Trade Bust, Labor and Wage Policy in Bolivia: A CGE Approach

Abstract

In this paper, we evaluate the possible impact of the labor and wage policy in Bolivia’s economy in the event of a reduction in the price of exports. For this analysis, we use a CGE model with a 2012 SAM. The Bolivian labor policy is characterized by compulsory increments in the private formal wage and an expanding labor force in the public services. A labor supply function allows migration between formality and informality and a reservation wage curve differentiates the nature of unemployment in the formal and the informal sector. The labor and wage policy does three things: 1) it promotes household consumption but reduces the GDP, decreases investment and growth, 2) it increases the rate of formality only at the expense of higher unemployment, and 3) it swells the primary sector to the detriment of the secondary sector. In the face of a decrease in commodity prices, Bolivia needs to make a correction of course in the labor and wage policy.