Labor-Market Reform

Chile Table of Contents

Immediately after the 1973 coup, many labor institutions, that is, traditional channels of influence, such as government offices, which unions used to get their voices heard, were disbanded, and some important unions were dissolved. Thus, wage adjustments became mainly a function of indexation, which, given Chile's history of inflation, had become an established element of any wage negotiation. Indexation was kept in place until 1982, through ten years of declining inflation.

Starting in October 1973, the government mandated across- theboard periodic wage adjustments tied to the rate of inflation. Lower wages were adjusted proportionally more than higher ones. From 1973 to 1979, indexation to past inflation with varying lags was the norm throughout the economy. The 1979 Labor Plan formalized this practice by requiring that collective bargaining agreements allow for wage adjustments at or above the rate of inflation. In 1982 the indexation clause of the Labor Plan was eliminated. The government continued the practice of periodically announcing wage readjustments and bonuses, with the wage increases usually not keeping pace with inflation and covering the nonunionized sector only. The dynamism of the economy in the early 1990s resulted in actual wage increases above officially announced readjustments.

The Employment Security Law established that in the absence of "just cause" for dismissal, such as drunkenness, absenteeism, or theft, a dismissed employee could be reinstated to the job by a labor court. This law was replaced by a less costly system of severance payments in 1978. Decree Law 2,200 authorized employers to modify individual labor contracts and to dismiss workers without "cause." A minimum severance payment was established that was equivalent to one month of salary per year of service, up to a maximum of five months' pay. This new system applied to all contracts signed after August 1981.

The changes introduced by Decree Law 2,200, along with the 1979 reforms, which established new mechanisms to govern union activity (Decree Law 2,756) and collective bargaining (Decree Law 2,758), became known in Chile as the Labor Plan. Decree Law 2,756 departed significantly from traditional legislation: union affiliation within a company became voluntary, and all negotiations would now have to be conducted at the company level; bargaining among many companies would be eliminated. According to the previous law, which had applied until the 1973 coup, once the majority of the workers of an enterprise chose to join an "industrial union" all workers became part of that union. That is, one union would have exclusive representation of all workers in an enterprise. The right to collective bargaining was granted to unions at the enterprise level and also to union federations and confederations. This resulted in some negotiations at the industry level with the participation of the Ministry of Labor and Social Welfare through the Labor Inspectorate. As in the past, the new law required participation of 10 percent of the workers or a minimum of twenty-five workers (whichever was greater) for creation of a union. Workers were not required to be represented by a union in collective bargaining.

Decree Law 2,758 stipulated that in the event of a strike, a firm could impose a lockout and temporarily lay off workers, which the previous law had prohibited. At the same time, Decree Law 2,758 established norms about collective bargaining, and in its Article 26 the law established that unionized workers' nominal wages should be adjusted to at least match the rate of inflation. This article, which became a severe constraint to downward real wage flexibility during the 1982-83 crisis, can be understood only in the context of a previously existing policy of 100 percent indexation across the board. In 1982, at the onset of the debt crisis, Article 26 was amended, eliminating the downward inflexibility of real wages. This reformed law was in effect until April 1991, when some important changes proposed by the Aylwin administration were approved by the National Congress (hereafter, Congress).

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Source: U.S. Library of Congress