Chile's Jobs Miracle Is Starting to Fizzle

Unemployment is starting to align with weaker growth
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Photographer: Marcelo Hernandez/STR/LatinContent via Getty Images

For the past two years, Chile’s labor market seemed to walk on water.

No matter how weak economic growth, or big the slump in investment, or large the drop in copper prices, the jobless rate remained near a record low. Now, that's starting to change.

Unemployment increased to 6.4 percent in the three months through April from 5.9 percent just two months earlier. Euroamerica economist Felipe Alarcon says it could reach as high as 7.5 percent in the next few months, damping consumer demand in an economy already reeling from a drop in investment.

Central banker Mario Marcel said the signs of mounting weakness in the labor market were already there — you just had to know where to look.

The number of people finding salaried work started to fall in October of last year, a sign that stable work was becoming harder to find. By March almost no-one was stepping into salaried work.

“The labor market has been adjusting for a few months,” Marcel said in an interview last month. “The idea that the labor market was isolated from the economic cycle is not correct.”

Even before salaried work started to decline, people were turning to self-employment. That may conjure up the image of start-ups in Silicon Valley, but it is far more likely to be people hawking goods on a street corner or doing informal construction work for families or small clients — outside of the taxed economy. 

"It is low-quality employment, with no contract or the social benefits attached to it," Alarcon said. "It probably corresponds to people employing themselves after they lost their permanent job."

Central bank director Marcel said Chile’s ability to withstand two years of sluggish growth before unemployment rose showed how flexible the labor market was. "Not all the weakening happened through unemployment," Marcel said.

However, what is flexibility to economists is insecurity for some workers. Chileans already faced greater instability than their counterparts elsewhere, with more people on temporary employment contracts than any other of the OECD countries. 

There may also be longer-term factors at play. For years, Chileans worked more than any other country in the 34-member OECD. Now weekly hours are on the decline. As the country becomes wealthier, people are looking for more leisure time, providing another possible explanation for the short-term resilience of the labor market.

Whatever the underlying trends, Chilean unemployment is now heading higher. While the official rate reached 6.4 percent in April, a separate survey by the Universidad de Chile puts the figure in the capital Santiago at 9.4 percent in the first quarter. 

“This is a turning point in the unemployment figures," said BTG Pactual economist Mario Arend. "If the economy keeps growing between 1.5 and 2 percent the output gap will grow and it will be reflected in the unemployment figures.''

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