Q24N (BloombergLinea.com) Latin America remains trapped in the dilemma of low productivity, despite being one of the regions with the longest working hours in the world.
This makes it difficult to generate quality jobs and recruit workers, especially in Central American and Caribbean countries.
The World Bank has noted a prolonged stagnation in labor productivity in Latin America over the last decade, which could have repercussions on multiple fronts and deteriorate job quality in the future.
“This stagnation represents a critical obstacle to the generation of quality jobs, as low productivity generally translates into weak labor demand from the private sector,” Carlos Rodríguez-Castelán, manager of the World Bank’s Poverty and Equity Global Practice for Latin America and the Caribbean, told Bloomberg Línea.
Rodríguez-Castelán explains that boosting productivity growth requires policies that promote macroeconomic stability and a predictable regulatory environment by strengthening government management, increasing transparency, and creating a friendly environment for private sector investment.
“Latin America continues to produce little, despite grueling workdays, because most companies are still managed with outdated methods and minimal digitalization, which limits the efficiency of each hour worked,” according to Miguel A. Martínez-Carrasco and María Ximena Hincapié, analysts and professors in Colombia at the Faculty of Management at the Universidad de los Andes.
Additionally, there is the survival of unproductive businesses, including companies in a large informal sector. In the analysts’ view, cumbersome regulations and uncompetitive markets allow them to continue operating and retain capital and talent that would yield more in better-managed firms.
“Furthermore, the informal sector becomes a funnel that attracts potential talent, which fails to develop its full potential, either due to a lack of opportunities, resources, or the prospect of a better life in the short term by entering the labor market early,” the academics wrote in an analysis shared with Bloomberg Línea.
Productivity Gaps
The region presents wide productivity gaps between countries. For example, although Hondurans work an average of 43.7 hours per week (2023), productivity is only US$6.83 per hour worked.
Panamanians work only 36 hours (2024), but productivity is US$45.81, according to figures compiled by Bloomberg Línea from sources such as the ILO and ECLAC using the latest available data.
According to the Economic Commission for Latin America and the Caribbean (ECLAC), while in 1950 it took 2.5 hours in the region to produce the same amount of work as in the United States in 1 hour, by 2023 it would take almost 4 hours.
The International Labor Organization (ILO) indicates that by 2024, the average number of hours worked per week per worker in the U.S. was 37.6.
According to analysts, there are two major determinants of a country’s productivity. One is its productive capabilities, which include the efficiency of the production processes used, the capacity to innovate in what is produced, and human talent.
Human talent is “perhaps the most important because the capacity to innovate and the capacity to improve production processes also depend on it,” Marcela Eslava, a professor at the Faculty of Economics at the Universidad de los Andes in Colombia, told Bloomberg.
She explains that the other major determinant is whether the business environment favors (or not) the maximum use of these capabilities and creates (or not) incentives for investment in improving them in the future.
“Compared to high-productivity countries, Latin America has deficiencies in both dimensions (…). The differences between countries often reflect these underlying factors,” says Eslava. “There is greater productivity in those countries within the region that build the bulk of their human capital more effectively, that invest more in innovation, and that encourage the development or adoption of better technologies.”
Also, more productive are those where the rules are more consistent with existing productive capabilities and encourage more investment to improve those capabilities.
The relationship between labor productivity and income growth
An increase in labor productivity has the potential to generate an increase in real labor incomes throughout the region, according to the World Bank.
The multilateral organization highlights that in Colombia, for example, a 1% increase in productivity can lead to an increase in wages of almost half a percentage point.
“Reforms that promote growth and increase labor productivity are the main long-term channel for revitalizing real labor incomes,” the World Bank said in a report.
According to the organization, there is significant potential for improving labor productivity in the region. In fact, according to pre-pandemic estimates, labor productivity was between 20% and 60% of the levels in member countries of the Organization for Economic Cooperation and Development (OECD), “with considerable variation across sectors,” the World Bank explains.
Analysts suggest that, to transform hours into added value, the region needs to eliminate barriers to business entry and exit, as proposed by Professors Martínez-Carrasco and Hincapié.
In addition, they suggest providing incentives for formalization and investing in Infrastructure 4.0, combining high-capacity logistics corridors with broadband, so that SMEs can seamlessly connect to national and international markets.
A third pillar, in their opinion, is to finance, through competitive bidding, the adoption of technology—hardware, software, and training—with disbursements conditioned on specific productivity goals.
Finally, they recommend empowering both public and private universities that need to rethink their educational models, rethinking them from the perspective of partnering with companies seeking to close the gap between the profiles produced by education and those demanded by industry.
Large-Scale Problem
Productivity is a large-scale structural challenge in Latin American countries at different levels.
According to a 2024 World Bank report, entitled “The Geographic Evolution of Productivity and Employment,” in Latin America and the Caribbean, most people live in cities, but these are not particularly productive areas.
The phenomenon of low productivity in the region’s cities is associated with a marked deindustrialization process, which has to do with the fact that cities have moved away from the production of tradable goods and services and have focused instead on non-tradable services.
This is evidenced by the fact that, of the 15 largest cities in the region, none are dedicated to manufacturing, and only Brazil, Mexico, and Central America have such cities, but they are relatively small.
Another structural obstacle facing Latin America in improving its productivity and competitiveness is the lack of infrastructure, says Alejandro Arroyo Welbers, director of Programs in International Trade and Regional Economies at the Universidad Austral in Argentina.
Without modern infrastructure and greater openness to the world, the region will continue to face structural barriers that limit its competitiveness and capacity for sustainable growth.
Deficiencies in ports, railways, highways, logistics, and energy networks limit both the region’s productive capacity and its connection to global markets.
In other words, “it’s not a matter of working 14 hours a day, but rather of having the necessary infrastructure and technologies that allow you to gain productivity in your manufacturing plant, in your distribution, supply, and in your connection to the world,” said Welbers.
In countries like Argentina, analyst Welbers says this situation is aggravated by their low level of trade openness and connection to the world.
Furthermore, the lack of industrial integration hinders the development of strategic sectors and job creation.
In comparison, countries like Brazil show a more determined commitment to infrastructure investment, although they also face challenges in absorbing growing demand.
Translated and adapted from BloombergLinea.com. Read the original (in Spanish) here.
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