Abstract:
Latin American economies had experienced high income disparities. One of the objectives of economic reforms in Latin America was to bring down the disparities in income distribution. The economic reforms introduced several measures like liberalization of trade, liberalization of capital account, privatization, reforms in tax structures and reforms in labor markets that had significant impact on income distribution in Latin America.
The Latin American economy has traditionally experienced high levels of income disparities. The major factor influencing income disparities has been the difference in wage levels of workers. The labor market of Latin America has undergone strategic changes due to implementation of economic reforms. In the pre-reform era, income inequality in the economy was attributed to supply related factors in the labor market like scarce availability of skilled workers.
Labor market and income distribution during economic reforms in Latin America
Economic reforms were undertaken in the 1980s and 1990s by many Latin American economies. Among the many changes brought into force by the reforms, shifting the onus in the labor market to demand related aspects was an important one. The economic reforms were implemented with the objective of ensuring growth for the Latin American economies by shifting towards an open market economy with liberalized trade, deregulation and increased impetus to investment. The benefits expected to accrue to the labor market from the reforms are -
Generation of new jobs for on-skilled workers.
Reduction in the level of difference in wages.
Secure a relatively advantageous position for the labor markets of Latin America compared to that of North America.
Major reform measures influencing income distribution in Latin America
The economic reforms of the 1980s and 1990s in Latin America introduced measures that were considered to be important determinants of income distribution and wage differentials in the economy. These include -
Liberalization of trade.
Liberalization of capital account.
Privatization
Reforms in tax structures.
Reforms in labor markets.
Liberalization of trade
Trade liberalization played a positive role in bringing down the disparities in income distribution due to the following factors -
Under trade liberalization, the production in an economy is focused on the sectors where it has comparative advantages over other countries. This is expected to raise the demand for lesser skilled workers in an economy thus bringing down the level of wage differences between skilled workers and non skilled workers. This in turn reduces income disparities in the economy.
Liberalization of trade negates the effect of subsidized capital which lowers the wages of lesser-skilled workers.
Liberalization of capital account
Liberalization of capital account led to higher investments due to increased availability of capital. This, however, can lead to higher increase in the wage level of skilled workers than that of non-skilled ones and result in an increase in the disparity of income distribution in an economy.
Privatization
Privatization of public sector units may lead to lower demand for labor in the Latin American economy. However in the long run, privatization is expected to increase productivity which will lead to higher demand for labor in Latin America. This will lead to lowering the disparities in income distribution in the Latin American economy.
Reforms in tax structures
Economic reforms in Latin America have introduced Value Added Taxes (VAT). The dependence on trade taxes and marginal income taxes has been reduced through the economic reforms in Latin America. Theses measures have acted as incentives to trade liberalization which in turn is expected to induce changes towards more uniform income distribution in the economy.
Reforms in labor markets
Reforms in labor markets in the Latin American economy have removed rigidities in the labor market. This is expected to generate higher demand for labor in the Latin American economy. The effect on income distribution, in such a case, will depend on the kind of labor (skilled or non-skilled) that experiences higher increase in demand.
