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Labor Income Inequality Shrank in Uruguay between 2007 and 2014 Despite an Increase in Productive Heterogeneity

ECLAC presented a new study in conjunction with the ILO indicating that Uruguay’s labor and tax policies likely contributed to reducing the income differential.

9 December 2016|News

Inequality in labor income fell significantly between 2007 and 2014 in Uruguay despite the fact that inequality in productivity continued to rise, probably facilitated by a series of labor and tax policies implemented during that period, according to a new book published by the Economic Commission for Latin America and the Caribbean (ECLAC) and the International Labour Organization (ILO).

The book entitled Toward Inclusive Development: The Case of Uruguay (only available in Spanish) analyzes the country’s evolution from 2001 to 2014 in terms of economic growth, labor market dynamics and social protection, which are the three fundamental pillars of inclusive development. This concept is understood as the achievement of greater productive and social insertion of people in the structure and functioning of the socioeconomic system to ensure a better primary distribution of income.

As the publication recalls, in 1999 the Uruguayan economy began a decline that culminated in the crisis of 2002, which was followed by 11 years of growth with increased production and improved economic and social indicators. The study explores, among other issues, the extent to which that growth has produced transformations in the productive foundation.

To that end, the authors used information about branches of activity and company size to establish a ranking of four productivity strata—low, medium-low, medium-high and high—in order to analyze the productive heterogeneity of the Uruguayan economy, which is to say, inequality in terms of production.

This analysis shows that between 2001 and 2014, average productivity rose to an annual rate of 1.7%. The growth in the stratum of high productivity was above this average (3%) and was followed by that of medium-low (1.6%), while that of medium-high (0.3%) and low (-1.8%) lagged behind. This increased the differential among productivities and, with it, the degree of productive heterogeneity.

In addition, the study underscores that while inequality in productivity increased between 2001 and 2014, labor income inequality only rose until 2007, when it began to decline. More specifically, the Gini index on wage income per hour went from a maximum of 0.48 in 2004 to 0.40 in 2013, rising until 2007 and contracting sharply from that year onward. Meanwhile, according to the Theil index, the decline in inequality among all employed persons was 32% between 2007 and 2014.

Based on those figures, the report concludes that the decline in labor income inequality seen starting in 2007 has not stemmed from changes in the productive structure, but rather appears to be the result of a battery of public policies applied during that period, along with the significant dynamism of the labor market.

The publication highlights, among the numerous institutional changes that occurred in this period, the reestablishment of collective bargaining, the increase in the minimum wage, specific regulations for domestic services, changes in unemployment insurance, advances in paternity and maternity leave, labor formalization and the modification of the tax structure.

This book is the result of a joint initiative by ECLAC and the ILO in which similar studies have been done on cases in Argentina, Brazil, Chile and Peru.