This is (Latin) America: The unequal cost of living

It is too soon to tell the long-term effects of the Covid-19 crisis on inequality in Latin America, but income and labor markets already seem to be Patient Zero. The pandemic has exacerbated the existing structural inequalities in Latin America’s labor markets, including a very high skill premium in terms of wages; a high correlation between the ability to work remotely and education, hence with pre-pandemic income;  a very high ratio of the minimum wage to the mean or median wage, which indicates a larger share of economically vulnerable workers, and the predominance of the informal sector, whose workers have no access to furlough schemes or unemployment insurance. In this context, job and income losses hit the lower-skilled and uneducated workers the hardest. In addition, preexisting occupational differences in terms of gender and age have translated into greater disparities and future vulnerabilities as the burden of additional housework and care responsibilities fell on women. As a result, the earnings gap is set to grow further. 

We can see the sharp decrease of total weekly hours worked to population, a measure of labor force dynamics, in Argentina, Brazil, Chile, Colombia, Mexico and Peru. The largest contraction in 2020 was seen in Peru (-27% y/y), while Argentina and Colombia both recorded a decline of -21% y/y. Mexico saw a sharp decrease of -12% y/y after six years of positive growth. In terms of the rate of employment, the story is similar: Peru had almost 12pp decrease, while in Chile the employment rate was -6.5pp lower and in Brazil -4.6pp lower.

Now, an alarming rise in inflation threatens to rub salt in the wound as food and fuel expenditures as a percentage of total consumption are exorbitantly high in the region. As a result, we estimate that 80 million people, or 18% of the total population in the six largest Latin American economies, are at risk of falling below the poverty line. Food and fuel expenditures as a percentage of total consumption range from 32% in Mexico to 53% in Argentina (in the US it stands at 12%). In the 2000s, rising commodity prices helped reduce income inequality in Latin America by creating greater demand for agriculture and mining labor, in turn increasing low-skilled employment and wages. However, the recent surge in inflation, coming after historic levels of liquidity were injected into in financial markets in response to the crisis, has already forced countries such as Brazil and Mexico to tighten their purse strings and increase policy rates: they now stand at 4.25% in both countries. It is likely that both countries will experience between two and three more hikes in the next 12 months as we think the Fed is currently at ease with a temporary overheating of the economy and Latin American countries will need to manage imported inflation. 


Patricia Pelayo Romero
Allianz SE