Macroeconomic regime, trade openness, unemployment and

inequality. The Argentine Experience.

Roxana Maurizio Universidad Nacional de General Sarmiento

Argentina

IDEAs Conference on Policy Perspective on Growth, Economic Structure and Poverty Reduction, Beijing, 2007

MOTIVATION

• On the one hand, Argentina is one of the Latin American countries that experienced the most dramatic long-term changes with respect to income inequality and welfare.

• On the other hand, the experience of Argentina indicates that it is possible to verify significant increments of the domestic product together with a very strong worsening of the personal and household income distribution.

OBJECTIVE

Analyze the Argentine experience focusing on the interactions among macroeconomic regime, labour performance, income distribution and poverty incidence.

LONG-TERM PERSPECTIVE Graph 1

Evolution of Real Wages. Index 1970=1

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1940

1950

1960

1970/74

1975/79

1980

1990

2000

LONG-TERM PERSPECTIVEGraph 3

Household's Poverty Index GBA

4

9

14

19

24

29

34

39

44

1991-94

1997-00

1994-96

2001-02

1986-90

2003-06

REGIONAL PERSPECTIVE

Gini Index of Per Capita Household Income Selected Latin American Countries

0.3

0.35

0.4

0.45

0.5

0.55

0.6

0.65

1990 2000

Poverty Index. Individuals. Selected Latin American Countries

0

1020

30

4050

60

Uruguay Argentina CostaRica

Chile Brasil México

1990 2000

Macroeconomic regime and labour market during the nineties • Convertibility Plan from 1991 to 2001 (Currency

board regime)

• Trade openness and financial liberalization

• Structural reforms (Washington Consensus)

-Privatization

-State reforms

-Labour flexibilization

Convertibility Plan: phases and final crisis

• 1991-1994: vigorous inflow of foreign capital, very high economic growth and sharp reduction in inflation rates. Real appreciation.

• 1995: “Tequila Crisis”

• 1996-1998: new flows of external capital and economic recovery

• 1998-2001: new contractionary phase and collapse of fixed exchange rate.

Graph 7 Real income of the employed and active population

GBA ( in constant 1999 prices)

550

600

650

700

750

800

850

900

M91 M92 M93 M94 M95 M96 M97 M98 M99 M00 M01 Employed Activ e population

20%

17% 3%

- 9%

Graph 6

Employment rate and full-time employment rateGBA

26

28

30

32

34

36

38

40

Employment rate Full-time employment rate

Involuntary underemployment

Graph 10Poverty indexes

GBA

10

15

20

25

30

35

40

May

-91

May

-92

May

-93

May

-94

May

-95

May

-96

May

-97

May

-98

May

-99

May

-00

May

-01

Households Individuals

Graph 8 Gini index of employed and active population

GBA

0.40

0.42

0.44

0.46

0.48

0.50

0.52

0.54

0.56

0.58

Employed Active population

Graph 5Unemployment rate

GBA

0.0

5.0

10.0

15.0

20.0

25.0

Ma

y

Oct

Ma

y

Oct

Ma

y

Oct

Ma

y

Oct

Ma

y

Oct

Ma

y

Oct

Ma

y

Oct

Ma

y

Oct

Ma

y

Oct

Ma

y

Oct

Ma

y

Oct

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Graph 9Per Capita Family Income. Rrelationship between fifth and first quintile

GBA

12

11

15

16

15

16

17

18

20

10

11

12

13

14

15

16

17

18

19

20

21

May

-91

May

-94

May

-98

May

-99

Oct-

99

May

-00

Oct-

00

May

-01

Oct-

01

Assessing the distributional worsening : the role of the macroeconomic and labour market

Some hypotheses:• “Unified Theory”. Shifts of different intensity in the

relative demand and supply of labour between skills due to (1) Trade openness and (2) technological changes.

• Argument based on the idea that macroeconomic regime determines the global performance of the labour market and has, through this channel, a direct impact on the level and distribution of welfare. This vision emphasizes the role of the aggregate labour demand over considerations which refer only to the shift in the composition of labour demand.

Reversion and perdurability after the macroeconomic regime change

• Macroeconomic and social crisis as a consequence of the collapse of Convertibility : -GDP decreased by more than 11%-Unemployment climbed to 21%-55% of the population lived in households with incomes below the poverty line.

• From the second half of 2002 some reversion of the trends of the labour market indicators but with different intensities.

Reversion and perdurability after the macroeconomic regime change

• Positive facts: Labour dynamics. Very high employment generation, real wage recovery, unemployment reduction, fall in inequality and poverty.

• Negative facts: the “stocks”. Still significant precariousness, high unemployment rate, inequality and social vulnerability.

ReversionGraph 11

Production and employment in manufacturing activitiesIndex 1997=100

65

75

85

95

105

115

125

Employment Index of fisical volumen

TOTAL EMPLOYMENT 21% 100%CategoryWage-earners 28% 96%

Registered 30% 59%Non-registered 26% 37%

Non-wage earners 9% 11%Employers 31% 6%

Own-Account 5% 5%Workers without wages -53% -7%

Educational levelPrimary 11% 16%Secondary 26% 46%Tertiary 24% 38%

SectorManufacture 30% 20%Construction 50% 17%Commerce 17% 20%Transport 9% 3%Financial services 30% 14%Education and health 19% 19%Other services 9% 7%

Table 1Evolution of employment by category, educational level and sector (%)

28 urban centres. Excludes employment plans

Var. 2006/2003Contribution to employment

growth

Graph 12 Real labour income

28 urban centres. Excludes employent plans(Index Oct- 01=100)

60

65

70

75

80

85

90

95

100

105

110

Oct. Mayo Oct. Mayo Oct. M / ISem.

II Sem. I Sem. II Sem. I Sem. II Sem. I Sem.

2000 2001 2002 2003 2004 2005 2006

Semi-annual EPH Continuous EPH

Graph 13Gini index of labour income

28 urban centres. Excludes employment plans

0.420

0.430

0.440

0.450

0.460

0.470

0.480

Oct. Mayo Oct. Mayo Oct. M / ISem.

II Sem. I Sem. II Sem. I Sem. II Sem. I Sem.

2000 2001 2002 2003 2004 2005 2006

Semi-annual EPH Continuous EPH

Perdurability

QUINTILE I SEM 2003 II SEM 2003 I SEM 2004 II SEM 2004 I SEM 2005 II SEM 2005 I SEM 20061 2% 3% 3% 3% 3% 3% 3%2 7% 7% 8% 8% 8% 8% 8%3 12% 12% 13% 13% 13% 13% 14%4 21% 21% 21% 21% 21% 21% 22%5 57% 57% 56% 55% 54% 54% 53%

TOTAL 100% 100% 100% 100% 100% 100% 100%

25 21 18 17 16 16 15

Quintile distribución of Per Capita Family Income

Average income fifth Q / first Q

QUINTILE I SEM 2003 II SEM 2003 I SEM 2004 II SEM 2004 I SEM 2005 II SEM 2005 I SEM 20061 3% 4% 4% 4% 4% 4% 4%2 9% 9% 10% 10% 10% 10% 10%3 15% 14% 15% 15% 15% 15% 15%4 22% 22% 21% 22% 22% 22% 22%5 51% 51% 51% 49% 49% 50% 48%

TOTAL 100% 100% 100% 100% 100% 102% 100%

Quintile distribution of incomes from main occupation

Graph 17Poverty and indigence

28 urban centres

35.938.3

53.0

57.554.7 54

47.844.3

40.238.5

33.831.4

26.9

11.613.6

24.827.5 26.3 27.7

20.517.0

15.0 13.6 12.2 11.28.7

0

10

20

30

40

50

60

70

M01 O01 M02 O02 M03 1 S 03 2 S 03 1 S 04 2 S 04 1 S 05 2 S 05 1 S 06 2 S 06

Individual poverty Individual indigence

Decomposition of poverty variation (households)

Period Variation (p.p)Growth effect

Inflation effect

Nominal income effect

Distribution effect

Residual

O00-O01 4.7 70% -6% 74% 30% 2%O01-M02 12.3 98% 63% 28% 10% -1%M02-O02 4.8 72% 150% -63% 9% 4%O02-M03 -3.1 85% -2% 89% 18% -5%

II S03- IIS04 -6.7 72% -36% 97% 29% 9%IIS04-IIS05 -5.1 72% -66% 133% 22% 10%

IIS03-IS06 -13.4 72% -61% 116% 27% 18%

CONCLUSIONS• Macroeconomic regime matters in term of

distributional and living conditions outcomes There are environments that, in spite of producing important GDP growths, do not benefit the employment creation and therefore contribute to the inequality increase.

• Negative effects that some macroeconomic configurations have on the labour market and income distribution persist even after the country returns to its growth path.

CONCLUSIONS (cont.)

• Argentina has experienced a pattern where the successive crises worsen the income distribution as long as the recovery cycles find boundaries for the complete reversion of these trends.

• High real exchange rate alone do not solve all labour and social problems.