Chile has the highest level of economic freedom in Latin America and was the 7th most economically free country in the world according to the 2015 edition of the annual Wall Street Journal/Heritage Foundation Index of Economic Freedom. But, if the Chilean Congress passes President Michelle Bachelet’s proposed changes to Chile’s labor code, that high ranking could be threatened.
The 2015 Index of Economic Freedom noted that labor regulations in Chile are quite rigid, with broad wage settlements and high unionization. President Bachelet’s proposed new law would give unions even more power.
Business associations and unions have voiced objections to the labor reform legislation, which is being discussed amid a commodity slump and higher copper production costs in Chile, supplier of one-third of the world’s copper.
Their opposition is not surprising. As James Sherk of The Heritage Foundation has reported,
Economic theory holds that unions operate as labor cartels. Unions only raise wages for their members by raising prices and reducing job opportunities for non-union workers. Few economists believe unions increase overall living standards. On the whole economists find the harm to non-union workers outweighs the economic gains to union members. As one academic literature summary concluded: “Most economists believe, as a generalization, that the negative side of unions outweighs the positive side, at least with respect to resource allocation and efficiency.”
Further, unions do not—and cannot—simply redistribute from “the rich.” While unions harm businesses’ profitability, they also hurt low-income and middle-income workers. The higher prices imposed by unions hurt rich, poor, and middle-class consumers alike, but lower-income workers feel the sting of price increases more acutely. Restricting jobs in unionized companies reduces demand in related industries and pushes more workers into the non-union and informal economic sectors. Both effects depress the pay of non-union employees. Most of the income that unions redistribute comes from other workers, not stockowners.
Sherk concludes that unions do not, in fact, provide the economic benefits to society as a whole that would justify forcing workers to pay union dues.
The labor freedom component of the Index of Economic Freedom is a quantitative measure that considers the legal and regulatory framework and relative flexibility of a country’s labor market and laws, including regulations concerning minimum wages, laws that inhibit layoffs, severance requirements, and measurable regulatory restraints on hiring and hours worked. Labor regulations that affect “the hiring and redundancy of workers and the rigidity of working hours” are examined closely.
Chile’s Index labor freedom score is 67 (on a scale of 0 to 100), and it currently ranks only 69th out of 178 countries in the world on the labor freedom indicator. If the Chilean Congress passes the legislation proposed by President Bachelet to make Chile’s labor laws even more rigid, the country’s labor freedom will decline even more.
