Labor Market Maladjustment in Chile; Structural Economic Reforms and Friction Among Sub-Markets

Abstract

This paper discusses the main features of the labor market performance in the Chilean economy during the 1970s. Its purpose is to analyse several explanation for Chile's high unemployment levels on the basis of the stylized facts surrounding labor market behavior. Several interpretations on the heavy unemployment prevailing in Chile have been based on the role played by either the labor demand downfall or the abnormal increase in the labor supply. However, those hypotheses have failed in providing a satisfactory explanation for the lack of adjustment seen in the labor market. In this paper, the available evidence on sectoral shifts of production and employment is analyzed in terms of their implications for the unemployment persistence. Owing to the demands for inter-industry labor reallocation stemming from the change in the productive structure, the role played by the existence of industry-specific human capital is stressed. The results detailed here suggest that the persistence of heavy unemployment can be importantly attached to a series of disruptions in different industries; that these disruptions could not be accomodated smoothly in the short run; and that the market has been responding but only slowly.