Understanding the How and Why behind ...

Technology versus Trade versus Social Institutions: Rising Wage Inequality in the Chilean Cosmetics Industry1

Janine Berg Introduction One of the arguably more disappointing outcomes of globalization has been the rise in wage inequality in developing countries. With few exceptions, mainly in East Asia, wage inequality has increased under trade and financial liberalization. In Latin America, including Chile, this outcome has been particularly acute. The association between openness and rising wage inequality has been well established in econometric studies on the Chilean economy (Robbins, 1994; Beyer et al., 1999). The studies assume that free trade causes an increase in demand for skilled workers, a fall in demand for low-skilled workers, and thus, a rise in the relative wage gap. Similar studies on other developing countries (Aitken et al., 1996; Feenstra and Hanson, 1997), have associated increased multinational activity in developing countries with rising wage inequality. Multinationals are believed to cause technological spillovers, which increase the demand for skilled workers, increasing relative wage dispersion.2 What remains unclear, however, is how these effects occur. What are the dynamic processes that cause openness to lead to increased wage dispersion? Are there other forces that are not considered, and if so, how do they play out? This chapter gives evidence of how restructuring under free trade affects workers, through a case study of the Chilean cosmetics industry.

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Financial support of field research in Chile during 2000-2001 was provided by the Fulbright-Hays Doctoral Dissertation Research Abroad Fellowship program. I am grateful to William Milberg for many helpful comments and suggestions on this research. 2 See the chapter by Slaughter (this volume) for a more in-depth discussion of the possible effects of multinational activity on developing country workers.

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The Chilean cosmetics industry was closed to trade under the period of importsubstitution industrialization. The sector began to be liberalized in 1974 and has since faced increasing competition, particularly during the 1990s. The increase in foreign competition arising from free trade has had two principal effects depending on whether the firm is a foreignowned multinational or a domestic, Chilean-owned firm. Multinationals have changed their competitive strategy in Chile, leading to a loss of production jobs and increased relative demand and wages for skilled workers employed in management and sales. Domestic firms, on the other hand, have responded to the more competitive environment by making investments that expand and upgrade their manufacturing facilities. The technological changes have been low-skilled biased, leading to an increase in the relative employment of low-skilled workers. Yet the employment increases have not led to concomitant increases in the relative wages of low-skilled workers. Domestic firms have used the weakened labor relations environment to hold down wage increases for low-skilled workers, allowing the firms to continue under pricing the multinationals and retain market share.

Free Trade and Wages Since 1973, when the military government unleashed its program of economic liberalization, including trade reform, wage differentials in Chile between skilled and low-skilled workers have steadily increased. By the 1990s, the returns to schooling of university-educated workers had approached a thirty percent wage premium, after controlling for other worker characteristics.3 At the same time, the returns to schooling of high school educated workers had steadily fallen, from a difference of about five percentage points compared with university-

3

Based on data from the University of Chile employment survey which covers the Greater Santiago area.

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educated workers in the 1960s under import-substitution industrialization, to more than a fifteen percentage-point difference by the end of the 1990s (See Figure 1).4 Figure 1 Returns to Schooling for University, High-School and Primary-School Educated Workers, Greater Santiago, 1958-1998 Return by educational cycles 0.35

0.30

0.25

0.20 Return

Junior education High school education College and graduate education 0.15

0.10

0.05

96

94

92

90

88

86

84

82

80

98 19

19

19

19

19

19

19

19

19

76

74

72

70

68

66

64

62

60

78

19

19

19

19

19

19

19

19

19

19

19

19

58

0.00

Year

Source: Berg and Contreras (2001), based on University of Chile Employment Survey.

The increase in the returns to schooling for university-educated workers is surprising given the tremendous increase in educational attainment among Chilean workers over the four decades. In the 1957-1965 period, only 6.3 percent of the Greater Santiago labor force had more than 12 years of schooling, yet by 1991-1996, 22.3 percent of the labor force had more than 12 years of schooling and 14.6 percent were university educated (17 years or more). At the same time, the number of workers with less than 12 years of schooling was cut in half from 83.7 percent to 42.9 percent, as the government pursued its policy of universal secondary education (Bravo and Marinovic, 1997).

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Other measures of inequality reflect similar patterns. For example, the Gini coefficient for Greater Santiago increased from .506 in 1964-1969 to .586 in 1987-1990. Alternatively, estimates based on the national household survey, CASEN, give a Gini coefficient of .560 in 1987, falling slightly to .553 in 1996 (Larrañaga, 1999).

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The increase in wage inequality is also surprising as the shift to an open economy is expected to compress wages in developing countries where labor, particularly low-skilled labor, is the more abundant factor of production. In Chile, it was thought that import-substitution industrialization had created a bias towards greater incorporation of capital goods into production that would be reversed under free trade, since without the preferential terms of trade, industries would shift production towards more readily and cheaply available low-skilled labor (Corbo and Meller, 1982). As predicted by Hecksher-Ohlin theory, low-skilled labor, the relatively more abundant factor of production, would reap the returns of the policy shift. Moreover, inequality was expected to reduce, as the increased demand for low-skilled labor under free trade would, under the Stolper-Samuelson theory, increase the remuneration of low-skilled labor while lowering the remuneration of skilled labor. For supply and demand shifts alone to explain the substantial rise in wage inequality in Chile since liberalization, it would imply that demand shifts in favor of skilled workers were great enough to mitigate the increase in supply of skilled workers. It would also mean that production did not shift toward the relatively more abundant factor of production, as predicted by Heckscher-Ohlin. This belief supports the view of some economists who have argued that trade liberalization in Chile has been associated with skill-biased technological change. Robbins (1994) and Gindling and Robbins (2001) have advocated this viewpoint, arguing that machinery imported since liberalization has necessitated skilled workers, while reducing the need for lowskilled workers. Similarly, Beyer et al. (1999) regress an index for openness on Chilean wage differentials over time and find a positive and significant coefficient. They suggest that this can be explained from technological change that was biased against low-skilled labor in the 1980s and 1990s.

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These arguments, however, are based on econometric work that measures correlations and thus cannot account for variables that are not easily proxied for, such as labor market deregulation.5 Labor market deregulation is an important issue since along with the trade reforms, the government adopted policies to make the labor market more ‘flexible,’ as well as de-politicize labor relations (Meller, 1992). When the government assumed power in 1973, it threw out the existing labor code, replacing it in 1979 with a wholly revised code that restricted unions and collective bargaining. Because of this, the possibility remains that the econometric results given in the literature to explain rising wage inequality in Chile since liberalization are spurious, with trade reforms, machinery imports, and wage inequality occurring simultaneously, but not necessarily as the direct result of one another.

Methodology To analyze the causes of increased wage inequality in Chile simply by identifying an outcome and then hypothesizing about its causes provides little understanding of the mechanisms by which trade liberalization alters demand for workers in developing countries. This chapter aims to understand the dynamic processes that cause openness to lead to increased wage dispersion, through the use of a case study. The goal of case study research is to “expand and generalize theories,” as opposed to statistical work which enumerates frequencies. Thus findings are to be used to generalize to theoretical propositions as opposed to assessing incidence (Yin, 1994, p.10). Industry decompositions for Chile indicate that around eighty percent of relative employment and wage shifts since liberalization have been within industry rather than between

5

Household and firm-level data sets in Chile do not contain information on union membership or other similar indicators.

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(Meller and Tokman, 1998), suggesting that a within-industry study is an appropriate analytical approach. With this case study, I am able to consider the effects of changing strategies of multinational firms, increased competition, technological change, and a changed labor-relations environment, on the employment and pay of skilled and low-skilled workers. The analysis provides several insights into the applicability of the traditional view of trade and wages (HOS), versus alternative explanations, such as skill-biased technological change (SBTC) and labor market rigidity. Doing so highlights the need to consider other changes in the economy besides just the price and use of certain labor. A variety of factors were taken into consideration when choosing the case, including feasibility, but also whether the case offered an interesting study. I deliberately avoided dying industries, such as apparel and footwear, which have suffered tremendous and continual job loss since the 1970s. Employment in the cosmetics industry, on the other hand, has expanded over the past several decades despite significant restructuring. In 1979, cosmetics firms with factories employed 4,359 workers growing to 6,239 by 1997.6 Another important factor in my decision to study the cosmetics industry was its technological accessibility. Cosmetics products have been successfully produced in Chile for a century, thus their production did not pose a scientific hurdle for the country. Also, simple perusal of supermarket and pharmacy shelves indicated that there was substantial domestic and foreign presence in the sector, offering the possibility for an analysis of foreign direct investment. The fall in trade barriers, transportation costs and more aggressive market seeking by multinational cosmetics firms offered enough challenges to make its story worth telling.

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Based on data from annual manufacturing survey (ENIA) for SIC 3523, toiletry products. I was unable to locate comprehensive data on employment in cosmetics firms without factories.

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The field research is based on interviews with management and union leaders at nine cosmetics companies, four of which are multinational subsidiaries, the other five are Chilean owned. Other sources of information included data from the Chilean annual manufacturing census, available at the four-digit SIC level; factory visits; interviews with outside experts; and information from annual reports and the business press. The use of different sources of evidence is encouraged in case study research because it allows the researcher to triangulate, meaning that researcher enlists multiple sources of evidence to show convergence upon a line of inquiry. Doing so result in more accurate and convincing study conclusions. Thirteen firms were contacted for interviews, of which nine agreed to participate in the study. Firms were selected to achieve a balanced representation of multinational and domestic firms and different-sized firms; within these categories the selection was random. Based on sales and market share information, the sample includes roughly thirty percent of the Chilean cosmetics market.

Features of the Chilean Cosmetics Industry The cosmetics industry is a fast-moving consumer good industry that includes skin care, hair care, fragrance, makeup and personal hygiene products. For 2000, the world cosmetics industry was valued at US$122.2 billion (Koser, 2001). The Chilean cosmetics industry is composed of approximately fifty companies in production, distribution or both. Roughly sixty percent of the market is foreign-owned, either through multinational subsidiaries, distributorships or licensing agreements. Products are targeted at three consumer segments: selective (4 percent), semi-selective (20 percent) and mass-market (52 percent); the remaining 24 percent of the population does not have the resources to purchase cosmetics products (U.S. Department of Commerce, 2000). According to the Chilean Cosmetics Industry Chamber of Commerce, retail

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sales in 1999 were US$680 million, which accounts for roughly one percent of GDP and annual per capita spending of US$45. With an increase in real incomes beginning in the late 1980s and continuing in the 1990s, more Chileans are regularly buying cosmetics products and many have upgraded their market segment.

Restructuring under Free Trade Although initially alarmed by the government’s 1974 announcement that tariffs would be reduced to 10 percent by 1979, Chilean cosmetics firms faced little competition from imports during the 1970s and 1980s. The economic crisis of the early 1980s, coupled with the temporary increase in tariffs following the crisis, resulted in a real average annual fall of final good cosmetics imports of 4.2 percent for the decade. During the 1970s and 1980s, cosmetics and personal hygiene imports were limited to selective niche products, such as name-brand perfumes sold in department stores. In the 1990s, imports diversified in terms of product range, as well as consumer market group. A strong economy along with multinational fervor to capture new markets led to a real annual increase of final good cosmetics imports of 66.5 percent between 1990 and 2000. By 2000, imports totaled US$100 million (at wholesale prices), a significant portion of the US$680 million domestic retail sales market. Importing economically priced massmarket products in the 1990s threatened the survival of companies that had been previously untouched by import competition. At the same time, cosmetics companies faced cost pressures on the retailing end with the growth of “hypermarkets” (defined as having 10,000 m2 or more of floor space) as well as supermarket and pharmacy chains. The U.S. supermarket model was not introduced into Chile until the 1960s, yet by century’s end, 63 percent of the country’s population shopped regularly at

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supermarkets. The industry is extremely consolidated, with the market leader, D y S, holding almost 30 percent market share and 21 hypermarkets accounting for 28 percent of industry sales (ASACH, 2001). The consolidated buying power of the retailers has allowed them to exert pressure on cosmetics firms to keep prices down. Further contributing to the decrease in margins is the practice by large chains and hypermarkets of renting their shelf space, which has increased cosmetics firms’ selling costs.

Cosmetics Multinationals in Chile: Resurgence and Regionalization The first wave of cosmetics multinationals entered Chile during the period of importsubstitution industrialization by hopping the tariff and constructing greenfield factories. Between 1970 and the debt crisis of 1982, there was little multinational investment as firms felt hampered by the political and economic turmoil in Chile as well as their own internal problems as a result of the oil crisis. Following the debt crisis, multinational expansion re-surged, attracted by the ample brownfield investment opportunities as a result of the high bankruptcy rate following the 1982 crash. In the 1990s, cosmetics multinationals in Chile altered their policy of setting up, either as greenfield or brownfield investments, local production centers in the country. This policy was not as a response to internal conditions in Chile, but rather was dependent on the economic policies of other countries in the region, as well as on the internal policies of the countries. Many factories that had opened in Latin American countries to “tariff-hop” during importsubstitution industrialization closed in the 1990s after the region embraced free trade, making it possible to establish regional production centers to serve the different country markets. Overall, Chile has fared negatively under the strategy of regionalizing production since the multinationals

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prefer to locate production in Brazil or Mexico where the domestic markets are larger, rather than in small countries like Chile. Moreover, Chile’s surrounding Andes Mountains make transportation to other Latin American countries difficult and costly. The effect of the regionalization policy was particularly perverse in some instances when multinationals acquired successful Chilean cosmetics firms, only to then close the factory and import the products from their regional production centers. Complementing the strategy of regionalizing production was the decision by multinationals to narrow their product lines, removing country specific products so that the same good would be sold in all countries of the region. In doing so, production facilities could increase economies of scale. Although cosmetics production is still produced in batches— meaning that production is organized discontinuously as a succession of workshops, rather than organized as a continuous line—firms save money by having fewer, but larger, batches. Also product standardization can allow automation of some labor-intensive tasks, such as putting on a bottle top. More importantly, firms can save money on raw material purchases since the larger quantities needed enable them to negotiate better prices with their suppliers. For examples, firms can order chemical supplies by the tank wagon, as opposed to the more costly drums. Factories can also make better use of high-cost “magic” ingredients, such as botanical extracts used in shampoos. Concentration levels of the magic ingredients are minimal (less than one percent), yet chemical producers will sell a minimum of ten kilos, nine of which may not be needed by a small production facility. What has this meant for the Chilean subsidiaries? Previously the subsidiaries operated as quasi-independent firms with product lines oftentimes specific to the country, with production done locally by in-house factories, and with marketing, sales and distribution undertaken by the

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country office. Now multinational subsidiaries in Chile, for the most part, are limited to marketing, sales and distribution. The benefit of the regionalization strategy is that the reduced production costs have allowed the multinationals to lower their prices and compete for the mass market, a segment that had previously been relegated to the domestic firms. The strategy has been largely successful: multinational firms have captured market share from consumers previously unable to afford their products.7

Domestic Cosmetics Firms: Fighting to Retain Market Share Three, somewhat intertwined, factors have threatened the competitive position of the Chilean firms: the increase in imports, the drop in multinational product prices, and the consolidation of the retail sector and subsequent decline of traditional mom and pop outlets. The response of the domestic firms to the competitive threats include upgrading technology, diversifying the product line to offer a wider range of cosmetics products, and expanding into third-party production. Prices have been lowered as well. Among Chilean cosmetics firms, exports comprise a minor share of production (roughly eight percent of sales) and the industry remains constrained by the small size of its domestic market. Production is thus done in small batches making it preferable to produce with semiautomatic rather than automatic equipment. Nevertheless, the domestic firms have taken steps to update their stock of machinery in an effort to improve product quality. The new technologies, however, have not affected the organization of work. Most of these investments have been through the purchase of second-hand equipment from closed multinational factories.

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For example, one multinational introduced in 1996 its line of mass-market make-up products, after purchasing the leading Chilean make-up company, dissolving its product line and importing the products. By 2000, the multinational was second to a domestic firm in number of units sold and first in value of sales (AC Nielson market study, January-February 2000).

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Additionally, firms have invested in increasing the range of products they offer, thereby diversifying their risk and staking out market share in new areas. Product diversification also allows the firms to make the best use of the small-batch production model. It also enables the firms to offer more products on the shelf space that must now be rented at the supermarkets. Another way to increase sales and take advantage of installed capacity has been to accept subcontracting work from other cosmetics companies, from supermarkets and pharmacies that have generic lines, or from hotels. The domestic firms have been successful in retaining the low and middle-income segments of the market, where sales are based more on price than on marketing and advertising. Some domestic firms have also been able to successfully compete with the multinationals in the higher-end market segment, exploiting their advantage of in-country product development and production. The at-home advantage allows them a quicker turn-around in developing new products that respond to the demands of Chilean consumers.

How have the shifts in competitive strategies affected the industry’s workforce? The competitive policies of multinational corporations and the defensive responses of domestic firms have had direct ramifications on who is or isn’t hired by these two competitor groups, as summarized in Table 1.

Table 1. Cosmetics Industry Jobs: Gender, Skills, Pay and Labor Demand Job Title/ Duties

Sex

Skill/ Schooling

Management

Both

High-skilled. University degree.

Marketing and Sales

Both

Marketing staff has university degree. Sales

Pay (Domestic Firms) US$ $7,300/month (technical dir.) $5,500/month (HR manager) Marketing: $1,4002,600/mo.

Labor Demand Multinationals Domestic Unchanged

Unchanged

Increase

Increase dependent on consumer segment: more

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Quality Control

Mostly Female

Compounder

Male

Mechanic

Male

“Envasadora” /Filling & Assembly Storage and Distribution

Female

Male

staff has high school or more. University or technical school studies. Semi-skilled. OJT. Semi-skilled. OJT. May have technical school studies. Unskilled, some high school Unskilled, some high school

Sales: $1,200$1,600/mo Head of QC = $1,800/month; Assistants = $550 $500/month

Decrease – job loss with closing Decrease – job loss with closing

exclusive = increased demand Increase from expansion and emphasis on product quality. Increase with greater output Increase with greater output

$275/month

Decrease – job loss with closing

Increase with greater output

$275/month

Decrease from outsourcing and computerization. Decrease from outsourcing

Some increase, though controlled w/computerization Unchanged

$500/month

Decrease – job loss with closing

Unskilled $250/month Cleaning/ Non-core Cooking= services Female; (cleaning, Security/ security, Grounds grounds, =Male cafeteria) Increase; emphasis $275/month Increase; needed Unskilled, “Promotora”/ Female on low-cost for selling at appearance Product promotional efforts department stores most important Promoter Note: Wages are US$ per month and were calculated at C$550 = US$1. Data are averages for the category and are based on interviews with general managers and union wage information. Source: Author’s compilation based on interviews, factory visits and union contracts.

For workers employed at multinationals, the strategy to regionalize production resulted in a closing of local factories that forced the dismissal of the mostly low-skilled workforce, employed to place tops on bottles and other simple, yet labor-intensive, tasks. Other more skilled production workers, such as the semi-skilled mixers and machinery adjusters, as well as the few personnel hired to ensure quality control, have also lost their jobs. Moreover, in the 1990s, multinational subsidiaries have adopted their headquarters’ policy of outsourcing non-core personnel such as the maintenance, cleaning and security staff. Although these workers may then be rehired through a subcontracting firm, their wages are lower then they were when hired directly by the multinational. The study confirmed the wellknown finding that multinationals pay more than domestic firms—in this industry, almost double

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the domestic firms’ low-skilled wage rate of roughly US$275 per month. Unfortunately, managers could not convincingly explain why they pursued this wage policy. In the end, however, few low-skilled workers benefited from the higher wages paid by multinationals as many of these jobs were eliminated, either through regionalization or outsourcing.8 The workers that kept their jobs at the multinational subsidiaries are employed in management, marketing and sales; all well-paid, skilled positions with workers, who if not university educated, have at least completed high school and have work experience. Yet the size and function of the subsidiaries’ staff is now greatly reduced. The net result of labor demand changes at multinationals has been a large upward shift in the relative demand for skilled compared with low-skilled workers. Domestic firms, on the other hand, have shown an increase in the employment of production workers as companies have focused more on production-related activities, accepting subcontracting jobs from multinational firms and retailers. The competitive strategies of product diversification and third-party production coupled with the characteristics of small-batch production have meant that technological investments have not caused a drop in employment. Instead, more low-skilled workers have been needed for the labor-intensive tasks of monitoring runs, fitting bottle tops and packaging goods. Even when machinery is more productive, such as upgrading from manual to semi-automatic equipment, increases in output have been accompanied by increases in employment. The following example illustrates the employment effects of the machinery investments undertaken by domestic producers. In 1999, a domestic firm purchased a new reactor from Argentina for the purpose of producing facial cream. The new reactor produces two and a half

8

For this reason, “envasadora” pay in Table 1 reflects the current industry average, after the closing of many multinational factories.

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times the volume of the reactor they owned, which dated from the 1970s. The digital temperature display on the new reactor is more accurate and more readable than the mechanical temperature display of the old one; the reactor itself is also easier to clean. The domestic firm still uses the old reactor, which is located in the workroom next to the new reactor. Compared with the old reactor, the new one improves quality by having improved temperature control, by making larger batches, and by mixing the batches more quickly. In sum, it is more productive. Yet at the packaging stage of production, more workers (envasadoras) are needed to fill and put the caps on the jars, and then package the boxes to prepare them for delivery. In the aggregate, the labor saved from having a better reactor is cancelled out by the labor intensity of the packaging operations, leading to an increase in employment. Yet overall productivity is greater and the final product is of higher quality. As this example shows, it is incorrect to interpret technological upgrading in this industry as a capital-labor trade-off. Also contributing to the increase in employment has been the low-cost approach that domestic firms have taken towards marketing and sales. Because domestic firms prefer to use the savings from advertising to offer lower prices, spending on product promotion has involved hiring low-skilled product promoters (promotoras) to introduce the products, as opposed to other more costly forms of advertising. Thus, this competitive strategy has also increased low-skilled employment. The result has been an overall increase in the relative demand for low-skilled labor, as confirmed by manufacturing census data. According to the census, employment at cosmetics factories increased by 83 percent between 1980 and 1995 for low-skilled workers, while skilled

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workers’ employment increased by 49 percent during the same period.9 Yet the employment gains that favored low-skilled production workers did not lead to an improvement of their financial position in the firm. Between 1980 and 1995, productivity increased annually by 3.8 percent, skilled workers’ wages increased by 4.2 percent annually, but low-skilled workers’ wages increased by just 1.5 percent annually. Thus the strong relative employment gains for low-skilled workers were not matched by wage gains.

What explains the wage divergence? To understand the relative lack of wage gains for low-skilled workers in domestic firms we must consider labor relations. Labor unions in Chile are divided along class lines, with lowskilled and semi-skilled production workers belonging to a union, and skilled production workers, administrative staff and managerial personnel, generally not unionized. Thus, collective bargaining negotiations affect just one class of workers. The decline in union power, as a result of repression and the introduction of neo-liberal labor laws, affected low-skilled workers as opposed to skilled workers. Prior to the military coup, the cosmetics industry was a highly unionized sector, with its own industry federation that dates back to the early 1940s. Today, the few unions that exist are in firms that were in business prior to the military coup; firms that started after 1973 do not have unions. Moreover, there are fewer unions today as domestic cosmetics firms acquired by multinationals in the 1980s and 1990s were closed under the regionalization strategy. Among the firms that have unions, the affiliation rate is low. When workers have effectively organized, their efforts have often been thwarted by employers who promote union leaders to managerial 9

The census defines low-skilled and skilled according to the job performed and not whether the worker is involved in production. Nevertheless, there remains a strong correlation between the low-skilled/production versus

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positions, creating a leadership vacuum, or give higher pay increases to non-union workers, causing the union to eventually dissolve (See Table 2). Table 2. Existence and Status of Unions in participating firms Firm

Union?

What Happened? Condition of Union? Dissolved with factory closing. Dissolved 2 years prior to factory closing.

M1 M2

No No

M3 M4 C1

No No Yes

Dissolved with factory closing. Subcontracts manufacturing. Only 20% of production workers are members.

C2 C3

No Yes

Workers sign collective agreement. Most of the 22 production workers belong. Negotiations concern wage increases. Union exists for both white-collar and blue-collar workers. Negotiations concern wage increases. Workers sign collective agreement.

Anti-union practices?

Allegations of anti-union practices by offering early retirement package to union leader and bonuses to workers to leave union.

Allegations of anti-union practices by promoting union leader to non-union position.

Allegations of anti-union practices by promoting union leaders to non-union positions. C5 No Management admitted paying non-union workers more in a deliberate and successful attempt to destroy the union. Note: M1 – M4 are multinational firms; C1 – C5 are domestic firms. By negotiating a collective agreement as opposed to a collective bargaining contract, the workers forfeit their right to strike. Source: Interviews with management and union leaders; collective bargaining contracts. C4

Yes

The low affiliation rate and lack of dedication to collective efforts on the part of the workers has made it easier for domestic cosmetics firms to constrain wage growth. Yet even well functioning unions with capable leadership often have difficulty securing wage increases for their workers due to the highly competitive external environment that the firms’ face. For example, in 1998 wage negotiations at one domestic firm, management placed greater emphasis on the heightened state of competitiveness within the cosmetics industry, and in particular, on the market power of multinational firms, as opposed to the slowdown in the Chilean economy. In a response to union demands for a wage increase, management wrote:

skilled/production classification.

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Nowadays competition is noticeably greater as a consequence of market liberalization; we not only face internal competition, but also very strong competition from the most powerful transnationals of the sector…(Contract Negotiation Document, C4, 1998, translated from Spanish).

Management mentioned how a multinational had acquired the licenses to distribute products that it had been distributing, causing a fall in company sales and lower market share. In the end, the workers received wage increases of one percent above the previous year’s rate of inflation. The wage policy of the firms differs noticeably, however, towards skilled marketing and quality control staff and certain semi-skilled workers. When discussing the wage policy towards more skilled workers, managers stated how they paid these workers greater wages to reduce turnover. For the semi-skilled workers responsible for mixing large batches of expensive raw materials or who work with chemical explosives, the efficiency wage policy is appropriate. It also seems appropriate for the skilled workers responsible for formulating new lines of products and conducting quality control tests. Yet the same reasoning is less understandable towards skilled marketing and sales workers, particular since managers answered that it was easy to find these skilled workers. The divergence in wage growth stems from the increasingly competitive environment, which has decreased the ability of firms to share rents with workers. Within this setting, firms have favored sharing rents with more skilled workers. By controlling wage growth of lowskilled workers wages, more funds were made available to compensate the more skilled workers. In this respect, skilled workers benefited from the drop in low-skilled workers’ wages, as this increased the amount of revenue available for their wages.10 Unions have difficulty countering management’s wage policy as their inability to retain members lessens their representation in the

10

Bacha and Taylor (1978) propose a similar explanation for rising wage inequality in Brazil in the 1960s. In their view, hierarchy in firm, rather than marginal productivity, determines a worker’s earnings. As managers share in the residual income after workers are paid, they attempt to squeeze laborers’ pay.

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firm, hampering their negotiating power. The result is little real wage growth for the industry’s easily replaceable, low-skilled workers.

Conclusion Increased competition as a result of free trade and changing multinational strategies coupled with a weakened union movement have resulted in little real wage growth for lowskilled workers in the Chilean cosmetics industry. The story is invariably more complex when told by an industry case study as opposed to econometric output. The findings from this case study gives some insight into the causes of widening wage dispersion in Chile under free trade and, on a more theoretical level, insights into the relevance of competing theories on trade and labor. To begin with, it is not simply that Chile liberalized its trade in 1974 which prompted a shift in multinational strategy, but rather that the region reduced trade barriers in the 1990s prompting multinational firms to redesign the competitive strategies formed under ISI. Regionalization has enabled the multinationals to be more aggressive about controlling costs and thus more able to enter the mass-market consumer segment. It has also directly forced competition with domestic firms, leading to a drop in prices and a lowering of rents. Although price drops have been good for the Chilean consumer, to the extent that wages are associated with firm profits, it has not been good from some of the firm’s workforce. The shift in multinational strategy also has implications regarding traditional views about the benefits of multinational investment for a host country. Although the purchase of secondhand multinational equipment by domestic firms could be considered a “spillover,” for Chile, it was a one-shot benefit. Furthermore, the association between multinationals and greater relative

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employment of skilled workers is the result of the elimination of low-skilled positions, a shifting away from local production to a country presence that is limited to marketing, distributing and selling foreign products in the host country. Thus, the skill bias is not the outcome of production being more advanced in these firms. Moreover, multinational firms, unlike their domestic counterparts, outsource non-core service workers, a practice that has narrowed internal labor markets as well as reducing wages for the outsourced staff. It is evident from the analysis of the cosmetics industry that skill-biased technological change has not been a factor in the growth of relative wage differentials in the industry. In multinationals, the greater employment of skilled workers is not technologically driven, but rather, the result of deindustrialization in the sector. In domestic firms, machinery investments have improved quality and increased output, but the strategy of product diversification has resulted in an expansion of low-skilled employment, as more workers are needed for the manual tasks of assembly and packaging. Moreover, domestic firms have preferred low-cost competitive strategies that have favored employment of low-skilled workers, along Heckscher-Ohlin lines. With greater competition domestic firms have chosen to control costs by limiting the growth of low-skilled workers’ wages. The weakness of the union movement, as evident in low affiliation rates and waning commitment by leaders and the rank and file, has enabled managers to force cost reduction on low-skilled workers. Although one can only speculate what the outcome of the sector would have been with a strong union movement, it is likely that it would have resulted in a reduction of skilled workers’ wage growth and a decrease in wage differentials. At a minimum, the study highlighted the importance of institutional change in determining the distribution of wages and showed how decisions at the firm level can be used to constrain wage growth, beyond the constraints imposed by the aggregate economy.

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The goal of this case study was to offer insights into employment and wage change under free trade in Chile, the mechanisms that have triggered these changes, and the relevance of economic theory. Still, appeasing critics concerning the applicability of these findings to the larger economy, requires that similar studies be undertaken of other Chilean industries. Nevertheless, this study gives us a starting point for questioning prevailing wisdom about the relationship between trade, employment and wages in open developing economies.

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References Aitken, Brian, Ann Harrison and Robert Lipsey (1996) “Wages and Foreign Ownership: A Comparative Study of Mexico, Venezuela and the United States,” Journal of International Economics 40 (3-4 May): 345-371. Asociación Gremial de Supermercados de Chile (ASACH) “Participación de Ventas Supermercados de Chile,” 1996-2000. Bacha, Edward and Lance Taylor (1978) “Brazilian Income Distribution in the 1960s: ‘Facts,’ Model Results and the Controversy,” Journal of Development Studies 14 (3): 271-297. Berg, Janine and Dante Contreras (2001) “Is there a Wage Curve in Chile?,” paper presented at the XVIII Latin American Meetings of the Econometric Society, Buenos Aires, July. Beyer, Harald et al. (1999) “Trade Liberalization and Wage Inequality,” Journal of Development Economics 59:103-123. Bravo, David and Alejandra Marinovic (1997) “Wage Inequality in Chile: 40 Years of Evidence,” mimeo, Universidad de Chile. Corbo, Vittorio and Patricio Meller (1982) “Alternative Trade Strategies and Employment Implications: Chile,” in A. Krueger, ed., Trade and Employment in Developing Countries, Cambridge: NBER. Feenstra, Robert and Gordon Hanson (1997) “Foreign Direct Investment and Relative Wages: Evidence from Mexico’s Maquiladoras,” Journal of International Economics 42: 371393. Gindling, Thomas and Donald Robbins (2001) “Patterns and Sources of Changing Wage Inequality in Chile and Costa Rica during Structural Adjustment,” World Development 29 (4): 725-745. Koser, Glen (2001) “State of the Industry 2001,” Global Cosmetics Industry 168 (6): 20-30. Larrañaga, Osvaldo (1999) “Distribución de ingresos y crecimiento económico en Chile,” Serie Reformas Económicas 35, Santiago: CEPAL. Meller, Patricio and Andrea Tokman (1998) “Chile: Apertura Comercial, Empleo y Salarios,” Santiago: OIT/ETM. Robbins, Donald (1994) “Relative Wage Structure in Chile, 1957-1992: Changes in the Structure of Demand for Schooling,” Estudios de Economía, University of Chile: Santiago, vol. 21.

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Slaughter, Mathew (2002) “Skill Upgrading in Developing Countries: Has Inward Foreign Direct Investment Played a Role,” in William Milberg, ed., Labor and the Globalization of Production, forthcoming. Yin, Robert (1994) Case Study Research: Design and Methods, New York: Sage Publishers.

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