Evolving Wage Cyclicality in Latin America

Abstract

This paper examines the evolution of the cyclicality of real wages and employment in four Latin American economies, Brazil, Chile, Colombia, and Mexico, during the period 1980-2010. Wages were highly procyclical during the 1980s and early 1990s, a period characterized by high inflation. As inflation declined wages became less procyclical, a feature that is consistent with emerging downward wage rigidities in a low inflation environment. Compositional effects associated with changes in labor participation along the business cycle appear to matter less for estimates of wage cyclicality than in developed economies. JEL classification: J24 The debate about the extent and importance of nominal and real wage rigidities has been central in developed economies. Modern DSGE models, especially those used by central banks for policy evaluation, feature different forms of wage rigidity including nominal wage stickiness and partial indexation (e.g., Christiano, Eichenbaum, and Evans 2005 and Smets and Wouters 2007). Real wage rigidities are indeed fundamental to understand the trade-off between unemployment and inflation in models of the new-Keynesian tradition (Blanchard and Gali 2007). Direct estimates of the extent and nature of downward wage rigidities are abundant in the literature. 1 Similarly, the nature of real wage adjustments over the business cycle has been subject of substantial empirical scrutiny. 2In emerging countries the study of wage adjustments has traditionally attracted less attention from academics, perhaps because the high inflation and sharp recessions of the past were characterized by substantial wage flexibility. But macroeconomic stabilization, and in particular the rapid decline of inflation of recent decades, is likely to have brought substantial changes in wage rigidities. Disinflation has been particularly sharp in Latin American countries. The inflation rate declined from an average of 25 percent Luca Gambetti is associate professor at the refereences therein.2 SeeAbraham and Haltiwanger (1995) for an excellent literature review of the empirical literature and Messina, Strozzi, and Turunen (2009) for a more recent application to OECD countries.