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Colombia Inflation and Unemployment
High inflation and unemployment also confronted
Colombia in the
late 1980s. Although Colombia was able to avoid the
hyperinflation
characteristic of Argentina and Brazil in the 1980s,
persistent
annual increases in the consumer price index
(CPI--see Glossary) of
20 to 25 percent had been evident since the mid-1970s.
Higher coffee revenues in the 1970s caused rapid
increases in
demand and costs, which boosted inflation. This occurred
at a time
when the Third World was also experiencing rising oil
prices. As
the economy entered the 1981-85 recession, accelerated
deficit
spending by the government continued to fuel inflation. By
the
early 1980s, Colombia had entered a period of rising
prices
combined with economic stagnation. The rapid growth of the
money
supply and frequent devaluations of the peso (for value of
the
peso--see Glossary)
also fed inflation in the 1980s.
The annual inflation rate dipped below 20 percent in
1983 for
the first time in more than a decade, only to surge upward
again in
1985. In 1986 government efforts to control public debt
and funnel
windfall proceeds from that year's coffee boom into the
public
sector may have eased inflationary pressures, but the CPI
nevertheless rose by 21 percent.
Inflation was estimated at 25 percent in 1987, fueled
by price
increases in domestically produced items, including
housing, food,
and clothing. In the case of food prices, shortfalls in
domestic
production shot prices upward, increasing dependence on
more
expensive foreign foodstuffs. A price-indexed minimum wage
and
market adjustments throughout the wage structure also
contributed
to inflation. In 1987 the minimum wage rose by 24 percent,
nearly
equaling the price increases for the year.
The large number of United States dollars that entered
Colombia
illegally because of the drug trade also contributed to
inflationary pressures by raising the overall level of
demand.
Estimates varied as to the relative importance of the drug
trade,
but most observers believed that it may have accounted for
as much
as 25 to 30 percent of total inflation in the 1980s.
Government efforts to ameliorate the effects of
inflation
proved relatively unsuccessful because of the combined
effects of
wage indexing, drug money, and volatile prices, which
prompted
economists to forecast inflation rates above 20 percent
into the
1990s. Furthermore, it appeared that the government was
reconciled
to this level of inflation and would likely give priority
to other
economic problems.
Rising unemployment was also part of the economic
malaise of
the early 1980s. Although the economic boom of the 1970s
had caused
some researchers to conclude that unemployment would not
be a
serious problem in the 1980s, the Colombian unemployment
rate rose
steadily from 8.4 percent in 1981 to 14.9 percent by June
1986. The
trend was finally reversed in 1987, as all sectors of the
economy
began to expand following the 1986 coffee boom.
Unemployment fell
to 12 percent in 1987, the lowest level since 1982, and
continued
to decline in early 1988. Although a welcome sign, this
reduction
reconfirmed Colombia's continued dependence on coffee.
Unemployment was driven by numerous variables besides
the level
of economic output. These determinants included
demographic
changes, migration patterns, education and experience
levels, the
relative costs of labor and capital, wage rates, and the
segmentation of the labor market. Collectively, these
factors
pointed to a fundamental change in the nature of
employment since
the turn of the century.
Colombia's demographic makeup changed substantially
after the
1940s. Although birth rates declined steadily (the
population grew
only 2 percent in 1986), the labor force expanded rapidly
(see Population Trends
, ch. 2). By 1985 the size of the
economically
active population had reached 11.3 million people, or 38
percent of
the population. This represented an average annual growth
rate of
3.9 percent from 1973 to 1985, with women and youths
accounting for
most of the increase.
By 1985 one-third of the labor force consisted of
women, many
of whom were housewives who had recently entered the job
market
because of the attractive wages. Studies suggested that
this
addition to the work force accounted for much of the
increase in
family income among the very poor.
The rise in the number of adolescent workers
constituted the
other significant demographic development. Because there
was an
influx of relatively uneducated and unskilled young
workers into
the labor market, many youths found it impossible to gain
employment. The unemployment rate was highest in the
fifteen to
nineteen age-group, reaching 30 percent by 1986. Planners
hoped
that this situation would correct itself as demographic
trends
changed in the 1990s and as government efforts to keep
young people
in school longer began to have an effect.
Internal migration trends also affected the urban labor
market.
By the late 1980s, Colombia had become a predominantly
urban
society, with over two-thirds of the population residing
in cities.
In contrast, as recently as the 1950s the population had
been
concentrated principally in rural areas
(see Urbanization, Migration, and Immigration
, ch. 2).
Shifts in employment activity over time made these
rural-to-
urban migration patterns evident. As the country became
more
urbanized, it also became less dependent on the
agricultural sector
for employment (see
table 7, Appendix). In 1938 nearly 60
percent
of the population worked in agriculture and resided in
rural areas.
By 1984, however, only a third of the labor force was
engaged in
agricultural activity; most workers were employed in
services,
commerce, manufacturing, and construction.
Wage levels and type of employment also depended on
education.
Improvements in education occurred at all levels after
1951, when
42 percent of the labor force was uneducated and only 50
percent
and 7 percent, respectively, had finished primary and
secondary
school. By 1978 only 16 percent of the work force was
considered
uneducated; 55 percent had finished primary school, and 24
percent
had graduated from a secondary program. Most of the urban
unemployed, however, continued to be rural migrants and
others
having little or no formal education.
Local business costs also affected employment levels.
In a
broad sense, Colombian capital and labor could be easily
substituted for each other; consequently, the
manufacturing sector
inclined toward a capital-intensive export strategy in the
late
1960s. As a result, fewer workers were employed in this
sector than
might have been the case had a more labor-intensive
approach been
taken.
The cost of labor was relatively high in Colombia. This
resulted, in part, from social legislation and demands
made by
unions, including minimum wage requirements and nonwage
compensation such as severance and vacation pay, pensions,
and
disability allowances. Some economists also argued that
government
subsidies designed to encourage investment actually placed
the
marginal and relative costs of capital at below-market
rates and at
levels significantly lower than the cost of labor for many
businesses. This situation appeared unlikely to change
without some
type of government initiative.
Of increasing interest in the labor market was the
level of
segmentation, which could be conceptually represented by
dividing
the work force into two categories--the formal and
informal
sectors. The formal sector, or traditional labor market,
is easily
identified in national employment data. The informal
sector, by
contrast, is a segregated portion of the employment market
characterized by a lack of formal record keeping and by
small
enterprises that employ little capital and only a few, if
any,
usually undereducated employees. Many economists believed
that the
informal sector constituted as much as half of the labor
force in
the 1980s, including many peasants and other workers
engaged in
drug production and trafficking. The informal sector
played an
important role in absorbing unskilled workers who would
otherwise
have remained unemployed; the nature of this sector,
however,
dictated that wages remain well below those of the formal
sector,
and other nonwage compensation, such as paid leave or
insurance,
was unavailable to the workers. Those engaged in the drug
business
were the exception. They usually earned wages or salaries
in excess
of what their skills would bring in the formal employment
market.
In 1987 government estimates indicated an expansion of
the
informal sector in major urban centers, probably as a
result of
high unemployment. The size and profitability of the
informal
sector, therefore, appeared to be inversely related to the
prospects of the formal labor market.
Data as of December 1988
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