Labour market flexibility, employment and inequality: lessons from Chile

ABSTRACT

Flexibility proponents assert that rigid Latin American labour markets impede economic expansion and job growth; they advocate reforming labour codes through increased flexibility. Critics argue that heightened labour flexibility exacerbates inequality without expanding employment. From this perspective, precarious employment and inequality are remedied by strengthening labour’s bargaining power. Chile’s maintenance of flexible labour reforms adopted during the dictatorship make it appropriate for evaluating these competing perspectives. Based on flexibility proponents’ predictions, we should expect increased formal sector employment over time, particularly among the least skilled Chilean workers, as well as reduced wage inequality. Yet, the rate of unemployment among least skilled workers in Chile remains essentially unchanged since the democratic transition as does income inequality. These conditions persist despite a high degree of labour market flexibility. Thus, Chile’s continued adherence to a flexibilised labour market should be understood not in terms of its capacity to reduce inequality or generate employment. Rather, it should be understood as the product of several interrelated factors: (1) the business sector’s ability to protect its interests; (2) the Concertación’s conscious limitation of threats to the business sector’s interests and (3) the weakness of organised labour, resulting from the perpetuation of the Pinochet-era labour regime.

KEYWORDS:

• Chile
• labour flexibility
• income inequality
• employment
• union bargaining power

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Paul W. Posner is Associate Professor in the Department of Political Science at Clark University in Worcester, Massachusetts, where he directs the Center for Gender, Race and Area Studies and the Latin American and Latino Studies concentration. His current research focuses on labour politics, the politics of social welfare resource distribution, the New Left and populism in Latin America, with a specific focus on Chile, Ecuador and Venezuela.

Notes

1. Economic efficiency is enhanced when the market price for labour is commensurate with demand, expressed in terms of the wages employers are willing to pay. Advocates of labour market flexibility argue that flexibility increases employment by lowering wages and labour costs, thereby making it more cost effective for employers to hire more workers. Such hiring should, in turn, reduce informality, while the removal of job security protections should reduce wage disparities between those workers who enjoy such protections and those workers who do not.

2. Ley 16.744, Article 15 obligates employers to pay social security taxes of 0.9–4.3 per cent of workers’ salaries to insure workers against injury. The higher rate is to cover workers in more dangerous occupations.

3. The Dirección del Trabajo is the division within the Labor Ministry that monitors and oversees the enforcement of labor laws and works to resolve labour conflicts. See http://www.dt.gob.cl/1601/channel.html for further elaboration.

4. Fairfield and Jorratt arrive at slightly different figures, 15.1 per cent for the unadjusted share of national income for Chile’s top 1 per cent and 21.7–23.0 for the adjusted rate (2014: 19).

5. The revised capital gain figures are based on estimates of retained profits, that is, profits that the wealthiest Chileans do not declare in order to avoid paying capital gains taxes.

6. See Edgardo Boeninger (1986) for one of the earliest expressions of this argument. Boeninger served as the Coordinator of Political Relations and Government Programs for the pre-transition Concertación de Partidos por la Democracia (1988–89), Minister Secretary General of the Presidency under President Aylwin (1990–94), and finally as a designated senator in the Chilean Congress.

7. The bond was to be equal to four unidades de fomento, approximately 17,500 pesos or about $125.00 in 2006.

8. While the Bachelet government has stated that it supports the expansion of collective bargaining rights, it made clear that it does not support inter-enterprise collective bargaining, or in other words, bargaining that extends beyond the plant level. In contrast, the CUT has explicitly stated that it wants inter-enterprise collective bargaining rights.