Chile's Productivity Crisis Deepens: Unemployment Hits Nine-Year High

Chile's economy is facing its most severe diagnosis in years: unemployment climbed to 9.4% in the March-May quarter, its highest level since June 2021, while sectoral indicators point to a fifth consecutive drop in the Imacec in May, stoking fears among economists of a technical recession. The picture that emerges this Tuesday is of a country caught between a productive sector that is contracting, a labor market that fails to generate quality employment, and a fiscal policy that is moderating its spending without managing to reactivate demand.

According to the Instituto Nacional de Estadísticas, the number of unemployed is approaching one million — 981,315 to be precise — with an annual increase of 6.9%. The most revealing datapoint, however, is not the rate itself but its composition: annual job growth of just 0.8% is explained exclusively by informality, which is stringing together its own deterioration with three consecutive months of declines in informal employment. Chile has now spent 41 months with unemployment sustained above 8%, a streak that transcends political cycles and points to structural problems of productivity and investment. The crisis has a geography: the Maule region recorded the most significant increase of the quarter, while the Metropolitan region reached 9.8%, its worst reading since October 2023.

The market anticipated the blow. The IPSA closed higher above 10,800 points, but the impulse came from an exogenous factor: Chinese producer Sinomine Resource announced the temporary suspension of two production lines, withdrawing 65,000 annual tons of high-purity lithium chemicals from the market, which sent SQM soaring and served as a reminder of how dependent the local exchange remains on the swings of the commodities market. The dollar closed flat on the session, though it has accumulated a rise of more than $30 for the month, pressured by a Federal Reserve that keeps the door open to further rate hikes, which strengthened yields in the United States and weighed on emerging currencies. Copper, meanwhile, offers a note of cautious optimism: according to Cochilco, the pound registered in June its highest monthly average price in history in nominal terms, at US$6.16, and JP Morgan projects the ton will approach US$15,000 during the second half.

On the fiscal front, the adjustment is visible but insufficient. Public spending moderated in May, though revenues also fell, leaving the deficit stabilized at 2.5% of GDP over the past twelve months, according to the report from the Dirección de Presupuestos. The containment of spending is not producing the fiscal space necessary to drive reactivation, and the debate over the government's room for maneuver has sharpened after the Senate rejected, with broad majorities and crossover votes from the opposition, the constitutional accusation against former Finance Minister Nicolás Grau. The four chapters of the indictment — promoted by the Partido Republicano and the Partido Nacional Libertario — were dismissed, including the one referring to the management of the fiscal accounts, which barely garnered nine votes in favor. Grau celebrated the outcome as a vindication of his tenure, but the episode laid bare the political tension surrounding any discussion of the management of public finances.

The institutional response to the labor crisis took concrete shape: Labor Minister Tomás Rau received the final report from the Mesa de Reactivación Laboral chaired by economist David Bravo, with 22 proposals grouped into five pillars that include employment subsidies, formality, female employment, and reform of training. SOFOFA, for its part, is pressing for a more structural agenda: the industrial trade group proposes reducing the First Category Tax by four percentage points — from 27% to 23% — as a lever to generate at least 210,000 jobs over four years, and puts forward a reform of severance-by-years-of-service that would migrate toward individual accounts to reduce hiring costs and informality. The argument is direct: Chile is today the ninth OECD country with the highest corporate tax rate and second-to-last in tax competitiveness according to the Tax Foundation.

On infrastructure, the government notched a relevant advance. The Comité de Ministros rejected claims against the Kimal-Lo Aguirre mega-transmission line, an investment of roughly US$1.5 billion currently under construction, clearing its continuity and reinforcing the signal that the energy transition remains a priority. On the pension front, seven insurers submitted bids in the tender for the Seguro de Invalidez y Sobrevivencia — the country's largest group insurance policy, covering 6.5 million affiliates — in what will be the last such process administered by the AFPs before the pension reform takes effect.

In Asunción, President José Antonio Kast participated in the 68th Mercosur Summit, where he called on the region to coordinate the fight against organized crime as a condition for secure trade. The bilateral meeting with Brazilian President Luiz Inácio Lula da Silva produced cooperation commitments in aeronautics, science, and defense, along with an agenda of ministerial visits, while an upcoming visit by Kast to Bolivia is anticipated to advance mining integration and the bioceanic corridor.

What comes next will determine whether the market's pessimism is well calibrated. This Wednesday the Banco Central will publish the May Imacec, with the economists' consensus pointing to a drop of between 1% and 1.6% that would confirm the fifth consecutive monthly contraction of the year. If the reading exceeds that negative range, pressure on the Banco Central to recalibrate its monetary policy meeting will intensify. At the same time, the government's ability to translate the 22 proposals from the Mesa Bravo into concrete legislation — and the private sector's response to any tax signals — will define whether Chile manages to break the inertia of a labor market that, as SOFOFA warned, has become too costly and complex to attract the investment the country needs.