Labor Market Flexibility, Employment, and Inequality

Abstract

Flexibility proponents assert that rigid Latin American labor markets impede economic expansion and job growth; they advocate reforming labor codes through increased flexibility. Critics argue that heightened labor flexibility exacerbates inequality without expanding employment. From this perspective, precarious employment and inequality are remedied by strengthening labor’s bargaining power. Chile’s maintenance of flexible labor reforms since the Pinochet dictatorship make it appropriate for evaluating these competing perspectives. Based on flexibility proponents’ predictions, we should expect increased formal sector employment over time, particularly among the least skilled Chilean workers, as well as reduced wage inequality. Yet the rate of unemployment among least-skilled workers in Chile remains essentially unchanged since the democratic transition, as does income inequality. These conditions persist despite a highly flexible labor market. Thus, Chile’s continued adherence to a flexibilized labor market should be understood not in terms of its capacity to reduce inequality or generate employment. Rather, it should be understood as the product of several interrelated factors: (1) the business sector’s ability to protect its interests; (2) the Concertación’s conscious limitation of threats to the business sector’s interests; and (3) the weakness of organized labor, resulting from the perpetuation of the Pinochet-era labor regime.