Colombia - Inflation and Unemployment

Inflation and unemployment

High inflation and unemployment also confronted Colombia in the late 1980s. Although Colombia was able to avoid the hyperinflation characteristic of Argentina and Brazil in the 1980s, persistent annual increases in the consumer price index (CPI) of 20 to 25 percent had been evident since the mid-1970s.

Higher coffee revenues in the 1970s caused rapid increases in demand and costs, which boosted inflation. This occurred at a time when the Third World was also experiencing rising oil prices. As the economy entered the 1981-85 recession, accelerated deficit spending by the government continued to fuel inflation. By the early 1980s, Colombia had entered a period of rising prices combined with economic stagnation. The rapid growth of the money supply and frequent devaluations of the peso also fed inflation in the 1980s.

The annual inflation rate dipped below 20 percent in 1983 for the first time in more than a decade, only to surge upward again in 1985. In 1986 government efforts to control public debt and funnel windfall proceeds from that year's coffee boom into the public sector may have eased inflationary pressures, but the CPI nevertheless rose by 21 percent.

Inflation was estimated at 25 percent in 1987, fueled by price increases in domestically produced items, including housing, food, and clothing. In the case of food prices, shortfalls in domestic production shot prices upward, increasing dependence on more expensive foreign foodstuffs. A price-indexed minimum wage and market adjustments throughout the wage structure also contributed to inflation. In 1987 the minimum wage rose by 24 percent, nearly equaling the price increases for the year.

The large number of United States dollars that entered Colombia illegally because of the drug trade also contributed to inflationary pressures by raising the overall level of demand. Estimates varied as to the relative importance of the drug trade, but most observers believed that it may have accounted for as much as 25 to 30 percent of total inflation in the 1980s.

Government efforts to ameliorate the effects of inflation proved relatively unsuccessful because of the combined effects of wage indexing, drug money, and volatile prices, which prompted economists to forecast inflation rates above 20 percent into the 1990s. Furthermore, it appeared that the government was reconciled to this level of inflation and would likely give priority to other economic problems.

Rising unemployment was also part of the economic malaise of the early 1980s. Although the economic boom of the 1970s had caused some researchers to conclude that unemployment would not be a serious problem in the 1980s, the Colombian unemployment rate rose steadily from 8.4 percent in 1981 to 14.9 percent by June 1986. The trend was finally reversed in 1987, as all sectors of the economy began to expand following the 1986 coffee boom. Unemployment fell to 12 percent in 1987, the lowest level since 1982, and continued to decline in early 1988. Although a welcome sign, this reduction reconfirmed Colombia's continued dependence on coffee.

Unemployment was driven by numerous variables besides the level of economic output. These determinants included demographic changes, migration patterns, education and experience levels, the relative costs of labor and capital, wage rates, and the segmentation of the labor market. Collectively, these factors pointed to a fundamental change in the nature of employment since the turn of the century.

Colombia's demographic makeup changed substantially after the 1940s. Although birth rates declined steadily (the population grew only 2 percent in 1986), the labor force expanded rapidly. By 1985 the size of the economically active population had reached 11.3 million people, or 38 percent of the population. This represented an average annual growth rate of 3.9 percent from 1973 to 1985, with women and youths accounting for most of the increase.

By 1985 one-third of the labor force consisted of women, many of whom were housewives who had recently entered the job market because of the attractive wages. Studies suggested that this addition to the work force accounted for much of the increase in family income among the very poor.

The rise in the number of adolescent workers constituted the other significant demographic development. Because there was an influx of relatively uneducated and unskilled young workers into the labor market, many youths found it impossible to gain employment. The unemployment rate was highest in the fifteen to nineteen age-group, reaching 30 percent by 1986. Planners hoped that this situation would correct itself as demographic trends changed in the 1990s and as government efforts to keep young people in school longer began to have an effect.

Internal migration trends also affected the urban labor market. By the late 1980s, Colombia had become a predominantly urban society, with over two-thirds of the population residing in cities. In contrast, as recently as the 1950s the population had been concentrated principally in rural areas.

Shifts in employment activity over time made these rural-to- urban migration patterns evident. As the country became more urbanized, it also became less dependent on the agricultural sector for employment. In 1938 nearly 60 percent of the population worked in agriculture and resided in rural areas. By 1984, however, only a third of the labor force was engaged in agricultural activity; most workers were employed in services, commerce, manufacturing, and construction.

Wage levels and type of employment also depended on education. Improvements in education occurred at all levels after 1951, when 42 percent of the labor force was uneducated and only 50 percent and 7 percent, respectively, had finished primary and secondary school. By 1978 only 16 percent of the work force was considered uneducated; 55 percent had finished primary school, and 24 percent had graduated from a secondary program. Most of the urban unemployed, however, continued to be rural migrants and others having little or no formal education.

Local business costs also affected employment levels. In a broad sense, Colombian capital and labor could be easily substituted for each other; consequently, the manufacturing sector inclined toward a capital-intensive export strategy in the late 1960s. As a result, fewer workers were employed in this sector than might have been the case had a more labor-intensive approach been taken.

The cost of labor was relatively high in Colombia. This resulted, in part, from social legislation and demands made by unions, including minimum wage requirements and nonwage compensation such as severance and vacation pay, pensions, and disability allowances. Some economists also argued that government subsidies designed to encourage investment actually placed the marginal and relative costs of capital at below-market rates and at levels significantly lower than the cost of labor for many businesses. This situation appeared unlikely to change without some type of government initiative.

Of increasing interest in the labor market was the level of segmentation, which could be conceptually represented by dividing the work force into two categories--the formal and informal sectors. The formal sector, or traditional labor market, is easily identified in national employment data. The informal sector, by contrast, is a segregated portion of the employment market characterized by a lack of formal record keeping and by small enterprises that employ little capital and only a few, if any, usually undereducated employees. Many economists believed that the informal sector constituted as much as half of the labor force in the 1980s, including many peasants and other workers engaged in drug production and trafficking. The informal sector played an important role in absorbing unskilled workers who would otherwise have remained unemployed; the nature of this sector, however, dictated that wages remain well below those of the formal sector, and other nonwage compensation, such as paid leave or insurance, was unavailable to the workers. Those engaged in the drug business were the exception. They usually earned wages or salaries in excess of what their skills would bring in the formal employment market.

In 1987 government estimates indicated an expansion of the informal sector in major urban centers, probably as a result of high unemployment. The size and profitability of the informal sector, therefore, appeared to be inversely related to the prospects of the formal labor market.

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