Real wages, poverty and economic policy changes in South America and Mexico in the 1980s : a review of the evidence

This paper reviews the experiences of Mexico and ten South American countries (Bolivia, Chile, Colombia, Argentina, Paraguay, Uruguay, Peru, Ecuador, Brazil, and Venezuela) to see if any common patterns can be discerned. Section II examines the pace which different countries took toward adjustment, while Section III analyzes patterns in real wages, employment, and poverty levels. Labor force participation rates are discussed in Section IV and the relationship between real wages, exchange rates, and trade liberalization in Section V. Section VI assesses the effect of inflation on wages and unemployment and Section VII reviews impacts on poverty rates. The report concludes that the movement of real wages and unemployment in the 11 countries followed a fairly well-defined pattern. With the onset of economic crisis, real wages tended to fall and unemployment to increase, sometimes dramatically, as real per capita GDP turned negative or slowed. Failure to adjust promptly compounded these difficulties. Once effective programs of stabilization and comprehensive structural adjustment were enacted, economic growth resumed, real wages recovered, and unemployment declined, though sometimes only after several years. The paper concludes that since adjustment entails significant costs for wage workers, particularly the poor, it is important that countries adhere to sound macroeconomic and trade policies, avoiding exchange rate overvaluation, excessive protectionism, and misallocation of scarce resources. At the same time, safety net programs may be needed to protect those near the poverty line or already below it.