Labor Market Regulations and Productivity: Evidence from Chilean Manufacturing Plants

This paper analyzes the effect of minimum wage and labor market regulations on productivity. The main hypothesis to be tested is that an increase in the relative minimum wage could have a negative effect on total factor productivity (TFP) if there are important costs of adjustment like firing costs. Using data for the Chilean manufacturing industry for the period 1992 2005, we find that the effect of relative minimum wage is negative and significant. The quantitative effect on cumulative TFP for an industry in the 25th percentile of relative minimum wage increase was a decline of 5.3% for the period 1998-2005, but for an industry in the 75th percentile of relative minimum wage increase, the cumulative reduction in TFP was 10.2%, over the same period. We also find that the continuous reduction in unilateral trade restrictions and through free trade agreements has been productivity enhancing. This is especially true for those sectors with larger exposure to international trade.TFP, minimum wage, firing costs, slowdown

A Unified Growth Model for Independent Chile

This article analyzes long-term patterns of growth of the Chilean economy. Examining 200 years of data, it shows evidence in favor of using a neoclassical growth model to conduct the empirical analysis. It presents a formal analysis of structural breaks in the Chilean growth process, finding structural changes in 1929 and 1971/1981. A further analysis of the country’s economic history indicates that fiscal policy, external shocks and trade policy are plausible explanations for these breaks. When these variables are included in the empirical model, the hypothesis of no breaks during these 200 years cannot be rejected.Chile, structural breaks, growth, fiscal policies, external shocks

Chile's Free Trade Deals with the EU and the US: A Big Deal?

Chile put into place broad free trade agreements (FTAs) with its two major trading partners: the EU (effective 2003) and the US (effective 2004). This paper quanti- fies their economic effects for the Chilean economy, stemming from the conventional trade components (lower tariffs and higher market access) and other aspects of the lat- ter broad FTAs, including improved intellectual property rights, factor productivity gains, and their fiscal consequences. The paper also considers that the country risk premium may decline and aggregate investment may rise in response to the institutional stability and policy credibility enhanced by the FTAs. Simulation results are reported for steady states and dynamic transition paths, based on a three-sector dynamic general equilibrium model for an open economy inhabited by infinitely-lived representative agents. The model is calibrated to the Chilean economy and the actual features of both trade agreements. The reported effects of FTAs on resource allocations, relative prices, expenditure composition, output, and welfare are generally small due to Chile's high initial trade openness; aggregate output and consumption do not exceed 1% in any given period. On impact, the largest gains come from a lower risk premium that leads to a tem- porary consumption and investment boom, which is reverted in the long run as a result of larger net foreign liabilities. In steady state, the gains from improved factor productivity dominate all other effectsChile, Free Trade Agreements

Paths of Development, Specialization, and Natural Resources Abundance

This paper addresses three main questions; how can a country specialized in primary goods become an exporter of manufacturing goods? How does factor abundance affect the possibilities of achieving comparative advantages in manufactures? Does the type of natural resource abundance make any difference to the path of development? Based on factor-endowment-driven specialization, we study the trade patterns along the paths of development (defined as capital accumulation) for a large sample of countries in the last four decades. Consistently with the idea that countries are located in different cones of diversification, we find that net exports are a non-linear function of the capital/labor ratio of the economy. The pattern of gaining comparative advantages in manufacturing goods as a country develops depends not only on whether it is natural resource abundant or not, but also on its type of natural resources abundance. This paper shows that mineralabundant countries are positioned in a diversification cone with low levels of capital per worker and they are net importers of all manufacturing goods. In contrast to countries with comparative advantages in forestry and agricultural products, mining countries are the least likely group to change their specialization pattern towards manufacturing goods. On the other hand when we use human capital instead of physical, we find that mineral abundant countries will move to a cone where they produce and export capital intensive manufactures. The forest abundant countries will attain comparative advantages in machinery as they accumulate human capital. Looking at the mineral abundant countries we find some differences in the path of development for oil exporters and non-oil exporters.

Estimating the Chilean Natural Rate of Interest

In this paper we use a set of methods to estimate the neutral interest rate for Chile (NRIR). We group the methods into three categories: methods derived from pure economic theory, the NRIR implicit in the price of financial assets, and the rate estimated from a statistical model using macroeconomic data. We learnt that the neutral interest rate is not a time invariant variable. It is closely related to the potential growth of the economy (but it is not equal to the growth rate of the trended output). The application of all methods yields very similar results. The NRIR would be in a range between 2% and 3.6%, with a median equal to 2.8% with data up to the fourth quarter of 2006

Concentration and Price Rigidity: Evidence for the Deposit Market in Chile

The effects of monetary policy depend significantly on the capacity of the Central Bank to affect market interest rates by managing liquidity. Therefore, it comes out as an important issue to determine the degree of flexibility of lending and deposit rates to changes in policy rates. In this sense, there is a vast literature that explores sluggishness on bank interest rates. In terms of deposit interest rates a larger rigidity has been associated to higher levels of concentration on the banking industry. Besides, the market discipline hypothesis would imply differences on the response of banks’ deposit rates according to their characteristics. This paper analyzes deposit interest rate sluggishness for the Chilean banking industry and its relation with market concentration and bank characteristics. The results support the fact that higher concentration imply more rigidity and that bank characteristics such as solvency, size and loan risk would also make a difference in the speed of adjustment.

Entry into Export Markets and Product Quality Differences

Using a rich dataset of Chilean exporters, we analyze several issues related to the relationship between entry into export markets and product quality. We find that every year a large number of new exporting relationships are initiated, with either new firms or existent ones that begin exporting, but the survival rate of these entries is very low and declines over time. Using unit values as a proxy for product quality, our estimations show that entry is generally associated with higher product quality. This higher product quality, however, tends to decline over time and eventually disappears three years after entry. To better identify this effect, we explore whether there are systematic differences across sectors. As expected, for sectors in which quality differentiation may be important, our findings reveal that reference-price and differentiated products show a higher price in the year of entry and it takes longer to converge to the incumbent prices. These results hold after controlling for potential sample selection bias.

Characterizing the Business Cycles of Emerging Economies

We document the properties of business cycles using the dating algorithm by Harding andPagan (2002) on a quarterly database for 58 countries —21 industrial countries and 37 emerging market economies (EMEs)— from 1970q1 to 2007q4. We find that: (a) recessions are deeper, steeper and costlier among EMEs (especially, in East Asia and Latin America) and that recoveries are swifter and stronger. (b) Recessions have become less costly during the globalization period (1990-2007) than before (1970-89) for industrial countries and EMEs. (c) The main characteristics of downturns are amplified when associated to crisis episodes. (d) The time path of macroeconomic indicators around peaks in real GDP is more volatile in downturns associated with crisis compared to other downturns. (e) Financial cycles (credit and asset prices) tend to precede real output cycles. (f) Credit and stock prices are strongly pro-cyclical while real exchange rates, capital flows and terms of trade tend to be a-cyclical. Finally, an exploratory analysis on the conditional correlates of the cost of recessions shows that: (i) adverse terms of trade shocks raise the cost of recessions in countries with a more open trade regime and deeper financial markets. (ii) Recessions tend to be deeper if they coincide with a sudden stop, but the effect is smaller in countries with deeper domestic credit markets. (iii) Floating exchange rate regimes appear to act as shock absorbers.Business cycles, peaks and troughs, emerging markets

Is Ownership Structure a Determinant of Bank Efficiency?

When owners could easily sell a company if it is not performing well enough provide additional incentive to the administration to act in the best interest of the stockholders, since in the merger process the actual administration will lose their job (Jensen and Ruback, 1983; Schranz, 1993). It is difficult to test this hypothesis empirically due to the difficulty in measuring some of these concepts. This paper uses cost and profit functions to estimate efficiency at the bank level in Chile. Based on these measures, we explain cross-bank differences over time, which are related to bank size, ownership structure, and other relevant variables. We report two main findings. First, banks that are established as listed companies in Chile tend to show a higher level of efficiency than those established as closed companies. This result holds even after controlling for the bank’s product mix and property origin (domestic versus foreign). Our interpretation of this result is that listed banks have a relatively high probability of takeover in Chile, since the ownership structure is known. Managers therefore act in the best interest of stockholders. Second, banks that have a high property concentration demonstrate a high level of efficiency. The two results together suggest that mitigation of the principal-agent problem is key to explaining bank efficiency.