Western Hemisphere > Chile

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Jorge Alvarez and Carlo Pizzinelli
This paper documents the impact of the COVID-19 pandemic and associated lockdowns on the Colombian labor market using household micro-data. About a quarter of employment was temporarily disrupted at the height of the first pandemic-induced lockdown in 2020. Women, the young, and the less educated were the most affected groups. Since then, a remarkable recovery, led by a rebound in informal employment, has taken place. By adjusting both employment levels and hours faster, the informal sector acted as an important margin of adjustment, particularly in those industries most affected by the first lockdown. The informal sector also appears to have played a role in decreasing the sensitivity of aggregate employment to more recent lockdowns in 2021, as the economy has learned to cope with pandemic restrictions, although the possibility of higher informality rates becoming embedded remains an substantial downside risk for long-term productivity.
Mr. Antonio David, Frederic Lambert, and Mr. Frederik G Toscani
We analyze the performance of labor markets in Latin America since the late 1990s. Strong GDP growth during the commodity boom period led to important gains in employment and a fall in the unemployment rate as labor demand outpaced an increasing labor supply. We emphasize the role of informality in the dynamics of labor markets in Latin America. A re-examination of Okun’s law shows that informality dampens changes in unemployment accompanying output fluctuations. Moreover, we present some evidence that countries with higher redundancy costs and cumbersome dismissal regulations, exhibit “excess” informality over and above what would be expected based on their income and educational levels. Labor market reforms could thus contribute to reducing informality and increasing the responsiveness of labor markets to output growth. However, looking at selected case studies of reforms using the synthetic control method, we find mixed results in terms of labor market outcomes.
Laurence M. Ball, Mr. Nicolas de Roux Uribe, and Mr. Marc Hofstetter
JEL Cl This study constructs a new data set on unemployment rates in Latin America and the Caribbean and then explores the determinants of unemployment. We compare different countries, finding that unemployment is influenced by the size of the rural population and that the effects of government regulations are generally weak. We also examine large, persistent increases in unemployment over time, finding that they are caused by contractions in aggregate demand. These demand contractions result from either disinflationary monetary policy or the defense of an exchange - rate peg in the face of capital flight. Our evidence supports hysteresis theories in which short - run changes in unemployment influence the natural rate.
International Monetary Fund
This paper presents four studies on selected issues of the Chilean economy. The new framework for fiscal policy represented by the authorities' target of a central government structural surplus of 1 percent of GDP is also discussed. This study examines whether the variance of the cyclical component of output in Chile and 11 other countries increased during the 1990s, a period during which the variance of inflation declined. The alternative measures of potential output for Chile are also estimated.
Mr. Esteban Jadresic
This paper reexamines the macroeconomic effects of wage indexation in an open economy under alternative exchange rate regimes. The main finding is that, once the lags in actual indexation rules are considered, wage indexation affects output behavior substantially less than posited in the previous academic literature. This result implies that the academic view that wage indexation makes a flexible exchange rate generally preferable is unwarranted and suggests that the choice of exchange rate regime with and without wage indexation depends on similar factors. The analysis also reveals that the net effects of wage indexation on macroeconomic stability are ambiguous.
Mr. Esteban Jadresic
Since the mid-1970s, there has been considerable research on the macroeconomic consequences of wage indexation. Nonetheless, until recently, this research had not explicitly explored the implications of contracts that index wages to lagged inflation, the usual type of wage indexation observed in practice. Drawing mainly on recent research by the author, this paper examines the consequences of wage indexation to lagged inflation on aggregate wage formation, the cost of disinflation under money- and exchange-rate-based stabilization, the variability of output under alternative shocks and policy regimes, the choice of exchange rate regime, and the level and variability of inflation.
Pierre-Richard Agénor and Mr. Willy A Hoffmaister
This paper examines the short-run links between money growth, exchange rate depreciation, nominal wage growth, the output gap, and inflation in Chile, Korea, Mexico, and Turkey, using a generalized vector autoregression analysis. Nominal historical wage shocks are shown to have an important effect on movements in inflation only in Mexico. Generalized impulse response functions show that a positive historical shock to nominal wage growth generates a transitory but significant reduction in output. Inflation increases in all countries, particularly Mexico. A positive shock to nominal money growth raises real cash balances on impact and exerts an expansionary effect on output, despite an increase in real wages.
Mr. Benedikt Braumann
This paper examines the link between capital stock and unemployment persistence. An overlapping-generations model with endogenous labor supply and imperfect competition is presented. It is used to interpret the unusual persistence of unemployment in Trinidad and Tobago during the last twenty years. Although real wages are 60 percent lower today than in the mid-1980s, unemployment continues to be very high. The paper argues that an important part of the explanation lies in the decline of capital stock in this country after years of very low savings and investment. Policies to address this capital shortage are discussed.
Mr. Esteban Jadresic
This paper shows that it is possible to estimate the importance of different types of wage contracts at the aggregate level using the same data used to estimate standard Phillips curves. It finds that the behavior of the Chilean private aggregate wage during the 1980s is well described by two-year contracts that are revised every six months according to 100 percent of past inflation. The estimates also show that the unemployment rate was a strong determinant of the contract’s target real wage and that most wage negotiations were carried through during the first half of every year. The results prove robust to a variety of tests and fit the data better than standard Phillips curves.
Mr. Esteban Jadresic
While a standard academic presumption has been that wage indexation reduces the cost of disinflation, policymakers generally contend that wage indexing makes disinflation more difficult. To shed light on these views, this paper reexamines the effects of wage indexing on the output loss caused by money-based stabilization. It finds that the cost of disinflation with indexed wage contracts tends to be smaller than that with contracts that specify preset time-varying wages, but larger than that with contracts that specify fixed wages. Thus the academic and policymakers views can be both appropriate depending on the standard of reference.