Workers, Jobs, and Wages
The LAC region achieved laudable gains in the 2000s in the fight against poverty. This was a decade of solid economic growth; substantial reduction in poverty and income inequality; and progress toward being a middle-class society. But in recent years, the momentum has waned. Both extreme poverty, defined in the region as life on less than $2.50 a day, and total poverty ($4 a day) decreased at a slower pace than in previous years, while extreme poverty as measured by the global benchmark of $1.25 remained fairly constant. Income growth—in particular at the bottom 40 percent of the region’s income distribution—has slowed, while income inequality reduction has stagnated in recent years. Even when overall the decade’s gains were significant, one in five Latin Americans has not benefitted and has stayed in poverty over the last ten years. Taken in sum, these trends signal a need for policy action to keep to a course toward better lives for millions of people in the region and achievement of the goals of eradicating extreme poverty and bolstering shared prosperity
The region has invested heavily in upgrading skills through education and has obtained results: throughout the income distribution, workers are becoming more skilled, and this shift has contributed to the region’s poverty and inequality reduction. Yet the region faces a paradox. Even as access to schooling has increased and women are joining the labor force at higher rates, the least skilled are increasingly more likely to drop out of the labor force than the higher skilled. This is particularly true among the region’s youth, with many of the least-skilled not entering the labor force even as they drop out of school. This limits the effectiveness of anti-poverty strategies, as it disconnects many of the poor from the possibility of directly contributing to and benefiting from the region’s economic growth...
One policy tool that all LAC countries use is minimum wages. Even in the informal sector, the minimum wage has the potential to bolster the incomes of the poor by setting an economy-wide target, the so-called “lighthouse effect.” But LAC countries have had mixed experience with this tool, which authorities often enforce only haphazardly even in the formal economy. A relatively low minimum wage tends to have a minor positive effect on worker’s wages generally. But in countries that have set the wage too high, the lighthouse effect is lost as few people actually make the wage. Studies also show a possible trade-off of the minimum wage, some loss of employment as wages rise.
With the commodity boom fading, the region will do well to redouble internal efforts to promote more inclusive growth and to reduce poverty. This report highlights the need to ease the constraints that the poor face in labor market participation and to continue improving their access to high-quality education. While labor market policies like the minimum wage can be useful tools, care must be taken to apply them judiciously. Moreover, finding the best ways to stoke productivity, which will allow workers to make structural shifts to better jobs, will be an important challenge going forward for sustained inclusive growth and shared prosperity.
Poverty and Labor Brief (PLB) Series: No. 7