Juan O’Farrell and Soledad Villafañe, Guest Bloggers
Latin American countries’ experiences over the last decade have been widely described as a success story for reducing income inequality. In a work to be published this month, we analyze how the coordination between labor and macroeconomic policies with a clear objective of employment creation and welfare expansion explains the progress made in Argentina and Brazil towards income redistribution with economic growth. Under different macroeconomic regimes, but with similarly active promotion of wage increases and labor institutions, both countries achieved an expansion of employment, wages, and social protections, breaking a long period of downward trends. These factors are behind the reduction in the gap between the rich and the poor.
What these experiences show is that, contrary to the view of labor institutions (like the minimum wage, collective bargaining, etc.) as “rigidities,” these can be key drivers of inclusive development. This holds significant relevance beyond Latin America for an important reason: despite the evidence and increasing consensus of the role of declining wage shares in the unfolding of the global financial crisis, policymakers (especially in Europe) still resist abandoning the mantra of labor market “flexibilization” and internal devaluation as a way out of the crisis. Furthermore, there was an attempt this year to reintroduce the idea of flexibilization in G20 documents.