Economic Integration, Labor Markets and Regional Social Externalities in Central America

Abstract

A vast literature has analyzed the transmission of economic growth spillovers across developing countries that are members of economic integration programs, but scant attention has been directed to analyzing the repercussions of economic integration on member countries' labor markets. This is a grave shortcoming given that unemployment and underemployment constitute serious problems in developing countries; if research indicated that economic integration was a means to promote employment, the implications would be that it can be a source of meaningful benefits to the member countries, and that other developing countries should pursue their own integration programs. The objective of this study is to analyze, for one Central American country, El Salvador, the responses of its rates of wage and self-employment to economic dynamism and remittances in the other Central American countries. The methodology consists in the estimation of econometric equations that explain El Salvador' annual rates of self and wage employment in terms of their own economic growth and remittances, and those of the other Central American countries' and of the US, as in a regional Okun's law. The impacts of regional external aid received by a country on the other member countries' employment is also analyzed, as well as the existence of synchronism in member countries' rates of economic growth and its implications on the adoption of a common currency. The results show that wage employment increases and self-employment decreases in El Salvador in response to its own economic growth and remittances, and in response to economic growth and remittances in other Central American countries. Other results show the importance of adequate tax revenues in member countries so as to promote national social development and strengthen the integration program. An important result consists of the evidence that crime, homicide rates specifically, has a regional nature in Central America, resulting from the interdependence in national labor markets. The main policy implication is that in Central America, labor markets should be analyzed on a regional scope. Another implication is that it may be more effective to design social policies on a regional level, so as to obtain the benefits created by social externalities that result from the interdependence of labor markets. These results have not been analyzed in previous literature.