Colombia has reached her long run unemployment rate, it is too high, it is between 9.0% and 11.0%, this assessment is evidenced through annual data from 1976 to 2011 and it is the result of Central Bank low inflation target started in 1991 and labour Law 789 of 2002. Colombia reached a low inflation rate around 2.0% and 4.0%, this low inflation brought high unemployment rates, this high unemployment rate was the cost faced by society due to Colombia Central Bank low inflation rate target. Therefore, Colombia employees does not have to pay this long run high unemployment cost through financing the unemployment insurance with their labor obligatory saving called in Colombia “Cesantias”, this insurance must be payed by Central Bank and government incomes such as those received by crude oil or coal royalties. It is fair to remember that this high unemployment was reached due to Central Bank low inflation rate target and Law 789 of 2002 and it is not the fault of employees.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Colombia unemployment reached 9.8% at the end of 2011 but it increased to 10.9% on july of 2012. Therefore, there is a question about what’s going on with this high unemployment rate?. The last two years colombia has faced hight Gross Domestic Product (GDP) growth rates, for instance she reached 4.0% in 2010 and 5.9% in 2011, moreover this GDP growth has been positive before these dates, the only negative value was reached by 1999 when GDP growth reached -4.2%, it can be pointed as the worst economic crisis in Colombia since ever. The main argument to explain this high unemployment is through economic theory and empirical evidence. The first lesson on economics for everybody who takes principles of economics lecture is about 12 principles if one follows Krugman’s book called Fundamental of Economics or 10 principles if one follows Mankiw’s book called Principles of Economics. Both authors as many others point that there is a trade off between inflation and unemployment in the short run and a natural inflation rate and natural unemployment rate in the long run. It means that if inflation is driven down by Central Bank in the short run, therefore there is a cost on high unemployment rates. In the long run there is a steady-state between inflation rate and unemployment rate called Non-Accelerating Inflation Rate of Unemployment (NAIRU), at firs glance, Colombia has reached this last state but with high unemployment rate.
This relation between unemployment rate and inflation rate in short and long run can be evidenced in Colombia. After 1991 Colombian Central Bank has as a target to reduce the inflation rate and it has been reached, figure 1 shows that there was a negative slope relation between unemployment rate and inflation rate between 1976 to 2002 (blue points). Colombia showed an employment rate of 9.20% with an inflation of 24.68% in 1976 and an unemployment rate of 12.10% with an inflation rate of 6.99% in 2002, therefore unemployment rate increased and inflation rate declined. At the end of 2002, Colombian government approved the Law 789, this Law made its work to help to reduce unemployment rate but there was a high costs, this Law deteriorated employees welfare, for instance transitory contracts instead of permanent contracts for everybody and working hours payment that deteriorated employes’s income in favor of employers’ profits as many newspapers has pointed out since then.
Figure 1. Colombia Phillips curve 1976 - 2011
(%)
Due to this two facts, Central Bank target and Law 789, Colombia has reached a long run unemployment rate too high as figure 1 shows (red points), it was 9.80% at the end of 2011 and 10.80% in 2012 (july), the last 9 years this unemployment rate was around 9.80% and 12.10%, nevertheless inflation rate reached is lower values ever, it was 3.73% at the end of 2011. Table 1 shows the statistical evidence of a short run Phillips curve for Colombia and the impact of Law 789, one can read this table 1 as if inflation rate increases in about 1.0%, then unemployment rate should face a decline of 0.39% or, the other way around, if inflation rate shows a decline in about 1.0%, then unemployment rate should increase in about 0.39%, moreover this table shows the Law 789 impact was positive but not enough to reduce unemployment under 6.0%, its impacts was a decline in unemployment rate around 6.47% when it was about 21.10% and 19.90% before 2002 (short run scenario). Therefore colombian unemployment is still high due to structural facts instead of short run facts.
Table 1. Colombia Phillips curve 1976 - 2011
(OLS methodology)
Unemployment (%)
|
Coefficients
|
Inflation (%)
|
-0.39*
|
Dummy Law 789 of 2002
|
-6.47*
|
Constant
|
19.34*
|
R2
|
0.60
|
*P-value less than 0.01.
Source: Own calculations Stata 12.
This structural unemployment around 11.0% can be sorted out between Labor government department and Central Bank. These two government bodies have to work together in order to reduce this high unemployment, for instance through the unemployment insurance that has to be afforded by these two bodies. This insurance does not have to be payed by employees obligatory savings called “Cesantias”, this scenario will bring a worst welfare for employees as Law 789 brought.
Unemployment insurance can be afforded with crude oil and coal royalties. For instance if government spending increased in 1.0% due to labor insurance payment, it can bring a decline of 0.7% in unemployment rate as table 2 shows, this results are significative, moreover these results do not differ from those of table 1.
Table 2. Colombia Phillips curve adjusted by central government spending 1976 - 2011
(OLS methodology)
Unemployment (%)
|
Coefficients
|
Inflation (%)
|
-0.36*
|
Government spending growth (%)
|
-0.7**
|
Dummy Law 789 of 2002
|
-6.36*
|
Constant
|
19.34*
|
R2
|
0.60
|
*P-value less than 0.01; **P-value less than 0.05.
Source: Own calculations Stata 12.
The main conclusion is of this weekly note is Colombia faces a structural high unemployment which must be sorted out through better opportunities supplied by private sector (long run contracts, fair payments and so), moreover labor department has to work with Central Bank for financing unemployment insurance, it does not have to be payed with employees savings as government wants.
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