1. Labor Markets and Macroeconomic Performance in Chile Rodrigo Valdés Central Bank of Chile April 10, 2003

2. Two (seemingly) unrelated issues: Jobless growth in Chile? –Unemployment has been quite persistent –Labor growth declined strongly in the 90s –Some blame an (inexistent?) structural change (technology, matching) Inflation and wage dynamics –Is wage indexation really a problem? –What has happened after 12 years of successful inflation targeting?

3. Unemployment in Chile: 1986-2002

4. Labor Demand and Fundamentals IDB –Employment growth since 1998 is well explained by lower growth and real wages –Minimum wage policy has have an effect on lower-skill workers Martínez et al. (2001) –Prices (wages, cost of capital) explain well why employment growth declined in the 90s Structural Breaks in Matching?

5. GDP and Employment Growth: 1986-2000

6. Beveridge Curve in Chile: 1986-2002 (vacancies) 5 8 11 14 17 20 048121620 (unemployment)

7. Beveridge Curve in Temuco: 1986-2002

8. Inflation and Targets: 1990-2002

9. Has Inflation Became More Forward Looking? 0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 1971198119912001

10. A Closer Look: Inflation and Wage Dynamics MEP 1.5 Equations (inflation block)

11. Expected Inflation in Phillips Curve 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 919293949596979899000102

12. Lagged Inflation and Wages Dynamics: Indexation Is Alive 0.78 0.81 0.84 0.87 0.90 0.93 0.96 9596979899000102

13. Expected Inflation and Wage Dynamics: Still Unimportant 0.00 0.03 0.06 0.09 0.12 0.15 0.18 9596979899000102

14. -0.50 -0.40 -0.30 -0.20 -0.10 0.00 9596979899000102 Have Wages Became Less Sensitive to Unemployment?

15. Discussion Claim: Phillips curve “forward lookingness” alleviates the problems arising from wage indexation –Wages still depend on past inflation... –...but they are able to adjust to future inflation through actual inflation Worrisome: real rigidities (lack of sensibility) –They explain unemployment persistence –Might be problematic for adjustments

16. Discussion (cont’d.) Preliminary exercise: calculate sacrifice ratio with MEP 1.5 under different parameter values –Caveat: Lucas critique at its maximum –It seems that real wage sensitivity posses relevant costs for desinflation –Indexation to a lesser extent, given that inflation looks ahead

17. Concluding Remarks Jobless growth in Chile? –No, it depends on relative prices. Price elasticities are not zero –Technology (matching, production base) does not explain problems Inflation and wage dynamics –In principle, indexation effects can be circumvented with the effect of credibility on inflation dynamics –Real rigidities matter

18. Labor Markets and Macroeconomic Performance in Chile Rodrigo Valdés Central Bank of Chile April 10, 2003