In Latin America the pandemic has exacerbated inequalities structural factors in the labor market: see in this regard a high correlation between the ability to work remotely and education, a very high ratio between the minimum wage and the average or median wage, and the dominance of the informal sector, where workers they do not have access to unemployment insurance. In this context, the loss of jobs and income it hits the least skilled and uneducated workers hardest. Furthermore, pre-existing occupational differences in terms of gender and age have translated into greater inequalities and vulnerabilities, as the burden of additional household and care responsibilities is placed on women. Consequentially, the pay gap is set to grow further.
Un alarming rise in inflation threatens to further aggravate the situation, as food and fuel expenditures as a percentage of total consumption are exorbitant in the region. Euler Hermes estimates that 80 million people (18 percent of the population in the six largest economies of Latin America), are at risk of falling below the poverty line. Expenditure on food and fuel as a percentage of total consumption ranges from 32% in Mexico to 53% in Argentina (12% in the US). In the 2000s, rising commodity prices helped reduce income inequality by creating greater demand for agriculture and mining labor, in turn increasing employment and wages of the low-skilled workforce. However, the recent spike in inflation, which came after historic levels of liquidity were injected into financial markets in response to the crisis, has already forced economies such as Brazil and Mexico to tighten the purse strings and to raise monetary policy rates: they now stop at 4,25 percent in both countries. While the shocks that triggered the rise in inflation are temporary, the diversity, size and long horizon over which they have affected the price level pose a risk to consumers' income and purchasing power.
Since the 2008 financial crisis, combined energy and food expenditures have risen steadily. The pandemic in turn triggered a further surge: in Argentina, food prices have increased by 56% compared to March 2020; in Brazil, food is 17% more expensive than at the start of the pandemic; there Colombia recorded a generalized increase of 12%, while the Mexico faced +7% and Peru +5,5%. Only the Chile kept the price increase at bay (+5,8%). Analysts expect commodity prices to consolidate going forward, thanks to increased supply (from US and OPEC+).
At the same time, disposable income has declined generalized. This gap between rising inflation and disposable income growth creates pressure on the cost of living. In Argentina, while disposable income decreased by 13,1%, inflation was 42%. Although Argentina is a special case, in Brazil disposable income decreased by 5% while prices increased by 3,2%. In Chile, inflation was 3,0%, while income fell by 7,7%. Colombia is in a similar situation with an inflation rate of 3,5%, while disposable income decreased by 5,8%. Disposable income decreased in Mexico by 10,4% and inflation is estimated at 3,4%. In Peru, disposable income decreased by 8,7% and inflation was kept at bay at 1,8%.
In the Euler Hermes sample, the mobile poverty line, due to variations in the affordability of the basic goods basket, puts at risk the socioeconomic position of 80 million people (18% of the population who earn between 2 and 5,5 dollars a day). For reference, the share of this vulnerable population in the total population ranges from 8,4% in Argentina and 13,4% in Chile to 21,1% in Mexico and 23,3% in Colombia. In this context, the FAO estimate that beyond 42,5 million people could be reduced to hunger, equivalent to the entire population of Argentina, or double that of Chile: it is not surprising that there is an increase in governments oriented towards the promise of saving populations from the “neoliberal poverty trap“, but doing little to implement a credible path that delivers on these promises, interested more in power.
The necessary conditions for private investment to gravitate towards Latin America are a credible business environment and political stability: populism and divisive narratives don't help the cause of closing the economic gap, if anything making it worse. Hence, particular attention to education and productivity reforms becomes essential. The investment in education should be at the heart of the post-pandemic recovery: as incomes fall, households may feel encouraged to place young people in the workforce too early, thus lowering their wages and hampering social mobility. Better access to education would help close the skills gap, stimulate innovation and create the more inclusive growth Latin America needs.
