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Macroeconomic adjustment and the labor market in four Latin American countries

Author

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  • Lopez, Ramon E.
  • Riveros, Luis A.

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.

Suggested Citation

  • Lopez, Ramon E. & Riveros, Luis A., 1989. "Macroeconomic adjustment and the labor market in four Latin American countries," Policy Research Working Paper Series 335, The World Bank.
  • Handle: RePEc:wbk:wbrwps:335
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    Citations

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    Cited by:

    1. Caballero, Ricardo J. & Hammour, Mohamad L., 1996. "On the ills of adjustment," Journal of Development Economics, Elsevier, vol. 51(1), pages 161-192, October.
    2. Derk Bienen, 2002. "Mindestlohnreformen in Südamerika – ökonomische Rechtfertigung und praktische Umsetzung," Ibero America Institute for Econ. Research (IAI) Discussion Papers 090, Ibero-America Institute for Economic Research.
    3. Palle S. Andersen, 1991. "Labour market developments in developing countries," BIS Working Papers 16, Bank for International Settlements.
    4. Nora Lustig & Darryl McLeod, 1995. "Salario mínimo y pobreza: un análisis de corte transversal para países en desarrollo," COYUNTURA SOCIAL 013219, FEDESARROLLO.
    5. Stevenson, Gail, 1992. "How public sector pay and employment affect labor markets : research issues," Policy Research Working Paper Series 944, The World Bank.
    6. Daniele Checchi, 1996. "Macroeconomic populism: A formal representation and a suggested interpretation of the Peruvian experience (1985-90)," Journal of International Development, John Wiley & Sons, Ltd., vol. 8(4), pages 489-516.
    7. 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.

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