Uruguay: Selected Issues

This 2011 Article IV Consultation—Selected Issues paper focuses on estimating potential output and the output gap and spillovers from agriculture in the case of Uruguay. It introduces additional economic information and theory to estimate potential output, shedding some light on the discussion of current monetary and fiscal policies. The objective is to take advantage of economic data to disentangle the most recent economic performance by introducing multivariate techniques. The paper also presents an overview of the labor market and pension system of Uruguay.

Abstract

This 2011 Article IV Consultation—Selected Issues paper focuses on estimating potential output and the output gap and spillovers from agriculture in the case of Uruguay. It introduces additional economic information and theory to estimate potential output, shedding some light on the discussion of current monetary and fiscal policies. The objective is to take advantage of economic data to disentangle the most recent economic performance by introducing multivariate techniques. The paper also presents an overview of the labor market and pension system of Uruguay.

III. The Uruguayan Labor Market1

A. Introduction

1. The Uruguayan labor market has undergone significant changes in recent years. First, against the backdrop of the strong economic recovery after the 2002 economic crisis, Uruguay has experienced a sharp reduction in the unemployment rate amid rising labor force participation and a considerable increase in real wages. Second, there have been several important changes to the labor market regulatory framework and the social security system. The collective bargaining framework was restored in 2005, and further revamped in 2009 through a new wage negotiation law. In 2010, the government suggested indexation formulas that sought to align real wage increases with productivity growth in each sector. While such an alignment has yet to take place in full, the real wage has been shielded against reductions through inflation indexation; in the 2010/11 wage round more than 90 percent of agreements included clauses with ex-post corrections for deviation between actual and expected inflation.

2. This paper seeks to understand better these changes as well as their implications. To this end, it delves into its recent performance and regulatory changes, and includes an empirical analysis that attempts to gauge how the degree of labor market flexibility has evolved over time—in line with the different regulatory regimes that have characterized Uruguay in the last few decades. While in practice the degree of regulation and the character of any labor market regime constitute a social and political choice particular to each country and may vary over time, it is important for policymakers to have clarity on how these regimes and their key features interact with other macroeconomic variables and affect an economy’s mechanisms of adjustment to shocks.

3. The first part of this paper reviews the key features of Uruguay’s labor market. It includes a brief review of developments in unemployment and wages, including by looking into the evolution and role of the minimum wage and changes in the regulatory framework. It finds—in line with recent studies on the topic—that minimum salaries, though rising markedly in recent years, are not yet binding in the determination of other salaries in the economy. It also suggests that the reforms to the wage bargaining process and to social security have intensified the degree of labor market regulations.2

4. The second part of the paper undertakes an empirical study of labor market flexibility in Uruguay and comparator countries. Its results suggest that wage indexation on inflation and employment flexibility declined during the period of weaker collective bargaining (1994-2005), although both indexation and employment flexibility have generally remained above those observed in comparator countries for the last few decades. The results also indicate that the greater wage indexation to inflation in recent collective wage agreements would imply greater fluctuations in employment in response to economic shocks.

B. Key Features of the Labor Market

Recent Developments

5. Uruguay’s economic recovery since the country’s crisis in 2002 has led to a significant improvement in labor market conditions. The unemployment rate has fallen sharply, reaching record lows.3 However, youth unemployment (of those aged 25 years or below) has fallen somewhat less and remains high at 19.7 percent (2010 average). Unemployment among unskilled workers also remains relatively high.4 Real wages contracted during the 2002 crisis, but have since experienced a sustained improvement and now are about 9 percent higher than in 2000. This increase in real wages has gone hand in hand with substantial gains in labor productivity. Since 2004, series labor productivity has risen by 5 percent a year on average—according to data from the International Labor Organization’s (ILO).

Figure 1.
Figure 1.

Uruguay: Labor Market Indicators

Citation: IMF Staff Country Reports 2011, 376; 10.5089/9781463926601.002.A003

Source: Instituto Nacionalde Estadistica.
Figure 2.
Figure 2.

Uruguay: Selected Labor Market Indicators

Citation: IMF Staff Country Reports 2011, 376; 10.5089/9781463926601.002.A003

Sources: Banco Central del Uruguay, Instituto Nacional de Estadistica, National Bureau of Statistics, World Bank, Alaimo and Rucci (2009), Botero et al. (2004) and IMF staff calculations.

C. Minimum Wage Recovery

6. The minimum wage has been increased several times since 2005. The minimum wage was established by law in 1969. Its adjustment is not linked to a specific formula or price index, but determined by the government. During 2000-04, the nominal minimum wage reached a historical low level,5 and inflation eroded its real value. Starting in 2005, the government adopted an explicit policy to ensure its recovery, and the frequency of the adjustments has been increased to twice a year. The minimum wage was raised from UR$ 1,310 in January 2005 to UR$ 6,000 in January 2011. These increases translate into a 19 percent a year real increase in the minimum wage in 2005–11 (or 27 percent in nominal terms in the same period).

Figure 3.
Figure 3.

Uruguay: Minimum Wage Indexes (2005=100)

Citation: IMF Staff Country Reports 2011, 376; 10.5089/9781463926601.002.A003

Source: Instituto Nacional de Estadística.

7. The minimum wage appears to remain non-binding in the determination of other salaries. Bucheli (1998) and Furtado (2006) examined the potential impact of minimum wage increases in Uruguay, concluding that it was not relevant even in the cases of unskilled and young workers. There is no clear empirical evidence suggesting that there is a significant causal link between the minimum wage and wage setting. More recently, Borraz and Gonzalez (2011) have shown that the increases in the minimum wage in Uruguay have played no role in improving income-distribution.

8. Uruguay’s minimum wage does not appear high compared with other countries in the region. In fact, when measured in purchasing power terms or in relation to GDP per labor force member, Uruguay’s minimum wage is the lowest among selected countries in Latin America and much lower than in the United States and France—albeit higher than in Thailand and Malaysia. Cunningham (2007) finds that the share of the labor force that earns the minimum wage in Uruguay is the lowest in Latin American and the Caribbean.6

Table 1.

Uruguay: Minimum Wage in Uruguay and Selected Countries, 2010

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Note: Annual wages were calculated by multiplying monthly wages by 12, weekly wages by 52, daily wages by 5x52 and hourly wages by Wx52, where W is the legal maximum workweek length in hours.Sources: National Authorities, United State Department of State, IMF and IMF staff calculations.

2008 Country Reports on Human Rights Practices, United States Department of State.

Chilean Law 20,359.

2009 Country Reports on Human Rights Practices, United States Department of State.

D. Recent Regulatory Reforms

9. There have been important institutional and regulatory reforms to the labor market in recent years. Starting in 2005, restore the collective bargaining system and enhance unemployment insurance and the social security regime more generally (Annex 1).

10. Uruguay has a long-standing tradition of collective bargaining. Wage negotiations first started in 1943 (Law 10,449) through the creation of a tripartite wage negotiation mechanism reliant on wage councils whose main task was fixing minimum wages for each sector of activity. In 1993, this mechanism was suspended (except for some sectors such as health, public transport, and construction). In 2005, through the Decree 105, the wage councils were restored and a Tripartite Superior Council created. The latter was comprised by nine government representatives, six private sector employer representatives and six worker representatives. Agreements were “homologated” by decree in order to ensure that they became legally binding. 7

11. In 2009, a new wage negotiation law was approved. The law (number 18,566) establishes that negotiations between employers and employees are compulsory, while the government would only intervene if requested by either party. The law also establishes that negotiations can take place within one firm or—at the other extreme—can comprise a whole sector. When done at the sector level, all elements of the agreement (minimum wage, percentage of salary adjustment, etc.) apply to all firms in the sector, involving all employees (irrespective of whether they belong to the union or not). However, a firm can sign a different agreement with its employees provided that it includes better terms for the employees than in the sector-wide agreement. Exceptionally, a firm can request a waiver (from the Labor Ministry) from fulfilling the agreement (“descuelgue”) if it provides proof that the agreement would entail a large negative impact on the firm. All clauses of an existing agreement are valid until a new agreement supersedes the previous one (“ultra-activity”).

12. There are ongoing discussions about further modifications to the collective bargaining framework. In 2009, the private sector requested the ILO to review the new law and its compliance with ILO conventions.8 The main points being reviewed by the ILO are presented in Annex 2.

13. Data suggest that the new labor framework has had an impact on wage determination. In particular, the wage adjustment that followed from the 2010 wage negotiation round is based on three key guidelines provided by the Finance Ministry: (i) expected inflation; (ii) a weighted average between expected productivity growth at macroeconomic level and expected productivity growth at sector level and (iii) ex-post corrections of actual CPI inflation minus the expected inflation included in the previous agreement. The wage adjustment is annual or biannual; the agreements, in general, last between one and five years.9

14. The vast majority of the agreements under the 2010 wage negotiation round included inflation indexation, but only few embedded productivity growth. During this round, more than 80 percent of the activity groups negotiated a new agreement. In general, all agreements have set wages taking into account expected inflation (in general, it is the mid-point of the official target range of 4-6 percent, or an average between this figure and the median inflation expectation that results from the Central Bank survey). Also, almost all agreements include clauses for ex-post corrections (the difference between the actual inflation and the one in the agreement).

15. Since 2006, there have been other several important changes to the labor framework, which aim at strengthening employees’ rights (Annex 1). For example, law 17,940 grants immunity to union members, law 18,065 regulates the conditions of those working in domestic services, while laws 18,099 and 18,251 provide protection for workers which could be affected by the decentralization.

16. Reforms in recent years have also involved changes to the social security system and unemployment benefits. In 2008, a reform was adopted (law 18,395) which allows workers to retire with contributions to the system for 30 years or more (instead of 35 years) and gives special benefits to women (for example, each child is considered as one year of service). Law 18,399 establishes that the maximum coverage for unemployment insurance is six months (as before but in some cases, exemptions have been approved in order to extend its duration). It also establishes that the unemployment insurance equals the average value of the last six months’ wages with a gradually decreasing percentage (66, 57, 50, 45, 42 and 40 percent),10 in contrast with the previous law, which established that the insurance would equal 50 percent of the average value of the last six months wages.11 The law also creates a new legal concept “partial unemployment insurance” that is paid when the usual working day is reduced by 25 percent or more. This change helps enhance labor flexibility while keeping workers connected to work-key for maintaining skills. As Casanova (2009) shows, this measure has been applied since the 2008 global crisis especially by those sectors which registered a deep fall in demand (such as car-parts, and tanneries).12

Figure 4.
Figure 4.

Uruguay: Number of People Receiving the Unemployment Insurance

Citation: IMF Staff Country Reports 2011, 376; 10.5089/9781463926601.002.A003

Source: Banco de Prevision Social (BPS)

17. The authorities are also putting in place strategies to enhance the country’s labor skills. These respond to the rising skill gap in the labor market. In 2008, a new institute was created, the National Institute of Employment and Training (“Instituto Nacional de Empleo y Formación Profesional”, INEFOP) which is responsible for enhancing skilled labor through designing and implementing training courses.

Labor regulation index

18. The implications of recent changes to labor regulations can be assessed by updating the index developed by Botero et al. (2004). 13 One conclusion of Botero et al. (2004) is that heavier regulation of labor market may have adverse consequences for labor force participation and unemployment, especially for the young workers. Their “Labor Regulation Index” ranges from 0 to 1, and a number closer to one implies a heavy degree of regulation in the labor market. The index encompasses: (i) employment laws; (ii) collective relations laws, and (iii) social security laws. The sub-index of employment laws reflects the incremental cost to the employer of deviating from a hypothetical contract, in which the conditions of a job are specified and a worker cannot be fired. The second sub-index measures the protection of workers from employers through collective action. The third sub-index addresses the generosity of benefits by measuring the percentage of the net previous salary covered. According to the study, in 1997, the maximum value of the index was 0.75 for Russia and the minimum was 0.14 and corresponds to Malawi. Uruguay’s index was below the median and average (Table 2).

Table 2.

Uruguay: Index of Labor Regulation and Subindices

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Sources: Botero et al. (2004) and IMF staff calculations.

Average of the subindices.

19. According to the update, recent changes appear to have made the labor regulations somewhat heavier in Uruguay. The biggest increase in the overall index comes from the change in the sub-index for collective relations laws, which in turns is explained by the new mechanisms of collective bargaining (Annex 2).

20. The changes to the social security regime have also contributed to a relatively heavier regulation. The increase in the social security regulation sub-index corresponds to the change in how to compute the years of contribution needed to retire (law 18,395) and the increase in the unemployment insurance coverage in time and amount (law 18,399).

E. Assessing Labor Market Flexibility

Background

21. Recent reforms to the Uruguay’s labor market framework might have implications for labor market flexibility, as the available literature on Uruguay suggests. Allen et al. (1994) and Lederman et al. (2011) document that the Uruguayan collective bargaining system of 1985-93 and changes in unionization during 1997-2000 influenced labor market flexibility in the past. Against the backdrop of the recent restoration of the collective bargaining agreements and the new guidelines for wage determination based on inflation and productivity, this section provides empirical stylized facts about the macroeconomic labor market flexibility in Uruguay, relative to regional peers and selected countries of Asia, using the wage Philips curve and a quarterly VAR model.

22. The degree of labor market flexibility prevailing in a country influences its response to macroeconomic shocks. A flexible labor market allows for adjustment in real wages along the business cycle. When a strong downward real wage rigidity is present (particularly during the economic downturns), it tends to exacerbate the initial negative economic shock through employment flexibility. Intuitively, this is because companies cannot adjust the rigid real wages of their employees and thus respond through layoffs and substituting the most expensive workers with cheaper hires (employment flexibility) to adjust labor costs. This can prolong the adjustment process and makes it more costly in terms of output loss and often for workers as well.14

23. A higher real wage rigidity is usually associated with higher employment fluctuations. Based on evidence from 12 European Union countries, Babecky et al. (2010) show that companies tend to use cheaper hires (by laying off high-wage employees and hiring low-wage ones), to lower labor costs, and that such practice is statistically significantly positively related to the degree of nominal wage rigidity existing in the country. Lederman et al. (2011) show that the volatility of wages of those employees who “move” is higher than that of those who “stay”—implying that, in practice, the greater wage rigidity may not only turn out in greater employment shifts—but also that those workers who move will be affected by a greater change in their salaries as they transition through new posts.

24. The degree of labor market flexibility influences both the business cycle and the design of stabilization policies that address it. For example, as shown by Jadresic (1996) and Herrera (2002), how wage contracts are specified affects the magnitude of the economic downturn and cost of disinflation, that is, the sacrifice ratio. The slower the adjustment in real wages, the slower and more costly is the disinflation process. Thus, nominal wage indexation on inflation increases the rigidity in real wages and the time and cost of disinflation. This is in line with recent evidence for a variety of countries. To illustrate, according to Marczak and Beissinger (2010), Germany’s real wages tend to adjust to the economic cycle with a lag due to nominal wage stickiness (which implies a real wage rigidity). Therefore, macroeconomic stabilization may entail a deeper decline in employment and output and takes longer than under more flexible wages (Gomes, 2002).

Wage Philips Curve

25. The wage Philips curve estimation provides macroeconomic evidence on the degree of wage flexibility. The specification of the modern wage Philips curve goes back to Friedman (1968), who expressed the relationship between the expected real wage, productivity, and unemployment as follows:15

wt-pte=wt-1-pt-1+Δxt+α-βut,

where w, p, and x are logs of the nominal wage and price levels and labor productivity, and u denotes the unemployment rate. Under the assumption of backward-looking inflation expectations, the wage curve can be rewritten as follows:16

Δwi,t=αiβui,t+γΔpi,t1+δΔxi,t+ϵt,

which is the underlying regression specification for a particular country i, and where α, β, γ and δ are parameters to be estimated and ∊t denotes an i.i.d. error term. In addition, for Uruguay, we control for the dynamics of minimum wage-an exogenous factor, which might affect wage dynamics.

26. The analysis utilizes four basic time series per country at annual frequency, of varying available time spans per country, over the period 1983 and 2010:

  • Nominal wage index, derived from the real wage index (from EIU) using the consumer price index (IMF).

  • Minimum wage (Haver database).

  • Consumer price index (IMF).

  • Labor productivity is the GDP per employed person in prices of 1990 in purchasing power parity (PPP) measured in US dollars (IMF and ILO).

  • Unemployment rate (IMF).

27. The sample includes countries in Latin America as well as selected peers in Asia. The sample of Latin American countries consists of Chile, Colombia, Brazil, Mexico, Peru (LA5), Argentina, and Uruguay (Region 1). In addition, the sample (Region 2) includes Australia and New Zealand because these countries have similar production structure, compete in the same product markets, and thus could serve as good out-of-the-region comparators.

28. Nominal wages in Latin America exhibit large sensitivity to unemployment, and Uruguay is not an exception. A percentage change in the unemployment rate affects nominal wage dynamics by roughly a percentage point (Table 3). Uruguay seems to be aligned with the region since the Uruguay-specific effect of the unemployment rate on nominal wage dynamics is statistically insignificant (see results for Region 1).

Table 3.

Uruguay: Results for Fixed-Effects Regression

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Note:

The regression specification is as follows: Δwt-Δpt = θΔxt + λut + Δxt*D(URY) + δut*D(URY) + χt. Region 1 includes AL5 (Chile, Colombia, Brazil, Mexico, and Peru), Argentina, and Uruguay; Region 2 includes countries in Region 1 and Australia and New Zealand. The longest time period spans over 1993-2010 and the shortest over 2002-2010. D(URY) is a dummy varibale and equals one for Uruguay and zero otherwise. Stars denote significance as follows:*** at 1,** at 5, and* at 10 percent level.

29. Country specific constants (fixed effects) suggest the presence of stable differences among countries. The reported Hausman specification test (see Table 3) confirms that there are stable differences among countries in the panel. These fixed effects capture, for instance, the extent of the informal economy and other country-specific labor market characteristics.

30. Wage indexation on inflation in Uruguay is relatively higher than the Latin American average. The average coefficient on past inflation in the region of 0.43 is well below the one (0.75) for Uruguay (see results for Region 1). Nominal wages in the other countries of the region seem to be more tightly linked to productivity, with the coefficient of 0.18. However, in Uruguay, the link significantly differs and, in fact, productivity appears to correlate weakly negatively with nominal wage dynamics. This could be a consequence of a high degree of indexation on past inflation, when nominal wages of incumbent employees have not been compensated for the increase in productivity over the sample period.

31. The extended country sample shows a similar picture. Extending the sample for Australia and New Zealand affects the results only minimally (see the results for Region 2). The nominal wage response to unemployment is slightly lower, while the relation to productivity is slightly higher. The wage Philips curve fits the data well.

32. Real wages respond to unemployment and productivity in a similar way as nominal wages. The response of real wages to unemployment and productivity is only marginally lower than the response of nominal wages (see Table 3). It follows that, as expected, adjustments in real wages take place mostly through nominal wages both in the region and in Uruguay as well—the Uruguay-specific effect is not statistically significant.

33. Regarding the volatility of employment and output, Uruguay stands out compared to its peer countries. Uruguay’s relatively higher volatility of output and employment might be due to larger shocks to its GDP or a lengthy economic adjustment to shocks. Nevertheless, the positive correlation of output and employment volatility suggests that employment flexibility may be part of the labor market adjustment mechanism to macroeconomic shocks.

Figure 5.
Figure 5.

Output and Employment Volatility

(Standard deviation from trend, in percent; 1980-2010)

Citation: IMF Staff Country Reports 2011, 376; 10.5089/9781463926601.002.A003

Source: International Labor Organization, Haver, and IMF staff calculations.

34. Focusing on Uruguay alone, the results suggest that the degree of wage indexation to past inflation declined during the period in which collective wage bargaining was suspended (see Table 4). While for the entire sample (1983-2010) the wage indexation to past inflation is nearly 100 percent, the indexation for the period without collective bargaining (1994-2005) is somewhat lower.17 During the most recent round of wage bargaining, the degree of indexation on inflation further increased (see Section I.C).

35. The wage response to unemployment is also relatively high overall, but somewhat lower in the subsample 1994-2005. An increase in unemployment by one percent lowers nominal and real wages by 1.34 and 1 percent, respectively, depending on the sample. The elasticity of wages to unemployment is lower in the period of weaker collective bargaining (1994-2005), which is consistent with the observation of lower indexation on inflation in that period. The minimum wage (Δminwt), which is statistically insignificant, appears to be non-binding for nominal wage dynamics and hereby confirming the evidence of Amarante et al. (2008), reviewed in Part II. B.

Table 4.

Uruguay: Wage Philips Curve for Uruguay

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Note: Stars denote significance as follows:*** at 1,** at 5, and* at 10 percent level.

36. Nominal wages increases seem to have been inversely related to productivity, which might be a result of their high indexation and the response to higher unemployment during the low parts of the cycle. A higher negative relation is found for the longer sample than the more recent one—likely explained by the changes implied by the collective bargaining agreements. As it follows from the comparison of the two different time spans, higher wage indexation to past inflation is consistent with a larger wage response to unemployment and also a higher negative relation between wages and labor productivity. Drawing on this observation, even though it might be somewhat eroded by the small number of observations in the period 1994-2005, the recent changes to collective bargaining, may have lead to an increase in nominal and real wage rigidities and could increase employment fluctuations in response to negative shocks compared to the period 1994-2005.

Vector Autoregression

37. This section reports results for an unrestricted quarterly VAR model. The model contains four variables: nominal wages, unemployment rate, real GDP, and CPI on a quarterly frequency, from the Haver database. The VAR is based on year-on-year dynamics, while impulse responses are constructed with respect to unitary shocks, based on reduced form residuals, in selected variables.18 The same VAR specification has been run for two sample periods. The first period extends over 1988q1-2011q1, which represents the overall benchmark, and the second is a sub-period 1994q1-2005q4, which is a period characterized by weakened wage bargaining. The results are as follows.

38. VAR results for the overall sample period (1988-2011) show a relatively high wage rigidity and employment flexibility to GDP shocks. We report the four most relevant impulse responses. First, the response of the unemployment rate to a negative shock in real GDP growth (Figure 6.1). The negative output shock gradually increases unemployment for about two years. Such a response implies a fairly high labor flexibility. Second, the nominal wage reacts to a negative output shock slowly and its duration is lower than the effect on unemployment (Figure 6.2). Therefore the adjustment in nominal wages is delayed and takes place through the response to increasing unemployment level (Figure 6.3), however with a lag of about one year. This finding appears to support the results of high employment flexibility in the wage Philips curve estimation.

39. Further, there is evidence of a high transmission of inflationary shocks into nominal wages, confirming the presence of a relatively high wage indexation. A unitary shock into CPI inflation transmits into nominal wages rather strongly over subsequent year or so (Figure 6.4, solid line). Such a high response of nominal wages to inflationary shocks is consistent with a high degree of wage indexation on inflation, found in the wage Philips curve.

40. The differences between the overall results and results for the period of weakened wage bargaining suggest a tradeoff between wage indexation and employment flexibility. During the period of suspended collective wage bargaining (1994-2005), most of the impulse responses to shocks became less dynamic, compared to the overall period.19 The unemployment rate responds more slowly and by a smaller magnitude (Figure 6.1, dashed line), nominal wages respond less to unemployment shocks (Figure 6.3, dashed line), and inflationary shocks are transmitted much less to nominal wages. At the same time, nominal wages react faster and stronger to the economic downturn during the weakened-wage-bargaining period. Since nominal wages adjust more and faster to real GDP shocks and inflation is transmitted much less, the real adjustment of the economy is takes place more rapidly, and unemployment rises by less (lower employment flexibility). The comparison of the weakened-wage-bargaining period to the overall sample thus points to a tradeoff between degree of wage indexation and employment flexibility. It is also consistent with the findings using the wage Philips curve.

Figure 6.
Figure 6.

Uruguay: Impulse Response Functions

Citation: IMF Staff Country Reports 2011, 376; 10.5089/9781463926601.002.A003

Source: IMF staff calculations.

F. Concluding Remarks

41. One of the great success stories in the Uruguayan economy in recent years is the sharp reduction in unemployment (amid rising labor force participation) and the substantial increase in real wages. These developments have also come together with greater income equality.

42. The paper looks at recent regulatory changes in the labor market, and it finds that:

  • The minimum wage, though rising rapidly in recent years, does not yet seem to be binding for wage dynamics and is not very high compared with other countries in Latin America and the Caribbean, or even outside the region.

  • The reforms to the wage bargaining process and to social security have led to an intensification of labor market regulations in recent years.

  • The degree of wage indexation with respect to inflation and employment flexibility has typically been higher than in comparator countries.

  • Wage-indexation to inflation has risen in recent collective wage agreements.

  • Higher inflation indexation of wages appears to imply greater fluctuations in employment and unemployment in response to shocks.

References

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Appendix I. Regulatory Changes

Table 1.

Regulatory Changes

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Sources : Mazzuchi (2009) and IMF staff elaboration.

Appendix II. Factors Under Review

Table 1.

Factors Under Review

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1

Prepared by Natalia Melgar and Jiri Podpiera, with input from Harold Zavarce on an earlier draft.

3

The unemployment rate is also much lower than the natural rate of unemployment—estimated at 10.5 percent by Tubio and Borraz (2010). However, as this figure is difficult to accurately measure, it should be taken with caution.

4

The labor market data is based on the household surveys and covers both the formal and informal sectors.

5

These studies also argue that this fact distinguished Uruguay from the region (Furtado, 2006). Kristensen and Cunningham (2006) show that while in 1986, almost 30 percent of the workers earned the minimum wage; this ratio was only about 3 percent in 2003.

6

Though, as Cunningham (2007) also states, a low proportion of minimum wage earners does not necessarily mean that the minimum wage is irrelevant; it is still likely to affect wage distribution. However, Borraz and Gonzalez (2011) showed that in the case of Uruguay the minimum wage has had a non-significant impact on wage inequality.

7

To homologate means the granting of official approval of the agreement by the government in order to make it compulsory. Hence, there is only one table of minimum wages per sector and a minimum of wage adjustments given by the agreement.

8

ILO has suggested a change in Uruguayan labor legislation because it contradicts ILO’s Conventions 98 and 154 regarding free negotiations between employers and employees. The claim is that the current legislation should respect the labor rights of those workers who disagree with occupying the working place and cannot work due to such an occupation. It should also respect the property rights of the entrepreneurs who cannot access their property (such as the building or the machinery). Report available at: http://webfusion.ilo.org/public/db/standards/normes/appl/appl-displaycomment.cfm?hdroff=1&ctry=0620&year=2010&type=O&conv=C098&lang=En

9

The 2010 round is finished with 88 percent of the sub-groups have signed a new agreement. The remaining 12 percent has finalized discussions with agreements still to be signed or the agreement signed in a previous round continues to be valid.

10

The Executive could extend the period to 8 months in case of a recession.

11

The law also establishes the minimum and the maximum of the insurance (1 and 11 Base de Prestaciones y Contribuciones, BPC), the previous maximum was 8 minimum wages. In 2004, a new law (17,856) creates a new unit, BPC, which is used to determine the income tax (IRPF) brackets among other things.

12

Despite the fall registered in unemployment, the number of unemployment insurance requests has risen. This is due to a sharp increase in formalization in the labor sector, which has improved access to the available unemployment instruments.

13

The information in Uruguay comes from the relevant laws and regulations and the ILO’s Conditions of Work Digest (2010) and The Economist Intelligence Unit’s Country Commerce Report (2010, 2011).

14

In practice, real wage rigidities can appear due to contractual, institutional or legal restrictions to modify wages both at the real or nominal levels. Ultimately, however, it is the real wage flexibility that serves as a determinant of the overall degree of wage flexibility in each specific labor market.

15

Since the relation is between the expected real wage and the change in labor productivity, the change in labor productivity is assumed to be exogenous to the expected real wage. This has been a common practice-for a recent example, see Babecky et al. (2010) and Allen et al. (1994).

16

The specification nests alternative hypotheses about inflation expectations, including random walk.

17

A caveat must be made on the results for the period 1994-2005, which are based on a very small number of observations.

18

These results are based on unitary shocks based on a reduced-form VAR system, for easiness of comparison across sub-periods, and thus do not depend on a particular ordering of variables. The Impulse Response Functions using Cholesky decomposition based on one standard deviation shock to the structural innovations yields similar results.

19

Although the impulse responses between the two studied periods are not statistically significantly different due to high confidence intervals, it can still provide at least partial evidence for differences between periods.

Uruguay: 2011 Selected Issues
Author: International Monetary Fund