What does the end of the commodity boom mean for poverty in Latin America?

Agricultural - Natural Resource Economics
Financial Economics
Poverty - Inequality - Aid Effectiveness

Latin America and the Caribbean (LAC) has made significant gains in poverty reduction in the 2000s – by 2013 less than a quarter of the region’s population lived on less than $4 a day and just over one in ten on less than $2.50 per day. While this implies that millions are still living in poverty, it is a big reduction from the early 2000s where more than 40 percent lived on less than $4 per day and over a quarter on less than $2.50. In the Poverty team at the World Bank, we are constantly finding that the single biggest driver of these gains has been increased labor income. The follow-up question is always “Why? What is happening in the labor market?”
Good question.

What has been happening in LAC’s labor force and labor markets that can explain the rise in labor income?

This was the starting point for our recent Poverty and Labor Brief “Working to End Poverty in Latin America and the Caribbean: Workers, Jobs, and Wages.” Our analysis provides some clues.

These gains were more from increased labor earnings, with workers across all schooling levels seeing real wage increases, rather than from changes in the labor force or increased employment. What are the possible factors behind this widespread wage increase, which has been particularly strong for unskilled workers (those who did not finish primary school)?

We considered changes in the types of jobs or sectors of employment, thinking that perhaps higher wages were the result of significant changes in the region’s structure of employment. But, while there have been some positive changes, the majority of workers of all skill levels continue to rely on either self-employment or microenterprises (firms of five or fewer workers) for their income. These are typically lower-productivity jobs that pay less and do not offer benefits. Labor income growth also does not appear to be explained by changes in the sector of employment: workers were increasingly concentrated in services, sectors of lower-productivity that have seen some labor productivity gains over the past decade (“Latin America and the Caribbean as Tailwinds Recede”).

* See footnote

One fact stood out: wages grew across the board – across skill levels, sectors, type of jobs – but mostly for countries in South America that benefited from the commodity boom. Figure 1 shows the annualized wage growth rate for workers in countries with and without a commodity boom. Across types of sectors – tradables (those directly benefiting from the commodity boom), low-wage and high wage non-tradable sectors – the story was consistent: workers of all skill-levels, but especially the unskilled saw their wages increase, with unskilled workers in these countries getting an increase in average wages of about five percent per year between 2003 and 2013. On the other hand, in countries without commodity booms – those in Central America particularly – wages did not grow, and even fell for some groups, between 2003 and 2013. In line with these results, poverty and income inequality reduction were relatively much larger in commodity-boom countries.

The commodity boom has ended and growth in the region has slowed. The question now is, if wage growth was indeed largely a result of commodity prices rather than changes in the labor market and labor force, what will happen to the gains made by the region? Already we see signs of decreasing gains – at the regional level, poverty reduction has slowed in 2013, progress in shared prosperity (measured as income growth of people in the bottom 40 percent of the income distribution) has decreased, and inequality reduction has stagnated since 2010.

Can the region continue to pull its citizens out of poverty without the large wage gains that were associated with the commodity boom? Potentially, but it will become increasingly important to undertake key structural reforms and investments to improve productivity and to ensure that they benefit both the bottom 40 as well as the top 60. As the poor continue to face limited access to opportunities and, as a result, limited access to labor markets, the region’s limited fiscal resources will need to be better targeted to expand their access, particularly to quality education.

*Source: World Bank (2015) tabulations based on SEDLAC (CEDLAS and the World Bank). The figure reports the annualized growth of average wages for workers older than 15 years. Commodity boom countries are countries that registered annualized growth in terms of trade above two percent in the period 2003-13 (Chile, Bolivia, Colombia, Peru, Ecuador, Brazil, and Argentina). Countries without a commodity boom are Dominican Republic, Guatemala, Honduras, Mexico, Paraguay, El Salvador, and Uruguay. Due to data limitations, other countries in the region are excluded. Tradable sector includes: primary activities, mining and manufacturing. Non-tradable low-wage sectors includes: construction, wholesale and retail trade, hotels and restaurants, public administration, and domestic work. Non-tradable high-wage sectors are: electricity and gas, transport and communications, financials, real estate, education and health, and extraterritorial organizations.

This article was published by World Economic Forum, on June 30, 2015.

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