Labor Market Flexibility in Thirteen Latin American Countries and the United States: Revisiting and Expanding Okun Coefficients

SCID Working Paper 136



Latin America


The paper studies labor market flexibility in 13 Latin American Countries since the 1960s and 1970s by looking at the sensitivity of employment and unemployment, and real wages with respect to output. It finds that price stabilization has brought real wage stability, but it has tended to increase uncertainty of job security. It argues that declining inflation makes labor market rigidities binding because labor markets cannot absorb output shocks via prices. Cyclical relationships are studied by constructing Okun coefficients for unemployment, employment, and wages using first differences and the cyclical component of a Hodrick-Prescot (HP) decomposition of the series. This paper finds that compared to the United States, output fluctuations in Latin America have a small effect on the quantity variables, employment and unemployment, but a large effect on real wages. For five of the six countries that implemented a price stabilization program, the wage sensitivity of output decreased. Conversely, with respect to output, unemployment/employment sensitivity tended to increase. Countries in the sample with stable inflation levels do not exhibit such an inverse relationship. The most important determinants of the flexibility indicators, are labor market reforms.