A 1985 World Bank study concluded that in spite of a relatively well-educated work force, unemployment was Panama's "gravest economic and social problem." The unemployment rate climbed steadily, from 8.1 percent in 1978 to 11.8 percent in 1985. The study predicted that the unemployment situation would further deteriorate unless the government took forceful measures to change structural rigidities in the labor code and market. Legislation approved in March 1986 addressed some of the rigidities in the 1972 labor code. Those changes may have been responsible, at least in part, for the lowering of the unemployment rate in 1986 to 10 percent.

Employment

As a result of declining birth rates and stabilizing mortality rates, Panama's overall population growth rate fell from an annual average of 2.6 percent between 1965 and 1980 to 2.2 percent between 1980 and 1985. The working-age population (15 years and over) increased from 1,011,700 in 1978 to 1,256,800 in 1985, at a rate of approximately 4 percent a year. From 1970 through 1984, the rate of job creation was less than half the growth rate of GDP. Analysts have estimated that the economy would have to grow indefinitely by 7.5 percent a year to absorb new entrants into the labor market--a level almost impossible to sustain and far above Panama's average annual growth rates in the past.

Panama's experience suggested that a government's ability to improve the employment situation through direct intervention in the labor market is severely limited. In the 1960s, an average of 13,000 new jobs were created each year. During the recession in the 1970s, unemployment rose dramatically. In late 1977, the government sought to reverse the deteriorating employment situation with an emergency jobs program. As a result, 28,000 new jobs were created within a year--20,000 of which were in the public sector. The employment program drained government resources, however, and in 1980 it was terminated. Only 11,000 jobs were created annually between 1979 and 1982.

In 1985 the sectoral distribution of the labor force reflected shifts that had taken place since the 1960s. The services sector, led by financial services, continued to grow and accounted for 57.4 percent of the total labor force in 1985. Agriculture (including forestry and fishing) consistently experienced a relative decline, but still furnished 26.5 percent of the jobs. Industry's share of the labor force grew slightly between 1965 and 1980, but dropped to 16.1 percent in 1985.

The public-sector share of total employment rose slightly from 11 percent in 1963 to 13.1 percent in 1970. With the expansion of the public sector in the 1970s under Torrijos and the Emergency Employment Program in 1977, that share peaked at 25.1 percent in 1979. In 1982 the public sector still accounted for 25 percent of total employment.

Wage Policy and Labor Code

Panama's salaries were high by regional standards in the mid1980s . In a 1982 study comparing salaries in manufacturing, Costa Rica's average monthly salary was only 41 percent that of Panama's; Guatemala's, 71 percent, and Honduras's, 84 percent. In 1985 the average monthly salary in Panama was US$450, but that figure was influenced by salaries in the canal area, which averaged US$1,300 per month. In 1985 the minimum wage in the metropolitan area was US$0.82 per hour; that wage was adjusted for location and type of industry.

In the 1970s, the government became heavily involved in labor matters and intervened actively to increase wages. Although a labor code had existed for many years, only the minimum wage provisions were consistently enforced. In 1971 two decrees were issued; the first imposed an education tax and the second required employers to pay workers an extra month's wage each year.

In early 1972 a broad labor code, patterned after that of Mexico, substantially changed labor-management relations. Workers' security, benefits, and bargaining power were increased considerably. Collective bargaining and unionization were encouraged and resulted in rapid growth of union membership.

Although the 1972 labor code contributed to political stability in the 1970s, it substantially raised costs for employers, especially those in labor-intensive activities. The code also created disincentives to further hiring and private investment. Employers were prohibited from reducing a worker's salary. Therefore, piecework and assembly-type industries could not reward workers on the basis of productivity. As a partial result of these rigidities, Panama's labor costs were among the highest in the Caribbean Basin. According to a 1984 World Bank report, the annual cost of running a textile plant with 500 workers was US$588,300 in Haiti; US$789,800 in Costa Rica; US$919,700 in the Dominican Republic; US$1,048,500 in Colombia; US$1,057,600 in Mexico; and US$1,156,700 in Panama. Only Jamaica's costs were higher (US$1,828,300).

The labor code caused the effective cost of wages to rise, fueling inflation and discouraging private investment. The government, unable to devalue the currency, was forced to address the root of the problem--high labor costs. Law 95, which became effective in 1977, modified provisions of the labor code that related to job security and benefits. Previously, employers could only dismiss workers during their first two years on the job; that term was extended to five years. New provisions inhibited union actions, such as strikes, and imposed a two-year moratorium on collective bargaining agreements, which froze wages.

As a condition for the disbursement of a structural adjustment loan, the World Bank in 1985 recommended making the code more flexible. Panama's then-President Nicolás Ardito Barletta Vallarino (October 1984-September 1985) fully backed the World Bank recommendations. Opposition from unions and from within his own party, the Democratic Revolutionary Party (Partido Revolucionario Democrático--PRD), forced Ardito Barletta to withdraw the proposed changes and contributed to his resignation. His successor, Eric Arturo Delvalle Henríquez, was more successful. In March 1986, the Legislative Assembly approved major reforms in the labor code, in spite of widespread protests and a ten-day work stoppage by the unions. The changes included production-based wages, uniform rates of overtime pay, piecework provisions, removal of protective measures in industry, and flexible agricultural pricing. On the whole, the labor code modifications were aimed at making Panama's industry and agriculture more competitive internationally and expanding employment opportunities. Nonetheless, the economy was deemed likely to continue to experience high unemployment, especially in the metropolitan area, where unemployment rates tended to be much higher than the national average.

Income Distribution

One of Torrijos's major goals was to address the problem of unequal income distribution, which during the 1960s was one of the most skewed in the world. In 1970 the richest quintile (20 percent) of the households received 61.8 percent of the income; in stark contrast, the poorest quintile received only 2 percent of the income. Results of a study conducted in 1983 by the Panamanian government suggested that the Torrijos policies did, in fact, make income distribution more equitable. The income share of the richest quintile fell to nearly 50 percent, while all other income groups increased their share: the fourth quintile (second-to-richest) from 20 percent to 23 percent; the third quintile from 11 percent to 15 percent; the second quintile from 5 percent to 9 percent; and the first (poorest) quintile to 3 percent. Nevertheless, despite the program's success, the 1983 study confirmed a continuing pattern of a relatively prosperous metropolitan area and poor rural provinces.

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Source: U.S. Library of Congress