Employment Policy in Latin Employment Policy in Latin America: The Missing Link America: The Missing Link between Economic Growth, between Economic Growth,

Poverty and Income Poverty and Income DistributionDistribution

Class 2Class 2Kirsten SehnbruchKirsten Sehnbruch

Center for Latin American StudiesCenter for Latin American StudiesUC BerkeleyUC Berkeley

Feb 11 – March 4, Fridays, 10.00am – 1.00pmFeb 11 – March 4, Fridays, 10.00am – 1.00pm

History of Economic Development in History of Economic Development in Latin America (1): Colonial rootsLatin America (1): Colonial roots

History of natural resource exploitation History of natural resource exploitation Restrictions on manufacturing Restrictions on manufacturing Concentration of land ownershipConcentration of land ownershipLimited trade among different colonial Limited trade among different colonial territoriesterritoriesDutch Disease: natural resource industries Dutch Disease: natural resource industries crowded out local manufacturing which crowded out local manufacturing which had to compete for scarce labor (importing had to compete for scarce labor (importing manufactured goods was cheaper) manufactured goods was cheaper) high high wages wages

History of Economic Development in History of Economic Development in Latin America (2): After IndependenceLatin America (2): After Independence

First Britain (then US after WWI) became main First Britain (then US after WWI) became main foreign investor in LA (supplanting Spain and foreign investor in LA (supplanting Spain and Portugal) Portugal) Continued investment in natural resources: export-Continued investment in natural resources: export-led growth with declining terms of trade, ie produce led growth with declining terms of trade, ie produce more cotton to buy the same machinemore cotton to buy the same machineHigh concentration of export products (Table)High concentration of export products (Table)Subject to market fluctuations of trading partners, Subject to market fluctuations of trading partners, especially the 1929 crash; collapse in commodity especially the 1929 crash; collapse in commodity pricespricesVulnerability to external factors led to initial efforts to Vulnerability to external factors led to initial efforts to diversify production structures into manufacturingdiversify production structures into manufacturing

History of Economic Development in History of Economic Development in Latin America (3): 1950s to 70sLatin America (3): 1950s to 70s

Recovery and windfall cash flows during WWII as Recovery and windfall cash flows during WWII as LA became a supplier to nations at war, who had LA became a supplier to nations at war, who had turned their production into a war machine turned their production into a war machine After WWII, industrialised countries protected their After WWII, industrialised countries protected their markets again: now LA faced excess supplymarkets again: now LA faced excess supplyIncreased awareness of risks associated with Increased awareness of risks associated with dependence on trade in commodities dependence on trade in commodities Important role of ECLA in redefining development Important role of ECLA in redefining development processes: dependency theory led to:processes: dependency theory led to:Investment in Import Substitution Industrialisation Investment in Import Substitution Industrialisation (ISI), 1950s-1970s(ISI), 1950s-1970s

History of Economic Development in History of Economic Development in Latin America (4): ISILatin America (4): ISI

Deliberate decision to manufacture goods for local Deliberate decision to manufacture goods for local market (and then for export)market (and then for export)Closed local markets to imports through tariffs (except Closed local markets to imports through tariffs (except for capital goods required for manufacturing)for capital goods required for manufacturing)State subsidies for (or the state founded) companies that State subsidies for (or the state founded) companies that established local production, eg. steel, automobiles, established local production, eg. steel, automobiles, consumer durables, heavy industry.consumer durables, heavy industry.Nationalisation of existing industries (eg. copper, oil, Nationalisation of existing industries (eg. copper, oil, mining) mining) Financed with foreign loans from capital markets awash Financed with foreign loans from capital markets awash with cash from oil bonanzawith cash from oil bonanzaDisequilibria: inflation, overvalued exchange rates Disequilibria: inflation, overvalued exchange rates followed by massive devaluations, trade deficits, fiscal followed by massive devaluations, trade deficits, fiscal imbalancesimbalances

History of Economic Development in History of Economic Development in Latin America (5): Debt crisis and Latin America (5): Debt crisis and

ReformReform

Oil crisis of 1970s led to debt crisis in Latin America as Oil crisis of 1970s led to debt crisis in Latin America as interest rates rose interest rates rose Debt crisis led to stabilisation measures, structural Debt crisis led to stabilisation measures, structural adjustment and finally neo-liberal reformsadjustment and finally neo-liberal reformsThe 1980s in Latin America are generally referred to as The 1980s in Latin America are generally referred to as the ‘lost decade’. Overall growth was -8.3%. With few the ‘lost decade’. Overall growth was -8.3%. With few exceptions, per capita GDP in 1990 was below its 1980 exceptions, per capita GDP in 1990 was below its 1980 level.level.1990s: varying degrees of neo-liberal reforms and 1990s: varying degrees of neo-liberal reforms and implementation of Washington Consensus policies (eg. implementation of Washington Consensus policies (eg. privatisations, liberalisation of product and financial privatisations, liberalisation of product and financial markets, fiscal responsibility, generally lower inflation, and markets, fiscal responsibility, generally lower inflation, and massive retrenchment of the state in the economy)massive retrenchment of the state in the economy)

History of the Latin American History of the Latin American Labor MarketsLabor Markets

ISI causes internal migration (urbanization): result of ISI causes internal migration (urbanization): result of population increases in first half of 20population increases in first half of 20 thth c and the pull c and the pull of new jobs in industry of new jobs in industry Segmentation: the growth of the informal economy Segmentation: the growth of the informal economy begins (see slide below)begins (see slide below)Process of unionization leads to insider/outsider Process of unionization leads to insider/outsider problems: high wages vs informal economyproblems: high wages vs informal economyLabor force not able to compete in international Labor force not able to compete in international economyeconomyPoliticization of unions, especially under populist Politicization of unions, especially under populist regimes, leads to very powerful union structures regimes, leads to very powerful union structures Social security becomes increasingly fragmented: Social security becomes increasingly fragmented: based on interest groups and unionsbased on interest groups and unions

Example: Unions under PeronExample: Unions under Peron

Peron based his political power on unionsPeron based his political power on unionsMassive expansion of union membershipMassive expansion of union membershipClientilism: once he came to power, payback time: the Clientilism: once he came to power, payback time: the rights of the unions expanded massively under ISI rights of the unions expanded massively under ISI process he initiated (including social security structures)process he initiated (including social security structures)The process relied on continued investment into ISI The process relied on continued investment into ISI development to support entrenched interests (of unions development to support entrenched interests (of unions and employers)and employers)Prevented process of opening up economies to foster Prevented process of opening up economies to foster competitive export sector based on manufacturing (like competitive export sector based on manufacturing (like in Asia)in Asia)Unions became powerful political actor: the unrest they Unions became powerful political actor: the unrest they caused brought Peron down, and later their support caused brought Peron down, and later their support brought him backbrought him back

ConsequencesConsequences

The political role of unions in either supporting or The political role of unions in either supporting or opposing a government (historically) makes opposing a government (historically) makes relationships between employers and workers much relationships between employers and workers much more polarized: there is more at stake than mere wagesmore polarized: there is more at stake than mere wagesMilitary regimes decimated union power structures as a Military regimes decimated union power structures as a resultresultRelationships today are still polarized: unions have not Relationships today are still polarized: unions have not come to terms with neo-liberal reality and employers come to terms with neo-liberal reality and employers avoid unions at all cost. No spirit of cooperation.avoid unions at all cost. No spirit of cooperation.Unions represent a dwindling proportion of the labor Unions represent a dwindling proportion of the labor force: 10-20% (in a context of worldwide declining force: 10-20% (in a context of worldwide declining unionization rates)unionization rates)

The Informal SectorThe Informal Sector

19501950 19701970 19901990 2000/32000/3

ArgentinaArgentina 9.59.5 9.59.5 52.052.0 46.546.5

BoliviaBolivia 10.510.5 14.514.5 -- 66.766.7

BrazilBrazil 6.96.9 9.39.3 40.640.6 44.644.6

ChileChile 13.813.8 11.511.5 37.937.9 38.038.0

ColombiaColombia 8.58.5 11.511.5 45.745.7 55.655.6

EcuadorEcuador 7.77.7 13.713.7 55.655.6 55.055.0

MexicoMexico 9.79.7 14.514.5 38.438.4 41.041.0

PeruPeru 9.89.8 17.017.0 52.752.7 56.256.2

VenezuelaVenezuela 11.411.4 16.016.0 38.638.6 52.452.4

Employment and Democracy: Employment and Democracy: Today we have dataToday we have data

Economic insecurity, felt by the individual Economic insecurity, felt by the individual through precarious working conditions, is one of through precarious working conditions, is one of the primary concerns of Latin Americans the primary concerns of Latin Americans (Latinobarometro surveys)(Latinobarometro surveys)Dissatisfaction with their employment situation Dissatisfaction with their employment situation decreases people’s dissatisfaction with the decreases people’s dissatisfaction with the market economy market economy Dissatisfaction with the working of the market Dissatisfaction with the working of the market economy also decreases dissatisfaction with economy also decreases dissatisfaction with how democracy is working, and even with how democracy is working, and even with democracy as a system democracy as a system

The Social Actors (1): EmployersThe Social Actors (1): Employers

Stable macroeconomic environmentStable macroeconomic environmentNo boom/bust cyclesNo boom/bust cyclesProfit orientation: lowest possible Profit orientation: lowest possible wage costs and non-wage costswage costs and non-wage costssmooth operations of their business smooth operations of their business (no strikes)(no strikes)Requirement for a skilled and Requirement for a skilled and motivated labor force (positive and motivated labor force (positive and negative motivators)negative motivators)

The Social Actors (2): UnionsThe Social Actors (2): Unions

Unions represent interests of workers in their firmUnions represent interests of workers in their firmNational confederation of unions represents of the National confederation of unions represents of the workforce in generalworkforce in generalBut: insider/outsider issues: unions do not represent But: insider/outsider issues: unions do not represent informal workers, the unemployed, or the inactive who informal workers, the unemployed, or the inactive who cannot find workcannot find workUnions seek the best working conditions for their Unions seek the best working conditions for their members, often an overriding concern for wages members, often an overriding concern for wages Lost political power (military regimes and neoliberal Lost political power (military regimes and neoliberal reforms). Today hardly represent a valid interlocutor.reforms). Today hardly represent a valid interlocutor.Failed to adapt to neoliberal reality: no concern for Failed to adapt to neoliberal reality: no concern for improved productivity as a stepping stone for better improved productivity as a stepping stone for better working conditions, eg trainingworking conditions, eg training

The Social Actors (3): The Social Actors (3): GovernmentGovernment

Reduced role of government since neoliberal reformsReduced role of government since neoliberal reformsfoster economic growth and smooth functioning of the foster economic growth and smooth functioning of the economy (no crises, no strikes, no mass lay-offs)economy (no crises, no strikes, no mass lay-offs)Control unemployment rate (most politically sensitive Control unemployment rate (most politically sensitive factor of labor market issues)factor of labor market issues)ensure appropriate social security systemsensure appropriate social security systemsStrong political motivation for decreasing povertyStrong political motivation for decreasing povertyensure least fiscal expenditure on employment policiesensure least fiscal expenditure on employment policiesConcern for both formal and informal workers (but Concern for both formal and informal workers (but more for the formal ones)more for the formal ones)Concern for training the labor forceConcern for training the labor force

Example of Conflicting Interests: Example of Conflicting Interests: Professional Training PoliciesProfessional Training Policies

Objective: a labor force that is as highly trained Objective: a labor force that is as highly trained as possibleas possible

All social actors: spend as little on training as All social actors: spend as little on training as possiblepossible

Example of a solution: Chilean system SENCE: Example of a solution: Chilean system SENCE: government gives employers a tax credit if they government gives employers a tax credit if they invest in training. Any certified institution (public invest in training. Any certified institution (public or private) can provide this training.or private) can provide this training.

Or: European model of apprenticeships Or: European model of apprenticeships

Reality of SENCE TrainingReality of SENCE TrainingThe segment of the labor force that requires the most training The segment of the labor force that requires the most training is not part of the formal sector, and therefore has to rely either is not part of the formal sector, and therefore has to rely either on government training programs or on their own resources on government training programs or on their own resources Latin American governments spend very little on labor policy Latin American governments spend very little on labor policy (including training) compared to developed countries(including training) compared to developed countriesTraining is a business: it is cheaper and easier to teach Training is a business: it is cheaper and easier to teach English than a mechanical skill, which requires investment in English than a mechanical skill, which requires investment in machinerymachineryUnions: have failed to integrate the issue of training into their Unions: have failed to integrate the issue of training into their negotiation processes and to adopt it as a regular issue on negotiation processes and to adopt it as a regular issue on their agendatheir agendaEmployers are afraid that they will lose an employee once he Employers are afraid that they will lose an employee once he or she has acquired a higher level of skill to the competition, or she has acquired a higher level of skill to the competition, and will thus lose the investmentand will thus lose the investmentWorkers: see little result from training and therefore do not Workers: see little result from training and therefore do not insist or ask for further traininginsist or ask for further training

Results from SENCE ProgramResults from SENCE Program

Very little training is actually undertakenVery little training is actually undertakenEmployers do not even use the full tax credit that Employers do not even use the full tax credit that they are entitled tothey are entitled toMost of the people who are trained, are trained Most of the people who are trained, are trained in blackboard skillsin blackboard skillsThere is a continued skill shortage in the Chilean There is a continued skill shortage in the Chilean labor marketlabor marketNobody takes training seriously as an issue to Nobody takes training seriously as an issue to invest in because there are few tangible results invest in because there are few tangible results from itfrom it

Alternative Model: Alternative Model: ApprenticeshipsApprenticeships

Students learn a technical skill while still in Students learn a technical skill while still in secondary education systemsecondary education systemWhile undertaking theoretical schooling they are While undertaking theoretical schooling they are also integrated into a business to learn practical also integrated into a business to learn practical skills on the jobskills on the jobQualifications consist of both practical and Qualifications consist of both practical and theoretical componentstheoretical componentsRequires a close cooperation between Requires a close cooperation between employers, government and unionsemployers, government and unions

Labour Codes: componentsLabour Codes: components

Exclusion of the independent / informal sectorExclusion of the independent / informal sectorDefinitions of contractsDefinitions of contractsConditions for dismissals/redundanciesConditions for dismissals/redundanciesOther working conditions (eg. Jornada laboral, Other working conditions (eg. Jornada laboral, maternity leave, subcontracting)maternity leave, subcontracting)Process of establishing unionsProcess of establishing unionsCollective bargainingCollective bargainingIndustrial action Industrial action Health and security at work: accident preventionHealth and security at work: accident preventionLegislative changes generally not retroactiveLegislative changes generally not retroactive

Independent WorkersIndependent Workers

In LA, independent workers (the self-In LA, independent workers (the self-employed) are not considered by labor employed) are not considered by labor legislationlegislationWhere labor legislation touches on social Where labor legislation touches on social security issues, they can generally security issues, they can generally contribute on a voluntary basiscontribute on a voluntary basisThe self-employed provide services The self-employed provide services regulated by civil law, not labor legislation regulated by civil law, not labor legislation (honorarios/boleta)(honorarios/boleta)

Types of ContractTypes of Contract

Open-ended (Contrato Indefinido)Open-ended (Contrato Indefinido)

Short-term (a plazo fijo / temporario)Short-term (a plazo fijo / temporario)

Project based (por tarea o servicio)Project based (por tarea o servicio)

Temporary (seasonal workers)Temporary (seasonal workers)

Domestic service (often subject to different Domestic service (often subject to different legislation within labor code)legislation within labor code)

Dismissals and Redundancies: Dismissals and Redundancies: ReasonsReasons

Just Reasons: Just Reasons: (Causa Justa)(Causa Justa)– end of contractend of contract– misconductmisconduct– retirementretirement– voluntary resignationvoluntary resignation

Unjust Reasons: Unjust Reasons: (necesidad de la (necesidad de la empresa)empresa)– downsizing (eg. downsizing (eg.

economic reasons)economic reasons)– redundancy (eg. skill redundancy (eg. skill

mismatch)mismatch)– Firm closure (usually Firm closure (usually

due to bankruptcy)due to bankruptcy)

Reasons for Dismissals Reasons for Dismissals determine Severance Paydetermine Severance Pay

A “fine” that the employer has to pay when A “fine” that the employer has to pay when dismissing an employee for unjust reasonsdismissing an employee for unjust reasonsThe amount is generally related to the period of The amount is generally related to the period of time that an employee worked for a companytime that an employee worked for a companyHistorical reasons for severance pay:Historical reasons for severance pay:– to avoid job rotationto avoid job rotation– to provide the worker with funds while looking for a to provide the worker with funds while looking for a

new job (unemployment insurance)new job (unemployment insurance)– One of the most important historical concessions that One of the most important historical concessions that

unions won for their membersunions won for their members

Today viewed as the most important impediment Today viewed as the most important impediment to labor market flexibility in Latin Americato labor market flexibility in Latin America

Practical reality of Severance PayPractical reality of Severance Pay

Only applicable in cases, where there was a formal contractOnly applicable in cases, where there was a formal contractGiven the relatively low cost of wages in Latin America, Given the relatively low cost of wages in Latin America, severance pay does not amount to great sumsseverance pay does not amount to great sumsIf there is a multiple lay-off for economic reasons, it can If there is a multiple lay-off for economic reasons, it can represent a high cost to employersrepresent a high cost to employersIf a worker has worked for a long time with the same employer If a worker has worked for a long time with the same employer (eg. > 20 years), and there is no legal ceiling to severance pay, (eg. > 20 years), and there is no legal ceiling to severance pay, it can represent a high costit can represent a high costThe smaller the company, the more significant the cost.The smaller the company, the more significant the cost.The smaller the company, the more likely that the worker will The smaller the company, the more likely that the worker will not be paid the full severance pay duenot be paid the full severance pay dueLack of data: we do not really know the extent to which Lack of data: we do not really know the extent to which severance pay legislation is complied with in Latin Americaseverance pay legislation is complied with in Latin AmericaThe larger the company, the more likely that severance pay is The larger the company, the more likely that severance pay is paid in fullpaid in full

Health and Safety LegislationHealth and Safety Legislation

Labor code establishes a firm’s obligation to take Labor code establishes a firm’s obligation to take out insuranceout insuranceInternal security structures (eg. Committees in Internal security structures (eg. Committees in charge of implementation, security training for new charge of implementation, security training for new staff, definition of safety equipment)staff, definition of safety equipment)Requires functioning compliance checking and/or Requires functioning compliance checking and/or massive punishment in case of employer massive punishment in case of employer negligencenegligenceLA has very high fatal and non-fatal accident ratesLA has very high fatal and non-fatal accident ratesOften additional legislation exists that is not in the Often additional legislation exists that is not in the labor codelabor code

Does size matter?Does size matter?

Differential legislation for different sized Differential legislation for different sized companiescompaniesThe larger a company, the better the jobs The larger a company, the better the jobs (generally) and the more likely they are to (generally) and the more likely they are to comply with labor legislationcomply with labor legislationLarge companies are often part of a Large companies are often part of a multinational operationmultinational operationLarge companies care for their public imageLarge companies care for their public imageLarge companies have greater fiscal resources, Large companies have greater fiscal resources, especially if they are part of a multinational, and especially if they are part of a multinational, and are much less likely to go bankruptare much less likely to go bankrupt

Legislation for small and large companies: Legislation for small and large companies:

Advantages and Disadvantages Advantages and Disadvantages

If smaller companies suffer from labour market If smaller companies suffer from labour market legislation, why not differentiate in the legislation legislation, why not differentiate in the legislation between smaller and larger companies? eg. between smaller and larger companies? eg. union legislation or maternity benefits in Chile union legislation or maternity benefits in Chile

Less rigorous legislation for smaller companies Less rigorous legislation for smaller companies makes it easier for them to establish themselves, makes it easier for them to establish themselves, to compete and to growto compete and to grow

What factors speak against such differentiation?What factors speak against such differentiation?

Regulation vs Jobs?Regulation vs Jobs?

The argument of neoliberal policy makers and The argument of neoliberal policy makers and employers is that regulation of labor market employers is that regulation of labor market activity in countries with large informal sectors activity in countries with large informal sectors hinders the generation of jobshinders the generation of jobsThe particular bone of contention is severance The particular bone of contention is severance pay and hiring/firing legislationpay and hiring/firing legislationUnions, on the other hand, do not want to lose Unions, on the other hand, do not want to lose their acquired rights (derechos adquiridos)their acquired rights (derechos adquiridos)And governments have to control unemployment And governments have to control unemployment rates, reduce the informal sector and foster the rates, reduce the informal sector and foster the best quality of employment possible.best quality of employment possible.