After a decade of continuous growth, theUruguayan economy experienced a recession over 1998-2001,with a deeper contraction registered in 2002 following theunraveling of the Argentinean crisis in late 2001, whichculminated in default, and devaluation in early 2002. Therecession had a deteriorating effect on poverty, and othersocial indicators, although considered better than in themajority of Latin American countries. Notably, increasedunemployment began in 1998 - unemployment, andself-employment - was accompanied by a reduction in realwages in the private sector. In addition, since 1999,pensions, which constitute a sizeable portion of householdincomes, have been falling as well. Vulnerable groups werethe most affected, which are groups composed by householdsin which the head is unemployed, employed in the informalsector, or self-employed; crowded households; householdsheaded by construction sector workers; and, by individualswith low educational attainment, or by young persons. Thereare also some "new poor", notably individualsliving in households with intermediately educated heads.This growth in poverty resulted from three broad factors: a)higher incidence of unemployment, combined with longerunemployment spells, and less hours worked, all of whichaffected more the vulnerable segments; b) reductions in realearnings originated by inflation, and the reduced rate ofincrease in nominal remunerations. These were compounded byoccupational, and sectoral shifts in the labor market, thatcontributed to the reduction of average earnings; and, c)higher household income inequality. The government responseto the recession included many positive actions, inparticular, the existence of a firmly established, andoverall well designed set of social programs, includingsocial assistance, and, there are three programs that playan important role in mitigating and coping with socialrisks: an early child development program; a housing programtargeted to poor households in rural areas; and, a housingprogram with similar characteristics, but targeted to urbanslums, introduced in 2000. Notwithstanding, somefragmentation within institutions, and overlapping programobjectives across institutions, were found in some socialinterventions. A key question arising from the analysis inthe Report is why nominal wages kept growing in the face ofreduced economic activity, forcing a significant quantityadjustment of the labor market. Analyses of the effect ofpolicies showed, that public wage rigidities exerted anegative, although small, impact on employment as a wholeuntil 2001, especially for intermediately educatedindividuals, and those belonging to the three lowestquintiles of the income distribution. The report finds thatboth the public wage bill, and overall wage inequality wouldbe lower if, public workers earned accordingly with theprivate pay structure. As noted in the final chapter,however, a deeper analysis of the labor market is needed, toassess other factors preventing adjustments in this market.Currently, the existing evidence in this regard is contradictory.
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