Does the elimination of work flexibility contribute to reducing wage inequality? Empirical evidence from Ecuador

From the empirical point of view, measures that promote work flexibility increase income inequalities and unemployment rates in the long-term, as well as promoting employment precariousness and the informality of the labor sector. The objective of the present work is to investigate the effect on wage inequality of eliminating work flexibility, which was undertaken in Ecuador in 2008. A two-way effect econometric model was applied with panel data. Data from the 21 provinces of Ecuador covering the period of 2007-2018 were obtained from the National Employment, Unemployment and Under-Employment Survey (ENEMDU) of the National Statistical and Census Institute (INEC). The results suggest that the elimination of work flexibility had a significant and negative effect on inequality; the policy was effective in reducing inequality. This result is significant for all the years subsequent to the introduction of these measures, although with variations according to regional and economic characteristics. Policies aimed at reducing inequality should focus on improving workers' bargaining power and on generating an environment that favors increasing levels of formality.