ONGOING RESEARCH


WORKING PAPERS

Evolving Wage Cyclicality in Latin America
Luca Gambetti and Julián Messina.
World Bank Economic Review (Forthcoming).

This paper examines the evolution of the cyclicality of real wages and employment in four Latin American economies (Brazil, Chile, Colombia and Mexico) during the period 1980-2010. Wages are highly pro-cyclical during the 1980s and early 1990s, a period characterized by high inflation. As inflation declined wages became less pro-cyclical, a feature that is consistent with emerging downward wage rigidities in a low-inflation environment. Compositional effects associated with changes in labor participation along the business cycle appear to matter less for estimates of wage cyclicality than in developed economies.

Minimum Wage: Does it Improve Welfare in Thailand?
Ximena del Carpio, Julián Messina and Anna Sanz de Galdeano

We study the causal impact of the minimum wage on labor market outcomes, household consumption, inequality and poverty in Thailand by relying on policy variation in minimum wages over time across provinces. We find that minimum-wage increases have a large and significant impact on the likelihood of working in the uncovered sector among workers with elementary education. However, the impact is very small and insignificant among other labor market groups. In contrast, the minimum wage has large positive effects on the wages of low-earning workers, such as the young, elderly and low educated. As a consequence, increases in the minimum wage are associated with reductions in household poverty and consumption inequality at the bottom half of the distribution.

Firm-Level Shocks and Labor Adjustments
Mikael Carlsson, Julián Messina and Oskar Nordström-Skans

We analyze how firms adjust their labor in response to idiosyncratic shifts in their production functions and firm-level demand curves using unique data on Swedish manufacturing firms. We show that the adjustment to permanent firm-level demand shocks is substantial, rapid and unconstrained. The choice of adjustment margin depends on the sign of the shock: Firms adjust through increased hires if these shocks are positive and through increased separations if the shocks are negative. In contrast, both transitory demand shocks and shocks to physical productivity have only modest effects on firm-level employment decisions, despite being important determinants of other firm-level fundamentals.

A more level playing field? Explaining the decline in earnings inequality in Brazil, 1995-2012
Francisco Ferreira, Sergio Firpo and Julián Messina

The Gini coefficient of labour earnings in Brazil fell by 20% between 1995 and 2012, from 0.5 to 0.4. The decline was even larger by other measures, with the 90-10 percentile ratio falling by almost 40%. Although the conventional explanation of falling returns to education did play a role, a RIF regression-based decomposition analysis suggests that substantial reductions in the gender, race and spatial wage gaps, conditional on human capital and institutional variables, explain the lion’s share of the decline in earnings inequality. Lower male, white, urban and Southeast wage premia, alongside lower formal-informal wage gaps, account for 6.3 of the ten Gini points difference between 1995 and 2012. Although rising minimum wages contributed to the decline during 2004-2012, they had no such effect during 1995-2002.

Skill Premium, Labor Supply and Changes in the Structure of Wages in Latin America
Manuel Fernández and Julián Messina

In Argentina and Chile earnings inequality increased in the 1990s and declined in the 2000s. In Brazil, inequality declined dramatically during the two decades. The paper traces earnings inequality dynamics in Argentina, Brazil and Chile linking the observed trends with changes in the composition of the labor force and the premiums of human capital. The reduction in the education and experience premiums are major drivers of the recent earnings inequality decline. Behind this common result lies an important divergence. The reduction of the experience premium is key to explain falling upper-tail (90/50) inequality. The decline of the education premium has a much larger explanatory power in the reduction of lower-tail (50/10) inequality. We show that the decline of the high-school and college premium is largely driven by the educational upgrading of the workforce, but our estimates suggest that relative demand trends favoured higher educated workers during the 1990s, but reversed during the 2000s. We find that this trend reversal is key to understanding the observed patterns in earnings inequality in these economies. These results are robust to several alternative specifications, including taking into account the role of the minimum wage and cyclical conditions of the labor market.

The Expansion of Higher Education in Colombia: Bad Students or Bad Programs?
Adriana Camacho, Julián Messina and Juan Pablo Uribe

A rapid expansion in the demand for post-secondary education triggered an unprecedented boom of higher education programs in Colombia, possibly deteriorating quality. This paper uses rich administrative data matching school admission information, socio-economic characteristics of the young graduates, standardized test scores pre- and post-tertiary education and entry wages, to assess the heterogeneity in the value added generated by new higher education programs. Our findings show that once we account for self-selection the penalty of attending a recently created program, which initially appeared to be quite large, becomes close to zero.

WORK IN PROGRESS

Minimum Wages and the Uncovered Sector in Low and Middle Income Countries
Giulia Lotti, Julián Messina and Luca Nunziata

We present new empirical evidence on the implications of minimum wages for the uncovered sector in developing countries, analyzing a unique dataset assembled from a set of micro surveys collected in 59 low and middle income countries. Our identification strategy exploits relative bindingness in minimum wages across labor market groups within countries and years. The empirical findings show that a higher minimum wage is associated with a larger self-employment share. The effect is approximately linear in the relative level of the minimum wage, even if higher levels of minimum wages are associated with higher levels of non-compliance. The estimated impact of the minimum wage on informality is economically significant: a 1 percentage point increase in the minimum wage ratio is associated with a 0.204 percentage points increase in the self-employment rate.

The polarization hypothesis in Latin America: how demand forces are shaping wage inequality?
Julián Messina, Giovanni Pica and Ana María Oviedo

The objective of the paper is to document whether employment and wage polarization occurs in Latin American countries. We measure the routine/abstract/manual content of jobs in Latin American countries exploiting a novel survey conducted in Bolivia, Colombia and El Salvador (STEP, Skills Towards Employment and Productivity). Comparing task intensity scores in those countries and the U.S. shows that while the abstract content of jobs is similar in North- and South-America, the routine and manual contents are different. We speculate that the reason may be that Latin American occupations comprise a more heterogeneous set of tasks. Merging occupation-specific information on the task intensity with individual-level data available for Mexico and Chile, we show that employment polarization seems to take place in Chile but not in Mexico during the 2000s. No evidence of wage polarization shows up. Descriptive evidence from cross-sectional individual data on the returns to skills in Mexico and Chile suggests that abstract and manual tasks have positive returns, the latter being more pronounced for older workers, while returns to routine tasks are negative.

Partial Identification of Treatment Effects in Observational Data under Sample Selection: an Application to PISA Test Scores in Argentina
Dimitris Christelis and Julián Messina

The identification of the causal impact of parental education on children’s school performance is affected by the endogeneity of parental education, as well as the possibility of sample selection due to children dropping out of school. We address both these issues using partial identification methods that bound the causal effect of interest in observational data under relatively mild assumptions. We apply our methods to identify the causal impact of mothers’ education on children’s PISA test scores in Argentina. We find that higher levels of maternal education substantially increase children’s test scores in the middle quantiles of the score distribution.

Downward Wage Rigidity, Unemployment and Informality. Evidence from Brazil
Julián Messina and Anna Sanz de Galdeano