effective adjustment program.