Sección o Parte de un Documento 1995 es 382.3 B584L(58739) Corden, W. Max Coediciones NAFTA AMERICA LATINA LIBERALIZACION DEL INTERCAMBIO NEGOCIACIONES COMERCIALES TRATADOS ZONAS DE LIBRE COMERCIO FREE TRADE AREAS LATIN AMERICA TRADE LIBERALIZATION TRADE NEGOTIATIONS TREATIES NAFTA Una zona de libre comercio en el Hemisferio Occidental: posibles implicancias para América Latina Incluye Bibliografía En: La liberalización del comercio en el Hemisferio Occidental - Washington, DC : BID/CEPAL, 1995 - p. 13-40 Proyecto Apoyo al Proceso de Liberalización Comercial en el Hemisferio Occidental http://hdl.handle.net/11362/1510 2014-01-02T14:51:16Z 2014-01-02T14:51:16Z Made available in DSpace on 2014-01-02T14:51:16Z (GMT). No. of bitstreams: 0 Previous issue date: 1995 POLÍTICA COMERCIAL Y ACUERDOS COMERCIALES TRADE NEGOTIATIONS COMERCIO INTERNACIONAL E INTEGRACIÓN INTERNATIONAL TRADE AND INTEGRATION Texto Documentos de proyectos /-VvV ;■-? :i ■ . w buu ;- C i v ■ V . Y y ■ í r H i V \) Unemployment, macroeconomic policy and labor market flexibility: Argentina and Mexico in the 1990s Roberto Frenkel and Jaime Ros N a c io n e s u n id a s C E P fl L UNEMPLOYMENT, MACROECONOMIC POLICY AND LABOR MARKET FLEXIBILITY: ARGENTINA AND MEXICO IN THE 1990s Roberto Frenkel and Jaime Ros LC/W .8 October 2004 This document was prepared by Roberto Frenkel, Senior Researcher at CEDES and Professor at the University of Buenos Aires; and Jaime Ros, Professor of the University of Notre Dame, within the ECLAC research project on M anagem ent o f Volatility, Financial G lobalization and Growth in EEs, supported by the Ford Foundation. The authors gratefully acknowledge the collaboration of Roxana Maurizio and Luis Orezzoli, as well as useful comments by Enrique Davila, Ricardo Ffrench-Davis, Jorge Katz, José Antonio Ocampo, Miguel Ramirez, Heriberto Tapia and participants in two stimulating seminars organized by ECLAC in 2002 and 2003, in Santiago Headquarters. The authors alone are responsible for the opinions expressed in this paper. Contents A bstract........................................................................................................................................................................ 5 Introduction.................................................................................................................................................................7 1. The p olicy context...............................................................................................................................................9 2. Manufacturing em ploym ent, G DP growth and the evolution o f key p rices...................................11 3. Em ploym ent and the pattern o f trade specialization.............................................................................. 15 4. U nem ploym ent, labor market regulations and the role o f the informal se cto r ............................. 21 5. C onclusions.........................................................................................................................................................27 R eferences................................................................................................................................................................. 31 ECLAC/Ford Foundation research project: documents published......................................................... 35 Serie inform es y estudios especiales: issues published............................................................................... 37 Tables Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 M acroeconom ic and labor market indicators, 1988-2001 ...............................................13 M exico: Em ploym ent and productivity in manufacturing (maquiladora and non-maquiladora industries), 1 9 9 0 -2 0 0 1 .............................................................................17 Labor market characteristics in Argentina and M e x ic o ................................................... 21 M exico: Full tim e em ploym ent, unem ploym ent and underem ploym ent in urban areas, 1991 -2 0 0 0 ........................................................................................................ 24 M exico: Full time em ploym ent in the non-tradable goods sectors, 1 9 9 1 -2 0 0 0 .......24 Argentina: Full tim e em ploym ent, unem ploym ent and underemployment, 1 9 9 1 -2 0 0 0 ................................................................................................25 Argentina: Full tim e em ploym ent in the non-tradable goods sectors, 1 9 9 1 -2 0 0 0 ..................................................................................................................... 25 D ecom position o f change in open unem ploym ent in Argentina and M exico, 1 9 9 1 -2 0 0 0 ............................................................................................................27 Figures Figure Figure Figure Figure Figure 1 2 3 4 5 Urban unem ploym ent....................................................................................................................8 Manufacturing em p loym en t......................................................................................................12 Com position o f M exico ’s exp orts........................................................................................... 15 Com position o f Argentina’s ex p o rts...................................................................................... 16 Em ploym ent in the maquiladora industry............................................................................ 29 3 Abstract This p a p e r com pares the unem ploym ent experience o f the 1990s in Argentina and M exico. Both countries p resen ted sim ilarities by the m id-1990s in term s o f econom ic reform s, an d both suffered intensively the tequila crisis o f 1994-95. H owever, their labor markets perform ed quite differently after that crisis. M irroring the behavior o f em ploym ent in the tradable sector, the unemploym ent rate in A rgentina rises fro m one-digit levels to over 15% by the end o f the decade, while in M exico it rem ains a t low levels after a tem porary increase in the mid-1990s. The p a p e r looks at the role o f m acroeconom ic policies, the p a ttern o f trade an d labor m arket regulations in explaining the tw o experiences. It argues that the em ploym ent effects o f exchange rate p o lic y and o f the growth and com position o f exports (manufactures-intensive in M exico an d com m odity-intensive in Argentina), rather than labor m arket characteristics, explain the sharp contrasts in em ploym ent and unemploym ent perform ance. 5 INTRODUCTION M exico since the m id 1980s and Argentina in the 1990s liberalized their econom ies, in particular their trade regim e, and adopted exchange rate based stabilization programs. Early in the 1990s, both received m assive capital inflow s w hich contributed to the appreciation o f the real exchange rate in the early 1990s and, as capital m ovem ents were reversed, to a sharp downturn o f econom ic activity in 1995. In the second half o f the decade, they continued to be affected by the volatility o f capital flow s, particularly by the East A sia, R ussia and Brazil crises, although exchange rate p olicies diverged sharply.1 In a number o f aspects, the behavior o f the two econom ies w as similar: G DP growth is identical for the 1990s as a w hole, the real exchange rate appreciates during the stabilization phase and real w ages stagnate from beginning to the end o f the decade. A t the same tim e there is a striking contrast in the adjustment o f the labor market: starting from som ewhat similar levels in the late 1980s, open unem ploym ent had becom e a decade later extrem ely high in Argentina (o f the order o f 16-17% o f the labor force) w hile remaining very low in M exico (2 to 4%, see figure 1). This is the central stylized fact that m otivates this paper.2 What explains this remarkable contrast in the adjustment o f the labor market that occurs despite equally striking sim ilarities in a number o f m acroeconom ic variables and external shocks? W hat w as the role in these developm ents o f m acroeconom ic policies? Can the divergent unem ploym ent experiences be explained by differences in the institutional characteristics o f the labor market? These are the questions addressed by this paper. W e begin in section 1 with a brief summary o f the policy and institutional context o f the 1990s. W e then turn in section 2 to the role o f G DP growth, real w ages and the real exchange rate in em ploym ent performance. Section 3 exam ines the role o f the pattern o f trade specialization in explaining the evolution o f em ploym ent in the tradable goods sector. Section 4 looks at the role o f labor market characteristics and that o f the non-tradable goods sector in the evolution o f the unem ployment rate. Section 5 concludes. 1 In addition, M exico benefited from a positive external shock received from the USA in 1998-2000. 2 It is worth noting that unemployment refers in both countries to an average o f urban areas and is defined in a very similar way. Following ILO recommendations, unemployment includes those that did not work at all and were actively seeking jobs. In any case, our focus is the different evolution over time of unemployment rates rather than a comparison of levels at a point in time. 7 % of Labor Force Figure 1. Urban Unemployment Year —♦ — Mexico Argentina Source : See Table 1 8 1. The policy context Mexico in late 1987 and Argentina in early 1991 adopted stringent stabilization programs aimed at bringing high inflation rapidly under control. Both Mexico’s Solidarity Pact, based on the initial fixing of the exchange rate followed by a crawling band, and Argentina’s convertibility plan based on a hard peg, relied on the exchange rate as a major policy instrument and an anchor for inflation expectations. The Convertibility Law, reinforced later on by a new Central Bank Law, imposed strict limits on monetary policy and established a 100% backing of international reserves for the monetary base. These stabilization programs took place in the midst of or were followed by wide ranging economic reforms. Trade liberalization, which had begun in 1985 in Mexico with the reduction of import restrictions on intermediate and capital goods, accelerated in 1988 with the liberalization of consumer goods imports. From January 1994, the free trade agreement with the United Sates and Canada became the new institutional framework for trade and capital flows within the North American region. In Argentina, a policy of gradual reduction of tariffs was implemented as from 1988. In the nineties, the gradualist approach was abandoned and trade opening was accelerated. Tariffs were reduced from a 26.5% average, in October 1989, to 9.7%, in April 1991. In addition, some specific taxes and quantitative restrictions on imports were simultaneously eliminated. Along with the approval of the Convertibility Law in April 1991, trade and financial flows were fully liberalized. Equal treatment of foreign and domestic investment was also established. Other economic reforms accompanied the trade liberalization-cum-exchange rate based stabilization programs of the 1990s. Economic liberalization accelerated in Mexico under the Salinas administration (December 1988-December 1994) with the privatization of state banks and public enterprises as well as the liberalization of the financial system and the capital account of the balance of payments. In Argentina, the Menem administration started a radical program of privatizations. The 1989 State Reform Law provided the legal base for the privatization of public enterprises through public debt-equity swaps. This process affected a wide range of activities (oil, communications, railways, energy and the state airlines). By 1994, most public firms had been transferred to the private sector. Along with these reforms came massive capital inflows predominantly in the form of financial investment. Our two countries were the major recipients of capital flows in Latin America from 1990 to 1993. In Mexico, the main receiver, the capital surge was followed in 1994 by a sudden contraction that led to the December 1994 devaluation of the peso, followed by a deep recession that a massive international rescue package managed to reverse in 1996. M exico’s Tequila crisis had reverberations across Latin America, particularly in Argentina, which suffered from massive outflows and a financial and economic contraction in 1995.3 3 On the experience of the first half of the decade, see Frenkel and Simpson (2003) and Ros (2001). For an overview o f the whole decade in Latin America, see Ffrench-Davis and Ocampo (2001). 9 Macroeconomic policies diverge sharply in the two countries in the second half of the decade. An initially undervalued peso, under a floating exchange rate regime, prevails in Mexico, while in Argentina the convertibility law yields an increasingly appreciated peg especially as major trading partners depreciate their currencies, including in particular Brazil in early 1999. A large and increasing foreign debt in Argentina prevents the use o f fiscal policy to offset the adverse effects of overvaluation on economic activity. In Mexico, rapid export growth up to 2001 makes fiscal expansion unnecessary while contributing to the fall of the debt-export ratio, which had already been reduced to low levels by privatizations of the beginning o f the decade. 10 2. Manufacturing employment, GDP growth and the evolution of key prices The stabilization programs, accompanied by trade liberalization and real exchange rate appreciation, constituted the macroeconomic setting in which both economies evolved during the first part o f the decade (up to 1994) and in the case of Argentina during the whole decade. As in other experiences of trade liberalization with real appreciation, the tradable goods sectors adjust to the shock through an acceleration of labor productivity growth.4 The counterpart of this acceleration has typically been a growth slowdown or even a contraction of employment in the tradable goods sectors. As shown in table 1 and figure 2, from 1990 to 1994 manufacturing employment (which we use as our indicator of employment in the tradable goods sector) falls in both experiences, although considerably more in Argentina than in Mexico (where the contraction is insignificant). Following the 1995 recession, associated to M exico’s balance of payments crisis in late 1994 and its Tequila effect in Argentina, employment recovers at a relatively fast pace in Mexico, while it continues to contract in Argentina, scarcely reaching in 2001 two thirds of its level in 1990 (see figure 2). It is remarkable that neither the growth rate of GDP nor real wages are good candidates to explain the contrast in the evolution of employment. The behavior of real wages for the decade as a whole and the average rate of growth of GDP are remarkably similar in the two economies (with annual growth rates of approximately 3.1% for GDP for 1990-2001 and slight variations in manufacturing real wages). Moreover, from 1990 to 1994, manufacturing employment falls by 1.1% in Mexico (6.4% for 1990-95), compared to a fall of 11% in Argentina (16.3% for 199095). Thus, in the first part of the decade (1990-94), GDP growth is faster in Argentina (7.6% vs. 3.6% per year in Mexico), where employment falls more, while in Mexico real wages increase more (14% vs. 1.3% in Argentina) and employment falls less. In the second part of the decade, after the 1995 recession, the anomalies partly disappear with employment growing faster (in Mexico) where GDP grows more. Indeed, for 1996-2001, employment in Argentina continues to fall at an annual rate of 4.5%, while it recovers at a pace of 4.1% per year in Mexico. In this period, Mexico catches up with a GDP growth rate of 4.4 % (compared to 1.4% in Argentina). The anomaly remains for the decade as a whole: the behavior of GDP is very similar while the evolution of employment is notably different and real wages increase less where employment falls more. 4 Defined as output (sectoral gross value added) per worker. For the case of Mexico, this acceleration, in relation to the historical trend of productivity growth, has been discussed in Hernández-Laos (1999), López (2002), Ros (1995) and Ros and Lustig (2001). For Argentina, see Frenkel and González Rozada (1999), and Damill, Frenkel and Maurizio (2002). 11 F ig u re 2. M an u factu rin g E m ploym ent Year M exico Argentina Source: see Table 1 What is then the reason for the sharply different evolution of employment if not a different behavior of real wages or a slower growth of output? One factor seems to be the different evolution of wages in constant dollars, which, arguably, is more relevant than real wages to the competitiveness, and the evolution of employment in the tradables sector. While dollar wages increase in Argentina by almost 100% (in 1990-94; 56% for the whole period 19902001) they do so by less than 40% in Mexico (for both 1990-94 and the whole period). Although the difference between the increase in dollar wages for the whole period is not very significant, there is a substantial difference between the paths followed by this relative price throughout the decade. What accounts for the different trajectories of the dollar wage rates? The answer seems clear-cut: the evolution of the real exchange rate, given that the dollar wage is nothing but the ratio of real wages to the real exchange rate. Given that the real wage stagnates in Mexico and falls in Argentina, it is the different evolution of the real exchange rate (a fall of 40% in Argentina and of around 20% in Mexico) that accounts for the different paths of dollar wages. In turn, the different trajectories of real exchange rates are largely due to the sharp devaluation of the Mexican peso by the middle of the decade. While the real exchange rate in Mexico is on average 95.2 for 1995-2001 (and 87.1 in 1990-94) -with a tendency to appreciate- in Argentina it oscillates around 54.6 (compared to 64.7 in 1990-94). 12 T a b le 1 Macroeconomic and labor market indicators, 1988-2001 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 94.6 95.8 100 104.2 108.0 110.1 115.0 107.8 113.4 121.1 127.2 131.7 140.4 140.0 1.3 4.2 5.1 4.2 3.6 2.0 4.4 -6.2 5.2 6.8 5.0 3.6 6.6 -0.3 51.7 19.7 29.9 18.8 11.9 8.0 7.1 52.0 27.7 15.7 18.6 12.3 9.0 4.4 111.1 105.6 100 91.4 83.3 78.9 82.0 118.6 107.5 95.1 96.2 88.1 82.3 78.6 Real wages (index)0 7 92.6 100.2 100 103.3 108.7 109.8 114.0 99.2 90.6 90.1 92.7 93.9 99.9 105.2 Wages in constant dollars8 7 83.3 95.4 100 113.1 130.4 139.2 139.0 83.6 84.3 94.8 96.4 106.5 121.3 133.8 Manufacturing employment1 7 92.7 96.7 100 101.0 103.2 101.1 98.9 93.6 100.1 108.9 115.2 119.5 125.2 119.0 3.6 3.0 2.8 2.6 2.8 3.4 3.7 6.2 5.5 3.7 3.2 2.5 2.2 2.4 109.0 102.2 100 109.7 119.6 126.4 133.8 130.0 137.2 148.3 154.0 148.8 147.6 141.1 -1.4 -6.2 -2.2 9.7 9.0 5.7 5.9 -2.8 5.5 8.1 3.9 -3.4 -0.8 -4.4 Inflation (%, end of year)0 7 387.7 4923.6 1343.9 84.0 17.5 7.4 3.9 1.6 1.0 0.3 1.5 -1.8 -0.8 -1.6 Real exchange rate (index)0 7 141.0 180.3 100 64.9 55.4 51.9 51.1 50.8 52.3 53.2 53.5 55.3 57.7 59.4 Real wages (index)0 7 123.0 104.3 100 94.1 97.9 99.4 101.3 96.2 96.3 93.5 91.9 92.4 93.6 92.7 87.2 57.9 100 144.8 176.9 191.6 198.3 189.3 184.3 175.7 171.9 166.9 162.1 156.2 114.8 105.7 100 95.2 94.5 91.7 89.0 83.7 80.7 81.5 80.0 73.8 68.6 63.3 6.3 7.7 7.6 6.5 6.9 9.7 11.5 17.5 17.2 14.9 12.8 14.2 15.1 16.4 Mexico GDP (index)3 7 GDP growth rate (%)a 7 Inflation (%, end of year)0 7 Real exchange rate (index)0 7 Urban unemployment9 7 Argentina GDP (index)3 7 GDP growth rate (%)a/ Wages in constant dollars8 7 Manufacturing employment1 7 Urban unemployment9 7 Notes: M exico:3 At constant 1993 prices. Source: National Accounts, IN E G I.b/ Consumer prices. Source: Banco de M éxico.0 Based on consumer prices in US and Mexico. Source: 7 7 Banco de México and IMF: International Financial Statistics.d/ Average real earnings in manufacturing. Source: National Accounts, INEGI. The value for 2001 was extrapolated using the Encuesta Industrial Mensual.0 Estimated as real wages divided by real exchange ra te .1 Wage employment (index) Source: National Accounts, IN E G I.9 Open unemployment as 1 7 7 % of labor force. Source: INEGI Argentina:0 At constant 1993 prices. Source: National Accounts, Ministerio de Economía de Argentina. b/ Consumer prices. Source: INDEC .0 Based 7 7 on consumer prices in US and Argentina. Source: INDEC and IMF. * Average real wage in manufacturing. Source: Encuesta Industrial Mensual, IN D EC .6 Estimated as real wages 7 divided by real exchange ra te .f/ Number of employed workers in manufacturing (index). Source: Encuesta Industrial Mensual, INDEC. 9 Open unemployment as % of labor force. 7 Source: Encuesta Permanente de Flogares, INDEC. 13 A comparison of the two subperiods also shows how the evolution of dollar wages removes the anomalous relationship between labor costs and employment that was suggested by the evolution of real wages. Now, in the first period (from 1990 to 1994) employment falls less where dollar wages increase less (Mexico). In Argentina, a sharp appreciation of the real exchange rate takes place in 1991, the first year of the stabilization program, and the contraction of employment from then onwards appears to be mainly a response to this large shock (together with trade liberalization). The different evolution of employment in the second half of the decade also illustrates the key role of the exchange rate and how it did reverse, in the case of Mexico, the adverse effects on employment that the real appreciation-cum-trade liberalization shock had in the first part of the decade. Clearly, the 1994-95 devaluation set the stage for the recovery of manufacturing employment in Mexico. To see more clearly how real wages and dollar wages can move in different directions, let us write the real wage (w/p) as the dollar wage (w*) times the real exchange rate: w /p = w * [(e p N* ) a (e p i * ) 13] / [(p N) a (P t ) 13] where w is the nominal wage rate; p = (pN)a (px)l a is the consumer price index (a and 1-a being respectively the shares of non tradable, N, and tradable goods, T, in consumption); w* = w/[(e p N * ) a (e P t * ) 1’3] is the dollar wage ( p N * and p T * being the foreign currency prices of non tradable and tradable goods, respectively, in the domestic economy trading partners); e is the nominal exchange rate. Assuming that the prices o f tradable goods are determined in the international market (px = e px*) and after some algebraic manipulation, we get: w /p = W * (P t/P n )3 ( P n * /P t * ) 3 Thus, a devaluation that increases (pt/ pn) raises the real wage relative to the dollar wage. It is worth noting that even if in the long run (pt/ pn) returns to its original value, the composition of employment will have changed in favor of the tradables sector. With increasing returns, due to economies of scale, and faster productivity improvements in the tradables sector and diminishing returns to labor in non tradables, this reallocation of the labor force will have increased the productivity (and competitiveness) of the economy as a whole. A second factor that contributes to explain the different behavior o f employment growth in Mexico and Argentina is the expansion of the US economy in the 1990s, particularly in the second half of the decade. Since the mid 1980s and especially with the passage of NAFTA in 1994, M exico’s business cycle has become increasingly synchronized with that of the US. According to Gruben (2001) and Gould (1998), demand factors have a large contribution to the variation of employment growth in M exico’s maquiladora sector. Argentina is not nearly as dependent on demand conditions in the US as Mexico is. 14 3. Employment and the pattern of trade specialization We have noted in the previous section that in the first part of the decade (1990-94) growth is faster in Argentina, where employment falls more, and real wages increase more in Mexico where employment falls less. While the anomaly disappears when we consider the behavior of the real exchange rate and dollar wages, a puzzle remains. Why is it that in Mexico employment largely remains constant in the first part of the decade despite a sharp appreciation of the real exchange rate, the increase in dollar wages and sluggish growth? We now turn to the role of the pattern of trade specialization in the evolution of employment in the tradable goods sectors. Argentina and Mexico are representative of two different patterns of trade specialization in Latin America.5 As shown in figures 3 and 4, the composition of Mexico’s exports is heavily and increasingly oriented towards manufacturing (with maquiladora and non maquiladora manufactures representing over 80% of total exports by 2000) while Argentina’s is dominated by natural resource intensive goods, with primary products and manufactures of agricultural origin having a relatively stable share of the order of 60% throughout the 1990s. These differences in trade patterns appear to have had important implications for the evolution of employment in tradables output. Figure 3. Com position of M exicos exports E other manufactures Dm aquiladoras B o il P o th e r Source: INEGI 5 On the Northern and Southern patterns of specialization in Latin America and their different employment consequences, see Ocampo (2004) and Stallings and Weller (2001). 15 Figure 4. Composition of Argentinas exports iB Primary products □ Manufactures of agricultural origin B Manufactures of industrial origin Source: INDEC Table 2 show s the evolution o f employment and labor productivity in M exico in two manufacturing sectors: the maquiladora export industry -w h ich includes a large segment o f the exportable manufactures sector- and the non-maquiladora industry, comprising mostly importable goods activities. A s shown in table 2, in the period o f overvaluation with trade liberalization, the level o f employment in the non-maquiladora industry actually falls (5.2% compared to the 11% fall in Argentina for manufacturing as a whole). It is thus the expansion o f employment in the maquiladora industries which prevents manufacturing employment from declining significantly between 1990 and 1994 and which explains at least part o f the contrast with Argentina’s experience. More generally, the decade records a major restructuring o f the M exican manufacturing sector with a rapid expansion o f employm ent in the maquiladora industries, which increase their share in manufacturing employm ent from 14% to over 30% between 1990 and 2000. This rapid expansion, which continues at a high pace after the devaluation o f the peso in late 1994, contributed in two ways to increase the labor requirements per unit o f output in manufacturing. First, the maquiladoras are more labor intensive than manufacturing on average. Value added per worker was at the beginning o f the decade about a third o f the level in the non-maquiladora industry (see table 2). The contraction o f the importable goods sectors and the expansion o f the exportable goods sector thus tended to increase the level o f employment per unit o f output. Second, labor productivity in the maquiladoras remained constant throughout the decade (see table 2). The increasing share in overall output and employment o f a sector with stagnant labor productivity contributed to the increase o f employment in the tradable goods sector, largely offsetting the fall in labor requirements per unit o f output in the non-maquiladora industry. The fact that, unlike what happened in the non-maquiladora industries, labor productivity does not increase rapidly after the trade reform is not surprising. The maquiladoras were bom under a free trade regime and thus did not have to adjust to the new conditions created by trade liberalization. 16 Table 2 Mexico: Employment and productivity in manufacturing (maquiladora and non maquiladora industries), 1990-2001 1990 1991 1992 1994 1995 100 101.7 101.8 86.2 86.9 85.1 98.6 94.8 86.6 84.1 82.6 79.7 100 96.2 111.6 116.7 124.6 137.8 13.8 13.1 14.9 15.9 17.4 100 102.1 105.6 108.0 1993 1997 1998 89.6 94.3 97.7 98.1 99.5 95.5 77.2 74.7 73.1 70.8 68.5 69.2 165.8 200.3 224.8 253.5 286.3 20.3 22.8 25.3 26.9 29.2 31.5 30.8 116.5 120.1 127.9 133.2 137.6 141.9 148.7 150.1 1996 1999 2000 2001 Employment3 1 Non maquiladora industry Index 1 9 9 0 = 100 As % of manuf. employment Maquiladora industry Index 1 9 9 0 = 100 As % of manuf. employment 266.3 Output per employee D / Non maquiladora industry (index) Maquiladora industry 100 98.0 99.8 100.0 103.7 104.1 103.5 97.6 97.1 96.8 97.5 94.8 31.6 30.4 29.9 29.2 28.1 27.4 25.6 23.2 22.3 21.6 20.7 20.0 Relative w ages0 1 81.2 77.3 74.5 73.6 73.6 79.8 83.0 84.2 84.1 83.9 87.0 87.3 Profits as percent of value added a/ 24.0 26.8 19.0 19.1 17.9 22.3 21.0 20.2 22.0 22.4 18.1 19.9 Index 19 9 0 = 100 As % on non maquila ind. Maquiladora industry Source. National Accounts, INEGI. 3 Wage employment. 1 b/ Gross value added divided by wage employment. 0 Average earnings in maquiladora industry as % of average earnings in manufacturing. 1 d/ Gross operating surplus as % of gross value added. 17 The stylized facts o f the Argentine experience do not differ from those observed in the M exican non-maquiladora manufacturing sector in the first half o f the nineties, although the em ploym ent contraction was significantly larger than in M exico. The k ey difference is that no manufacturing subsector played a cushion role sim ilar to the maquiladoras in M exico. The manufacturing sector in Argentina experienced a deep restructuring in the nineties. From 1991 onwards, em ploym ent in the sector continuously fell and there w as a persistent upward trend in output per worker and in output per hour worked. Manufacturing sector em ploym ent fell 37% between 1990 and 2001 and output per worker in the sector as a w hole increased by 94%. Taking into account the evolution o f manufacturing output, the trajectory o f em ploym ent in the sector can be decom posed in two com ponents: a positive one related to the growth in production and a negative one related to the contraction o f em ploym ent per unit o f output resulting from the adjustment process to the new conditions established by the com bination o f trade liberalization and an appreciated exchange rate. Estim ates o f the short-run output-elasticity o f labor (Frenkel and G onzález Rozada, 1999) show a coefficien t significantly positive and less than one. Therefore, output per worker grow s w hen production grows, i.e. output per worker has a cyclical com ponent. In the 1990-2001 period, about one quarter o f the rise in output per worker can be attributed to the increase in manufacturing output and three quarters to the autonom ous trend o f falling labor requirements per unit o f output. Ceteris paribus, if manufacturing output had been stagnant at the 1990 level, em ploym ent in the sector w ould have experienced a 62% contraction (instead o f the 37% drop actually observed). An analysis o f 26 individual manufacturing industries (Frenkel and G onzález Rozada, 1999) show s that none o f them was an exception to the trends described above. Each one experienced an adjustment process qualitatively similar to the manufacturing sector as a w hole. A lm ost all industries expelled labor force. O f course, the individual performances differ am ong them with respect to the rise in demand (dom estic demand plus exports) and also with respect to the com position o f the corresponding increase in supply (dom estic output plus imports). A comparative analysis o f the industries show s a negative correlation betw een the increase in output per worker and the change in the degree o f openness (change in imports divided by change in demand). On the other hand, changes in the degree o f openness are positively correlated with the degree o f openness (ratio o f imports to demand) observed at the beginning o f the period (in 1990). D om estic output and output per worker grew more in the industries show ing low er import penetration before the new conditions o f the nineties were established. In fact, the different trajectories follow ed by the manufacturing industries seem to be m ainly explained by the relative com petitiveness conditions prevailing at the end o f the eighties. Confronted with low er tariffs, an appreciated exchange rate and a strong increase in dom estic demand, the industries that com peted more advantageously with imports were those that already had higher relative com petitiveness before the shock, for instance the processing o f natural resources and industrial com m odities. A s in the M exican case, the forces that operated sim ultaneously in the first part o f the nineties induced the accentuation and consolidation o f the relative com petitiveness conditions o f the late eighties. H ow ever, in Argentina, as m entioned before, no manufacturing subsector played the role that the maquiladora industry performed in M exico, absorbing part o f the labor forced displaced by import penetration and the reduction o f labor per unit o f output in the rest o f the manufacturing sector. The w h ole manufacturing sector 18 expelled labor force. The generalized reduction in labor per unit o f output resulted m ainly from the introduction o f labor-saving technologies and organization schem es but involved also changes in the production profile (for instance, a less diversified product basket and the com plem entation o f the firm supply with imported final goods). G iven that the data analyzed refer to sector output (instead o f value-added) at the relatively aggregated level o f 26 manufacturing industries, another factor that has to be m entioned is the reduction o f value-added per unit o f output as a result o f more intensive use o f imported inputs. 19 4. Unemployment, labor market regulations and the role of the informal sector W e look now at the characteristics o f labor markets in the two countries. W e shall exam ine both level and changes in labor market rigidities. W hile changes in labor market characteristics are a clear candidate to explain unem ploym ent performance over tim e, it can also be argued that more flexible labor markets m inim ize the rise in unem ploym ent in the face o f negative shocks to aggregate demand and thus the level o f flexibility can also affect the behavior o f unem ploym ent over time. Is Argentina’s labor market more “distorted” than M ex ico ’s (or viceversa)? W hat has happened to distortions in the tw o labor markets over the 1990s? The evidence presented in table 3 show s striking sim ilarities in the levels o f flexibility betw een the tw o countries. Table 3 Labor market characteristics in Argentina and Mexico Argentina Mexico 67 76 0.38 0.33 36 23 Tax wedge 0 7 22.4 22.5 Dismissal costs0 7 24.8 26.1 26.1 30 29 18.1 Centralized, strong state intervention Centralized, strong state intervention ILO conventions 3 7 Aggregate labor rigidity0 7 Payroll taxe s 0 7 Unionization v Collective bargaining 9 7 Latin America 0.32 8 Number of ILO conventions ratified. Source: Edwards and Lustig (1997). 7 b/ Composite index based on average values for the period 1970-1999 of the ratio of minimum wages to average labor costs in large manufacturing firms, social security contributions as percent of salaries, union membership as percent of labor force, and employment in general government as percent of labor force. The partial indicators are normalized (so that the country with the highest level has a one and that with the lowest level gets a zero) and the aggregate is a simple average of the four components. Source: Forteza and Rama (2001). c/ As % of gross wages, early 1990s. Source: Cox-Edwards (1997). Fiscal contributions as percent of gross remuneration (including mandated benefits) (1995). Source: Guasch (1999). e/1999 (no change since 1990). Source: Heckman and Pagés-Serra (2000). 1 As % of labor force (average 1980-92). Source: Rama (1995). 1 9 Source-. Guasch (1999). 7 The number o f ratified ILO conventions, w hich is often taken to indicate the nom inal (on paper) “thickness” o f labor market regulation, that is, the w illingness and scope o f government intervention in the labor market, is slightly higher in M exico than in Argentina. Both have more ILO conventions than Chile (41) or C olom bia (50), and about the same as Brazil (73). The aggregate labor market rigidity indicator, constructed by Forteza and Ram a (2001), is a com posite index based on the ratio o f m inim um to average w ages, mandated benefits, trade union m em bership, and the share o f governm ent em ploym ent (see note b in table 3).6 A ccording 6 In the literature on labor market rigidities, public employment is assumed to introduce distortions as overstaffing and higher earnings and job security of public employees tend to increase labor costs in the private sector (on the public sector wage premium, see Panizza, 2001). 21 to this indicator, Argentina has a slightly more rigid labor market than M exico. Both are close to Latin A m erica’s average (0.32), have considerable more rigidity than Chile (0.15, the more flexib le labor market in the region) and significantly less than Uruguay (the more rigid market, with an indicator o f .47). The higher aggregate rigidity in Argentina is related to payroll taxes, w hich were considerably higher there in the early 1990s. A s percent o f gross w ages, these taxes were o f the order o f 23% in M exico compared to 36% in Argentina (the highest in a sample o f large and m edium size Latin American countries). H ow ever, by the m id-1990s the burden o f non-w age costs as measured by the tax w edge estim ated by Guasch (1999) w as practically identical in the tw o countries. From 1990 to 1995, it had substantially decreased in Argentina (from 32.8% to 22.4% ) and increased slightly in M exico (from 20.7% to 22.5% ). Forteza and Ram a’s rigidity indicator does not take into account job separation costs. This gap can be filled with the job security index provided by Heckm an and Pages-Serra (2000). This index com putes the expected cost, at the time o f hiring, o f future dism issal. D ism issal costs include advance notification costs and severance pay. It turns out that Argentina and M exico have very similar firing costs (24.8 and 26.1, respectively, as percent o f annual w age). In fact, they are slightly higher in M exico, w hich is right in the Latin Am erican average. Both countries have low er costs than Chile (28.2% ) and significantly higher costs than Brazil and Uruguay (14.9% and 18.6%, respectively). C ollective bargaining in our two countries is very sim ilar.7 Both countries have centralized system s with high state intervention through registration o f unions, conciliation and arbitration. Performance-based com pensation represents a low percentage o f collective labor contracts in both (Guasch, 1999). U nionization rates (30% in Argentina and 29% in M exico as a share o f the labor force) are almost identical and am ong the highest in Latin America. The high degree o f aggregate real w age flexibility in M exico has been attributed to this com bination o f centralization and government intervention.8 For the case o f the Argentine labor market, Dam ill, Frenkel and M aurizio (2002) present estim ations o f “w age curves”, relating real w ages to unem ploym ent rates, show ing significant w age-unem ploym ent elasticities, o f similar value to the elasticities estim ated for the U S econom y. H ave labor markets in our tw o countries becom e more rigid or more flexible during the 1990s? D ism issal costs were identical in 1990 and 1999 (see table 3, note e). In other aspects, Argentina’s labor market appears to have becom e, if anything, m ore flexible. In addition to 7 The effects of wage bargaining systems on unemployment (and the trade-off between inflation and unemployment) are not clear-cut (for a recent review and evaluation, see Thomas, 2002). Decentralized bargaining favors low unemployment to the extent that the high price elasticity o f product demand at the firm level implies a large employment effect of wage changes, which enhances wage flexibility in the face o f shocks. Centralized bargaining limits these effects of competition but internalizes the negative effects of wage increases on employment, thus moderating wage demands. As a result both centralized and highly decentralized systems tend to have a better unemployment performance than intermediate structures such as industry-level bargaining. The latter are not subject to firm level competition (since the price elasticity of demand at the industry level is much lower) nor do they internalize the unemployment externalities o f wage demands. 8 See, for example, Márquez and Ros (1990).Giugale et al. (2001) argue that the primary objective o f Mexican labor unions is maintaining employment, at the cost of wage demands. 22 pension reform in 19949, Argentina relaxed constraints on temporary contracts, reduced the tax w edge, and adopted legislation distinguishing betw een unjustified and justified dism issals (the latter being those associated to a firm ’s econom ic difficulties). B y contrast, M exico did not experience much labor market reform in the 1990s except for the im plications o f the adoption o f a fully-funded pension system in 1997 (Loayza and Palacios, 1997; Frediani, 1998). In conclusion, whether labor market interventions represent a major im pedim ent to efficiency in resource use and allocation (as asserted by dominant “distortionist” view s according to w hich there is an obvious trade-off betw een econom ic efficiency and the social protection o f labor) or not,10 it is clear that the differences in labor market regulations betw een the two countries are too sm all to account for the sharp contrasts in em ploym ent performance. W e believe, how ever, that som e characteristics o f the labor market, with no obvious and clear connection with labor regulations do matter for unem ploym ent performance. Tables 4 and 5 for M exico and tables 6 and 7 for Argentina show those sectors that experienced em ploym ent reductions and those that absorbed labor force, as w ell as the extent to w hich the increase in labor supply com ing from the change in the participation rate and the contraction o f the importable goods sectors was channeled into other sectors o f the econom y, underem ploym ent and open unem ploym ent. D espite the reversal o f em ploym ent losses that took place in M ex ico ’s manufacturing sector in the second half o f the decade, full tim e em ploym ent in the non maquiladora industries w as low er in 2000 (as % o f urban population) than it was at the beginning the decade (see table 4). M oreover, the 1990s recorded a sharp increase in the participation rate (3.4 percentage points o f the urban population) that added alm ost a half percentage point per year to the growth o f the labor supply. The contraction o f non-maquiladora full tim e em ploym ent plus the increase in the participation rate, equivalent together to 3.9 percentage points o f the urban population, had to find its w ay as full tim e em ploym ent in other sectors o f econom ic activity, underem ploym ent or open unem ploym ent. A s illustrated again by table 4, open unem ploym ent (as percent o f urban population) was the same at the beginning and the end o f the decade. At the same tim e, the increase in underem ploym ent (0.4 percentage points) falls w ell short o f the overall increase in the labor supply. 9 Fully funded pensions are considered to be less distorting than traditional pay-as-you-go social security systems as they involve a stronger link between contributions and benefits from the perspective of the individual worker. 10 As argued, for example, by Freeman (1993). 23 Table 4 Mexico: Full time employment, unemployment and underemployment in urban areas, 1991-2000 As % of urban population 3 7 1991-95 1995-2000 1991-2000 1991 1993 1995 2000 29.0 29.1 28.6 32.0 -0.4 3.4 3.0 Non maquiladora industry a 6.2 6.0 5.3 5.6 -0.9 0.3 -0.6 Maquiladora industry “ 0.9 1.1 1.4 2.5 0.5 1.1 1.6 21.1 21.6 21.5 23.4 0.4 1.9 2.3 1.0 1.1 1.0 1.2 0.0 0.2 0.2 14.9 15.2 14.9 16.6 0.0 1.7 1.7 Self-employed 4.1 4.1 4.4 4.7 0.3 0.3 0.6 Unpaid and other 1.1 1.2 1.2 0.9 0.1 -0.3 -0.2 0.8 0.4 0.4 0.5 -0.4 0.1 -0.3 Underemploymente/ 7.8 8.2 8.2 8.2 0.4 0.0 0.4 Open unemployment 0.9 1.3 2.8 0.9 1.9 -1.9 0.0 37.7 38.6 39.6 41.1 1.9 1.5 3.4 Full time employmentD / Non tradable goods sectors Employers W age employment Other Participation rate Sources: Encuesta Nacional de Empleo, Encuesta Nacional Empleo Urbano and National Accounts, INEGI, and Secretaría del Trabajo y Previsión Social. a Population In areas with more than 100,000 inhabitants. J b/ Includes those working 35 hours or more per week. d Obtained multiplying shares in manufacturing by manufacturing share in full time employment M anufacturing share includes extractive industries). Source: Encuesta Nacional de Empleo and National Accounts, INEGI. * Includes agriculture, unspecified, and residual difference. Includes those working less than 35 hours per week. Table 5 Mexico: Full time employment in the non-tradable goods sectors, 1991-2000 As % of urban population a/ 1991 1993 1995 2000 1991-95 1995-2000 1991-2000 Construction 1.8 1.9 1.6 2.0 -0.2 0.4 0.2 Electricity 0.2 0.2 0.1 0.2 -0.1 0.1 0.0 Commerce 5.9 6.0 6.1 6.6 0.2 0.5 0.7 Transport and communications 1.8 2.0 2.0 2.2 0.2 0.2 0.4 Public administration 2.2 2.0 1.9 2.0 -0.3 0.1 -0.2 Other services 9.3 9.4 9.7 10.4 0.4 0.7 1.1 Sources: Encuesta Nacional de Empleo, Encuesta Nacional Empleo Urbano and National Accounts, INEGI and Secretaria del Trabajo y Previsión Social. a Population in areas with more than 100,000 inhabitants. Thus, m ost o f the job losses in the importable goods sector plus the increase in labor supply were absorbed through the expansion o f full tim e em ploym ent in other sectors o f the econom y. W e have already seen the important role in this expansion o f the maquiladora industries, w hich increase their em ploym ent share by 1.6 percentage points. The non-tradable goods sectors, with an increase in the em ploym ent share o f 2.3 percentage points o f the urban population, had an even larger role. A s shown in table 4, this expansion took the form o f an 24 increase in w age earners (1.7 percentage points) and self-em ployed (0.6 percentage points) and w as concentrated in sectors o f econom ic activity usually associated with a high degree o f inform ality, such as other services (with an increase o f 1.1 percentage points) and com m erce (with an increase o f 0.6 percentage points) (see table 5). This is suggestive o f the role that the informal sector had in M exico in keeping unem ploym ent and underem ploym ent at low levels. A s shown in tables 6 and 7, the experience o f Argentina w as very different. N ot only were full tim e em ploym ent losses in the importable goods sectors m uch larger (3.5 percentage points o f urban population), but alm ost every non-tradable goods sector contributed to the fall in full tim e em ploym ent. The only exceptions are financial services, transport, and com m unications. Thus, in contrast to M exico, full tim e em ploym ent in the non-tradables sector as a w hole remained stagnant betw een 1991 and 2000 and consequently did not contribute to the absorption o f the full time jobs lost in the tradables sector. Som e sectors had show n declining trends before the recession associated with the Tequila effect. The Other Services sector show ed a system atic falling trend, unlike what happened in M exico. In the Com m erce and in the Construction sectors there has been a recovery o f full tim e jobs betw een 1995 and 2000, but in this last year the corresponding proportions in urban populations were low er than in 1991. Table 6 Argentina: Full time employment, unemployment and underemployment, 1991-2000 As % of total population 3 1 1991 1993 1995 2000 Full time em ploym ent 0 1 31.0 31.2 28.1 27.5 -2.9 -0.6 -3.5 8.9 8.6 6.5 5.3 -2.4 -1.2 -3.6 22.1 22.7 21.6 22.2 -0.5 0.6 0.1 3.9 Manufacture Non tradable goods sectors 1991-95 1995-2000 1991-2000 Involuntary underem ploym entc / 3.3 3.8 5.1 7.2 1.8 2.1 Voluntary underem ploym enta/ 4.2 4.5 3.4 3.4 -0.8 0.0 -0.8 Open unemployment 2.6 4.7 9.3 7.3 6.7 -2.0 4.7 41.1 44.2 45.9 45.4 5.0 -0.6 4.4 Participation rate Source: Encuesta Permanente de Hogares. INDEC. “ This data correspond to the Greater Buenos Aires region. b/ Includes those working 35 hours or more per week. d Includes those working involuntarily less than 35 hours per week. d/ Includes those working voluntarily less than 35 hours per week. Table 7 Argentina: Full time employment in the non-tradable goods sectors, 1991-2000 1991 1993 1995 2000 1991-95 1995-2000 1991-2000 Construction 2.2 2.1 1.7 1.9 -0.5 0.2 -0.3 Commerce 7.1 7.5 6.2 6.4 -0.9 0.2 -0.7 Transport and communications 2.2 2.6 3.0 3.0 0.8 0.0 0.8 0.6 0.5 1.1 -0.5 -0.3 -0.8 As % of total population a/ Financial Services 2.6 2.6 3,2 3.7 Other services 8.0 7.8 7.5 7.2 Source: Encuesta Permanente de Hogares, INDEC. a/ This data correspond to the Greater Buenos Aires region. 25 The contraction o f full tim e em ploym ent in the non-tradables sectors reflected also an adjustment process to the new relative prices (D am ill, Frenkel and M aurizio, 2002). Although these sectors were not forced to com pete with cheaper imports, these activities confronted incentives to incorporate labor-saving technology as the relative price o f imported equipment fell with the reduction in tariffs and real exchange rate appreciation. The fall in total em ploym ent w as less than the contraction in full time em ploym ent because o f the persistent increase o f involuntary underem ploym ent (3.9 percentage points o f urban population betw een 1991 and 2000). The inverse relation betw een full time em ploym ent and involuntary underem ploym ent variations is not m erely arithmetical. In the short run, involuntary underem ploym ent show s a counter-cyclical behavior, like open unem ploym ent, w hile full tim e em ploym ent has a significant pro-cyclical behavior. This suggests that involuntary underem ploym ent plays som e role in absorbing contractions in full time em ploym ent, just as the informal sector does in M exico. On the other hand, since the m id­ eighties there has been in Argentina an upward trend in the participation rate, explained by a rising participation o f w om en. In the period 1991-2000, the participation rate increased 4.4 percentage points. The changes in em ploym ent and the participation rate resulted in an increase in open unem ploym ent o f about 5 percentage points o f the urban population, between 1991 and 2000. Adding the variations o f open unem ploym ent and involuntary underem ploym ent provides a different perspective on the em ploym ent problems o f the decade. The sum o f those categories increased 8.6 percentage points betw een 1991 and 2000. About one-half o f this increase corresponds to the reduction in full tim e jobs and the other half to the increase in the participation rate. What explains the contrast in the behavior o f the non-tradable goods sectors in M exico and Argentina? A full answer to this question is beyond the scope o f this paper. W e lim it ourselves to note that the comparative literature on labor markets suggests indeed the presence o f a relatively high turnover rate in M exico (higher than in Argentina) which is suggestive o f large em ploym ent flow s into and out o f its informal sector (G iugale et al., ch. 22). This degree o f em ploym ent flexibility is thus consistent with a high capacity o f M ex ico ’s informal sector for absorbing em ploym ent losses in the formal sectors o f the econom y. 26 5. Conclusions Argentina and M exico constitute polar cases in the adjustment o f the labor market to the m acroeconom ic p olicies and external shocks o f the 1990s. The m ost striking difference betw een the tw o experiences refers to the behavior o f unem ploym ent, w hich increases sharply in Argentina w hile it remains at very low levels, even falling slightly, in the case o f M exico. Table 8 sum marizes som e o f our findings regarding this key difference. U sing tables 4 and 6, the table decom poses the change in unem ploym ent from 1991 to 2000 (as percent o f the urban population) into the sum o f the increase in the participation rate, the fall in full tim e em ploym ent in the tradable goods sectors, the fall in full tim e em ploym ent in the non tradables sector and the fall in underem ploym ent (all o f these as percent o f urban population). The large difference in the evolution o f open unem ploym ent (4.7 percentage points) should be attributed above all to the different evolution o f full tim e em ploym ent in the tradable goods sectors w hich falls by 3.6 percentage points in Argentina w h ile increasing by 0.7 percentage points in M exico. B ehind this contrast is the fact that in the 1990s, manufacturing em ploym ent increases by 25% in M exico w hile falling by over 30% in Argentina. The difference in the behavior o f em ploym ent in the non tradable goods sectors (more favorable again in the case o f M exico) is less sharp and tends to be offset by an increase in underem ploym ent w hich is larger in Argentina than in M exico. It is worth noting, finally, that the higher increase o f the participation rate in Argentina contributes to the unem ploym ent problem in this experience (1.1 percentage points difference with M exico). Table 8 Decomposition of change in open unemployment in Argentina and Mexico, 1991-2000 (as % of urban population) Argentina (1) Mexico (2) (1) - (2) Change in open unemployment 4.7 0.0 4.7 Increase in participation rate 4.4 3.4 1.0 Fall in full time employment (tradables) 3.6 -0.7 4.3 Fall in full time employment (non tradables) -0.1 -2.3 2.2 Fall in underemployment -3.1 -0.4 -2.7 Source: Tables 4 and 6. Thus, the contrast in the behavior o f unem ploym ent should be associated to the evolution o f em ploym ent in both the tradables goods and non-tradables sectors in the tw o countries, with the first making the larger contribution. Tw o factors explain the contrast in the tradable goods sector. The first is the behavior o f the real exchange rate and the associated behavior o f dollar w ages. In the case o f M exico, the sharp peso devaluation o f the m id-1990s enhanced the internal com petitiveness o f the tradable goods sectors (i.e. its capacity to attract resources from the rest o f the econom y) and the external com petitiveness o f the econom y as a w hole. In Argentina a continuous real appreciation, aggravated by the devaluation o f the Brazilian Real in 1999, had devastating effects on com petitiveness and em ploym ent in the tradable goods sector. It is worth insisting that the important difference refers to the behavior o f dollar w ages and not to that o f real w ages, w hich stagnate in M exico w hile falling in Argentina. 27 The pattern o f specialization is the other important determinant o f the evolution o f em ploym ent in the tradable goods sectors in the two experiences. M ex ico ’s trade specialization is dominated, and increasingly so throughout the decade, by manufacturing exports, especially those o f labor intensive maquiladoras, w hile Argentina’s continues to be based on the processing o f natural resources and industrial com m odities, activities that could not offset the em ploym ent losses in the manufacturing sectors producing importables. It is worth noting, how ever, the shortcom ings o f M ex ico ’s pattern o f specialization. The counterpart o f the high capacity o f em ploym ent absorption by the maquiladora industry has been, as w e have seen, low and stagnant labor productivity. A s the real exchange rate has appreciated again in the recent past and dollar w ages have increased, profit margins have declined11. This has put a brake on the expansion o f maquiladoras productive capacity and output with a corresponding fall in em ploym ent starting in the third quarter o f 2 0 0 0 (see figure 5). W ith no productivity growth, the maquiladoras constitute a sector that can only expand on the basis o f low wages. G iven the tendency o f w ages to increase in other sectors along with productivity gains, the maintenance o f the internal com petitiveness o f the maquiladoras w ould require a continuous undervaluation o f the currency. The non tradable goods sectors also made a higher contribution to em ploym ent absorption in M exico than in Argentina. This contrast appears to be related to the different capacity o f em ploym ent absorption o f the informal sector in the tw o countries. A s w e have seen, measuring flexibility b y the rate o f turnover, M ex ico ’s labor market appears to be more flexible than Argentina’s. The higher em ploym ent flexibility o f the M exican labor market should not be confused, how ever, w ith a higher degree o f real w age flexibility or a less regulated labor market that w ould tend to preserve em ploym ent in the formal sectors o f the econom y. The role o f flexibility in the comparative evolution o f unem ploym ent refers to the capacity o f the informal labor market o f absorbing em ploym ent losses in the formal sectors o f the econom y as w ell as the growth o f the labor supply. The increase in relative wages in the maquiladoras that has accompanied their rapid expansion in the recent past table 2) has also contributed to the profit squeeze. 28 Figure 5. Employment in the maquiladora industry year/m onth S o u rc e : IN E G I Thus, our findings, together with our comparison o f the evolution o f G D P and real w ages in the tw o cases, challenge the conventional w isdom according to w hich the differences in the adjustment o f the labor market must be due to the degree o f real w age flexibility and labor market regulations. A premise o f this view is that the striking differences in the adjustment o f the labor market reflects the flexibility o f M ex ico ’s labor market (in particular its real w age flexibility) that contrasts with the rigidities o f Argentina’s labor market. This prem ise is sim ply erroneous. Real w ages stagnated in M exico and fell in Argentina. M oreover, the characteristics o f labor markets in the tw o countries are so strikingly similar that they could hardly explain the sharp differences in em ploym ent and unem ploym ent performance. A ll this leads us to a more general com m ent on Latin A m erica’s em ploym ent performance in the 1990s and the lessons that w e can derive from it. There is a marked cleavage regarding the orientation o f policies that m ight reverse the poor em ploym ent performance in m any countries o f the region over the past decade, and particularly in the last five years. The dominant view attributes the problem s to a supposed incom pleteness o f liberalizing reforms. In a permanent escape into the future, this orientation recom m ends further reform in the face o f any difficulty arising in econom ic performance. W ith regard to com petitiveness and em ploym ent problem s, this orientation sees the institutional rigidity o f the labor market as the m ost important obstacle and advocates flexibilization as the main policy instrument to resolve em ploym ent problems. H ow ever, there seem s to be no successful cases involving this kind o f m odel in the developm ent experience. L osses o f com petitiveness associated w ith m assive capital inflow s and 29 currency appreciation have not been offset b y reductions in real w ages. M ore important from a normative point o f view , even i f processes o f this kind were viable, they w ould surely be long and painful stories and promote a social structure that is even more unequal and unfair than the one w e currently find in Latin Am erica. This opinion should not be interpreted as a defense o f existing labor legislation -w h ic h in m any countries is obviously obsolete and in efficien t- but rather as a criticism o f the prevailing idea that the cause o f em ploym ent performance is located in the rigidity o f labor market institutions and that, consequently, flexibilization is the m ost important p olicy orientation in this regard, if not the only one. Perhaps the cleavage over p olicy recom m endations can be better understood if w e express it in m ore technical terms. A s such, it becom es clear that its deep roots date back to the origins o f m acroeconom ics as a discipline, to Keyness analysis o f the causes and rem edies o f the Great Depressions unem ploym ent and the debate K eynes sustained with his contemporaries. The orientation w e are criticizing asserts that there is only one equilibrium price configuration in every econom y, w hich yields full em ploym ent (or better, unem ploym ent at its natural rate) in the labor market. W hen high rates o f unem ploym ent or em ploym ent generation problems are observed, these problems must be attributed to im perfections in the labor market. The diagnosis, m ost often im plicit, is that institutional obstacles inhibit the working o f com petition in this market, preventing the price o f labor from falling to the point at which the unem ploym ent rate equals the natural rate. This view disregards the importance o f the precise trajectory follow ed by the econom y in the past and its influence over the present, the so-called hysteresis phenom enon, w hich im plies that the current m acroeconom ic configuration m ay be heavily determined by the past. In this regard, consider the econom ic situation in Latin Am erica at tw o points in time: the second half o f the eighties and the first half o f the nineties. In the first, the international interest rate w as high; econom ies were financially rationed and m ade significant transfers abroad; absorption was low er than output; production was stagnant and productivity decreased. In the second period, the international interest rate was lower; econom ies had access to international financial markets and received transfers from abroad; absorption w as greater than output; production was growing and productivity went up. H owever, em ploym ent in the second period was low er than in the first, even though there seem s to be no doubt that there was a positive shock between the latter and the former. W hy then should labor costs have to fall to preserve equilibrium conditions in the labor market, as is suggested by the diagnosis m entioned above? The paradox w e reach from the idea o f a unique equilibrium configuration highlights the inadequacy o f this perspective. The alternative im plies considering the possibility o f m ultiple equilibrium configurations depending, am ong other circum stances, on the factors im posed by the external context and econom ic policies. Som e configurations are more favorable to em ploym ent and growth. Others im ply that the econom y is being driven to low -grow th and low -em ploym ent traps. The observed changes betw een the eighties and the nineties do not appear to be paradoxical from this perspective. 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