Economic theory suggests that in developing countries an increase
in GDP/c improves labor absorption and, under certain conditions,
the wage rate, with positive distributive effects. In contrast, a GDP
contraction raises inequality as wages drop and redundant workers
are not covered by unemployment insurance. The evidence in
Figure 4 on Latin America confirms this view and shows that, on
average, a one percent yearly increase in GDP/c over the cycle
(which has an average duration of 4-6 years) reduces the Gini
coefficient by 0.12 percentage points, thus confirming the
prediction of the above theory. Yet, a decline in inequality
following a return to growth is of course, far from automatic, as
growth patterns c a n b e pro-poor, neutral or immiserizing.
Figure 4. Percentage changes in Gini coefficients (y- axis) versus percentage
change in GDP/c (x-axis) over the business cycle in 18 countries, 1990-2007
Source: authors’ elaboration.
The evidence would thus suggest that the recovery recorded from
2003 to2007, as well as the labor policies discussed in section 3.4,
generated a positive effect on employment and the distribution of
wages. As shown in Table 2, from 2002 to 2007, the
unemployment r a t e dropped by 5.3 points in LOC countries and
2 points in NO-LOC countries. Over 5.3 million new jobs were
created each year in the region, i.e. at a much greater rate than
during the previous decade. The new jobs were mainly taken by
low–income groups, contributing significantly to the drop in
inequality.