Kirsten Sehnbruch Center for Latin American Studies UC Berkeley

1. Employment Policy in Latin America: The Missing Link between Economic Growth, Poverty and Income DistributionClass 2 Kirsten Sehnbruch Center for Latin American Studies UC Berkeley Feb 11 – March 4, Fridays, 10.00am – 1.00pm

2. History of Economic Development in Latin America (1): Colonial roots • History of natural resource exploitation • Restrictions on manufacturing • Concentration of land ownership • Limited trade among different colonial territories • Dutch Disease: natural resource industries crowded out local manufacturing which had to compete for scarce labor (importing manufactured goods was cheaper)  high wages

3. History of Economic Development in Latin America (2): After Independence • First Britain (then US after WWI) became main foreign investor in LA (supplanting Spain and Portugal) • Continued investment in natural resources: export-led growth with declining terms of trade, ie produce more cotton to buy the same machine • High concentration of export products (Table) • Subject to market fluctuations of trading partners, especially the 1929 crash; collapse in commodity prices • Vulnerability to external factors led to initial efforts to diversify production structures into manufacturing

4. History of Economic Development in Latin America (3): 1950s to 70s • Recovery and windfall cash flows during WWII as LA became a supplier to nations at war, who had turned their production into a war machine • After WWII, industrialised countries protected their markets again: now LA faced excess supply • Increased awareness of risks associated with dependence on trade in commodities • Important role of ECLA in redefining development processes: dependency theory led to: • Investment in Import Substitution Industrialisation (ISI), 1950s-1970s

5. History of Economic Development in Latin America (4): ISI • Deliberate decision to manufacture goods for local market (and then for export) • Closed local markets to imports through tariffs (except for capital goods required for manufacturing) • State subsidies for (or the state founded) companies that established local production, eg. steel, automobiles, consumer durables, heavy industry. • Nationalisation of existing industries (eg. copper, oil, mining) • Financed with foreign loans from capital markets awash with cash from oil bonanza • Disequilibria: inflation, overvalued exchange rates followed by massive devaluations, trade deficits, fiscal imbalances

6. History of Economic Development in Latin America (5): Debt crisis and Reform • Oil crisis of 1970s led to debt crisis in Latin America as interest rates rose • Debt crisis led to stabilisation measures, structural adjustment and finally neo-liberal reforms • The 1980s in Latin America are generally referred to as the ‘lost decade’. Overall growth was -8.3%. With few exceptions, per capita GDP in 1990 was below its 1980 level. • 1990s: varying degrees of neo-liberal reforms and implementation of Washington Consensus policies (eg. privatisations, liberalisation of product and financial markets, fiscal responsibility, generally lower inflation, and massive retrenchment of the state in the economy)

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

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

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

10. The Informal Sector

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

12. The Social Actors (1): Employers • Stable macroeconomic environment • No boom/bust cycles • Profit orientation: lowest possible wage costs and non-wage costs • smooth operations of their business (no strikes) • Requirement for a skilled and motivated labor force (positive and negative motivators)

13. The Social Actors (2): Unions • Unions represent interests of workers in their firm • National confederation of unions represents of the workforce in general • But: insider/outsider issues: unions do not represent informal workers, the unemployed, or the inactive who cannot find work • Unions seek the best working conditions for their members, often an overriding concern for wages • Lost political power (military regimes and neoliberal reforms). Today hardly represent a valid interlocutor. • Failed to adapt to neoliberal reality: no concern for improved productivity as a stepping stone for better working conditions, eg training

14. The Social Actors (3): Government • Reduced role of government since neoliberal reforms • foster economic growth and smooth functioning of the economy (no crises, no strikes, no mass lay-offs) • Control unemployment rate (most politically sensitive factor of labor market issues) • ensure appropriate social security systems • Strong political motivation for decreasing poverty • ensure least fiscal expenditure on employment policies • Concern for both formal and informal workers (but more for the formal ones) • Concern for training the labor force

15. Example of Conflicting Interests: Professional Training Policies • Objective: a labor force that is as highly trained as possible • All social actors: spend as little on training as possible • Example of a solution: Chilean system SENCE: government gives employers a tax credit if they invest in training. Any certified institution (public or private) can provide this training. • Or: European model of apprenticeships

16. Reality of SENCE 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 on government training programs or on their own resources • Latin American governments spend very little on labor policy (including training) compared to developed countries • Training is a business: it is cheaper and easier to teach English than a mechanical skill, which requires investment in machinery • Unions: have failed to integrate the issue of training into their negotiation processes and to adopt it as a regular issue on their agenda • Employers are afraid that they will lose an employee once he or she has acquired a higher level of skill to the competition, and will thus lose the investment • Workers: see little result from training and therefore do not insist or ask for further training

17. Results from SENCE Program • Very little training is actually undertaken • Employers do not even use the full tax credit that they are entitled to • Most of the people who are trained, are trained in blackboard skills • There is a continued skill shortage in the Chilean labor market • Nobody takes training seriously as an issue to invest in because there are few tangible results from it

18. Alternative Model: Apprenticeships • Students learn a technical skill while still in secondary education system • While undertaking theoretical schooling they are also integrated into a business to learn practical skills on the job • Qualifications consist of both practical and theoretical components • Requires a close cooperation between employers, government and unions

19. Labour Codes: components • Exclusion of the independent / informal sector • Definitions of contracts • Conditions for dismissals/redundancies • Other working conditions (eg. Jornada laboral, maternity leave, subcontracting) • Process of establishing unions • Collective bargaining • Industrial action • Health and security at work: accident prevention • Legislative changes generally not retroactive

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

21. Types of Contract

22. Just Reasons: (Causa Justa) end of contract misconduct retirement voluntary resignation Unjust Reasons: (necesidad de la empresa) downsizing (eg. economic reasons) redundancy (eg. skill mismatch) Firm closure (usually due to bankruptcy) Dismissals and Redundancies: Reasons

23. Reasons for Dismissals determine Severance Pay • A “fine” that the employer has to pay when dismissing an employee for unjust reasons • The amount is generally related to the period of time that an employee worked for a company • Historical reasons for severance pay: • to avoid job rotation • to provide the worker with funds while looking for a new job (unemployment insurance) • One of the most important historical concessions that unions won for their members • Today viewed as the most important impediment to labor market flexibility in Latin America

24. Practical reality of Severance Pay • Only applicable in cases, where there was a formal contract • Given the relatively low cost of wages in Latin America, severance pay does not amount to great sums • If there is a multiple lay-off for economic reasons, it can represent a high cost to employers • 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, it can represent a high cost • The smaller the company, the more significant the cost. • The smaller the company, the more likely that the worker will not be paid the full severance pay due • Lack of data: we do not really know the extent to which severance pay legislation is complied with in Latin America • The larger the company, the more likely that severance pay is paid in full

25. Health and Safety Legislation • Labor code establishes a firm’s obligation to take out insurance • Internal security structures (eg. Committees in charge of implementation, security training for new staff, definition of safety equipment) • Requires functioning compliance checking and/or massive punishment in case of employer negligence • LA has very high fatal and non-fatal accident rates • Often additional legislation exists that is not in the labor code

26. Does size matter? • Differential legislation for different sized companies • The larger a company, the better the jobs (generally) and the more likely they are to comply with labor legislation • Large companies are often part of a multinational operation • Large companies care for their public image • Large companies have greater fiscal resources, especially if they are part of a multinational, and are much less likely to go bankrupt

27. Legislation for small and large companies: Advantages and Disadvantages • If smaller companies suffer from labour market legislation, why not differentiate in the legislation between smaller and larger companies? eg. union legislation or maternity benefits in Chile • Less rigorous legislation for smaller companies makes it easier for them to establish themselves, to compete and to grow • What factors speak against such differentiation?

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