Evolving Wage Cyclicality in Latin America

Abstract

This paper examines the evolution of the cyclicality of real wages and employment in four Latin American economies (Brazil, Chile, Colombia and Mexico) during the period 1980-2010. Wages are highly pro-cyclical during the 1980s and early 1990s, a period characterized by high inflation. As inflation declined wages became less pro-cyclical, a feature that is consistent with emerging downward wage rigidities in a low-inflation environment. Compositional effects associated with changes in labor participation along the business cycle appear to matter less for estimates of wage cyclicality than in developed economies.

Keywords: Downward wage rigidity, Indexation, Real wage cyclicality, Vector autoregression, Time-varying coefficients, Bayesian estimation

JEL Classification: E24