Labour Markets and Income Inequality What Are the New Insights after the Washington Consensus?

The economic reform policies in the 1980s and the 1990s under the so-called Washington Consensus have recently led to growing concern for inequality. This paper looks at some of the labour market outcomes of the economic reform policies in terms of inequality. The paper argues that labour market policies, regulations and institutions have at least three goals, improving allocative efficiency (matching supply and demand), improving dynamic efficiency (increasing the quality of the labour force) and improving or maintaining a sense of equity and social justice among labour force participants.The paper observes that in many developing countries employment became more informal, wage shares declined and the difference between skilled and unskilled wages increased. These developments are set against some of the typical labour market elements of reform policies under the Washington Consensus such as a reduction in minimum wages, breaking up of bargaining power, reduction of employment protection, reduction in public sector employment and reduced government outlays in human capital formation. Typically, these policies were taken to increase the allocative function of labour market institutions.In reviewing past experiences the paper concludes that the dynamic, equity and social cohesion elements of labour market policies have to be an important element of redistributive and growth policies. Including these elements of labour market policies in economic reform policies are not only necessary to reduce inequality but makes it also easier for economic reform policies to deal with the allocative aspects of the labour market. By focusing narrowly on the allocative aspect of the labour market, the reform policies under the Washington Consensus have seriously compromised the options for equitable and pro-poor growth development policies.