Labor Market Flexibility in Thirteen Latin American Countries and the United States

This paper studies labor market flexibility in 13 Latin American countries--Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Guatemala, Mexico, Panama, Paraguay, Peru, Uruguay, and Venezuela--since the 1960s and 1970s by looking at the sensitivity of employment and unemployment, and real wages with respect to output. It finds that price stabilization has brought real-wage stability, but that it has tended to increase uncertainty of job security. It argues that declining inflation makes labor market rigidities binding because labor markets cannot absorb output shocks through prices. Cyclical relationships are studies by constructing Okun coefficients for unemployment, employment, and wages using first differences and the cyclical component of a Hodrick-Prescott (HP) decomposition of the series. This paper finds that compared with the United States, output fluctuations in Latin America have a small effect on employment and unemployment, but a large effect on real wages. The most important determinants of the flexibility indicators are labor market reforms. Long-term relationships are studies using a standard production function and the permanent component of the HP decomposition of the series. In all seven countries that implemented a price stabilization program, the output elasticity of employment increased, implying higher productivity and lower employment generation.