To address persistent problems of unemployment, job insecurity, informality and inequality, there is widespread agreement on the need for labour reform in Latin America. Yet there is no consensus on the type of reform necessary. Policy options fall into two broad camps: increasing labor market flexibility or strengthening workers’ bargaining leverage and protection vis-à-vis capital. The Chilean case provides a valuable opportunity to assess the merits of these competing perspectives. Chile’s macroeconomic and political stability since its 1990 democratic transition are the envy of many of its Latin American neighbors. Moreover, labour reforms adopted during the Pinochet dictatorship and largely maintained since the democratic transition are consistent with the flexible labour policies advocated by the IMF, World Bank and Inter-American Development Bank. In accordance with their policy predictions, we should expect flexible labor reforms to reduce wage inequality and increase formal sector employment, particularly among the least-skilled Chilean workers. In fact, however, the rate of unemployment among Chile’s least-skilled workers has increased since the democratic transition and wage inequality has remained high.
Therefore, preservation of labour market flexibility in Chile cannot be understood in terms of its success in generating employment or reducing wage inequality. Rather, this analysis argues, the preservation of such policies is best explained by political factors shaped by the legacy of the Pinochet dictatorship. While the center-left Concertación governments that ruled from 1990 to 2010 stressed the need for “growth with equity,” they were forced to walk a fine line between maintaining a favorable investment climate for business and addressing economic and social inequities that preoccupy their middle and working class constituents. In light of the economy’s dependence on private investment and with the pre-coup history of class conflict and labour strife in mind, Concertación leaders were highly sensitive to the prospect that remobilizing labour or strengthening its relative bargaining power could alienate private investors. Furthermore, their policy-making latitude was constrained by two legacies of the Pinochet dictatorship: (1) highly cohesive and powerful business associations, which oppose reform; and (2) the presence of designated senators, which until their abrogation in the latter part of Lagos government (2005) gave the right an artificial majority that could block reform. The response of Concertación governments to this dilemma was to pursue reforms designed to strengthen the protection of individual labor rights and to avoid reforms that would enhance the labour movement’s cohesiveness and collective bargaining power. As a result, organized labour remains a relatively weak political and economic actor in Chile while inequality and employment insecurity remain high. From this perspective, Chile’s continued adherence to a flexibilized labour market is best understood not in terms of its capacity to promote economic efficiency or generate employment. Rather, it should be understood as the product of the business sector’s ability to protect its interests through the leverage it accrued with policy makers over the course of the dictatorship and with the assistance of the center-left Concertación (1990-2010), which consciously limited threats to the business sector in order to maintain private investment. Accordingly, the Chilean case does not lend support to the argument that greater labour flexibility is needed to increase employment and reduce inequality. It suggests instead that policy reforms are necessary to enhance the collective strength of workers vis-à-vis business.
KEYWORDS: Labour Reform; Employment Flexibility; Latin America; Chile; Inequality; Democratization
