Labor Markets and Macroeconomic Performance

in Chile

Rodrigo ValdésCentral Bank of Chile

April 10, 2003

Two (seemingly) unrelated issues:

• Jobless growth in Chile?– Unemployment has been quite persistent– Labor growth declined strongly in the

90s – Some blame an (inexistent?) structural

change (technology, matching)

• Inflation and wage dynamics– Is wage indexation really a problem?– What has happened after 12 years of

successful inflation targeting?

Unemployment in Chile: 1986-2002

56789

101112131415

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Labor Demand and Fundamentals

• IDB – Employment growth since 1998 is

well explained by lower growth and real wages

– Minimum wage policy has have an effect on lower-skill workers

• Martínez et al. (2001)– Prices (wages, cost of capital) explain

well why employment growth declined in the 90s

• Structural Breaks in Matching?

GDP and Employment Growth: 1986-2000

-0.5

-0.3

-0.1

0.1

0.3

0.5

0.7

0.9

1.1

1.3

1.5di

c-87

jun-

88

dic-

88

jun-

89

dic-

89

jun-

90

dic-

90

jun-

91

dic-

91

jun-

92

dic-

92

jun-

93

dic-

93

jun-

94

dic-

94

jun-

95

dic-

95

jun-

96

dic-

96

jun-

97

dic-

97

jun-

98

dic-

98

jun-

99

dic-

99

jun-

00

dic-

00

Elasticidad Corregida Elasticidad Original

Beveridge Curve in Chile: 1986-2002

(vacancies)

5

8

11

14

17

20

0 4 8 12 16 20(unemployment)

Beveridge Curve in Temuco: 1986-2002

0

9

18

27

36

45

0 4 8 12 16 20

(vacancies)

(unemployment)

Inflation and Targets: 1990-2002

0

5

10

15

20

25

30

91 92 93 94 95 96 97 98 99 00 01 02 03

Has Inflation Became More Forward Looking?

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

1971 1981 1991 2001

0 1( 1) ( 1)

A Closer Look: Inflation and Wage Dynamics

• MEP 1.5 Equations (inflation block)

(1 ) *WL

P EPY

0 0 1ˆ ( 1) (1 ) ( 1) ( )

YW u u

L

0 1 0 1 2 3( 1) ( 1) (1 ) * ( ) ( )e y y

Expected Inflation in Phillips Curve

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

91 92 93 94 95 96 97 98 99 00 01 02

Lagged Inflation and Wages Dynamics: Indexation Is Alive

0.78

0.81

0.84

0.87

0.90

0.93

0.96

95 96 97 98 99 00 01 02

Expected Inflation and Wage Dynamics:Still Unimportant

0.00

0.03

0.06

0.09

0.12

0.15

0.18

95 96 97 98 99 00 01 02

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

95 96 97 98 99 00 01 02

Have Wages Became Less Sensitive to Unemployment?

0 0 1ˆ ( 1) (1 ) ( 1) ( )

YW u u

L

Discussion

• Claim: Phillips curve “forward lookingness” alleviates the problems arising from wage indexation– Wages still depend on past inflation...– ...but they are able to adjust to future

inflation through actual inflation• Worrisome: real rigidities (lack of

sensibility)– They explain unemployment

persistence– Might be problematic for adjustments

Discussion (cont’d.)

• Preliminary exercise: calculate sacrifice ratio with MEP 1.5 under different parameter values– Caveat: Lucas critique at its

maximum– It seems that real wage sensitivity

posses relevant costs for desinflation– Indexation to a lesser extent, given

that inflation looks ahead

Concluding Remarks

• Jobless growth in Chile?– No, it depends on relative prices.

Price elasticities are not zero– Technology (matching, production

base) does not explain problems• Inflation and wage dynamics

– In principle, indexation effects can be circumvented with the effect of credibility on inflation dynamics

– Real rigidities matter

Labor Markets and Macroeconomic Performance

in Chile

Rodrigo ValdésCentral Bank of Chile

April 10, 2003