Lesson 4: Labour Regulations in Developing Countries

(1)

10 facts on labour market institutions (Freeman 2010) Early Works

Fallon and Lucas (1991), WBER

Cross-Country Evidence

Botero et al. (2004), QJE Indexes of LMI: critics Bazillier (2008), WD

National Evidence:

India and China

Besley and Burgess (2004), QJE on India Mayneris et al. (2016) on China

Research perspectives: the Better Work Program

Lesson 4: Labour Regulations in Developing Countries

Firm Performance and Development Master 2 Development Economics

Univ. Paris 1 Pantheon-Sorbonne

R´ emi Bazillier ¹

1

Remi.Bazillier@univ-paris1.fr

http://remi.bazillier.free.fr

(2)

Labour Regulations R´emi Bazillier

Introduction 10 facts on labour market institutions (Freeman 2010) Early Works

National Evidence:

India and China

Outline

Introduction

10 facts on labour market institutions (Freeman 2010) Early Works

Fallon and Lucas (1991), WBER Cross-Country Evidence

Botero et al. (2004), QJE Indexes of LMI: critics Bazillier (2008), WD

National Evidence: India and China

Besley and Burgess (2004), QJE on India Mayneris et al. (2016) on China

Research perspectives: the Better Work Program

(3)

National Evidence:

India and China

The traditional view on Labour Market Institutions by the World Bank

“Labor market policies-minimum wages, job security

regulations, and social security - are usually intended to raise welfare or reduce exploitation. But they actually work to raise the cost of labor in the formal sector and reduce labor demand, increase the supply of labor to the rural and urban informal sectors, and thus depress labor incomes where most of the poor are found” (World Bank, 1990, p.63)

I

Reference: Freeman, R. B. (2010) : “Chapter 70 - Labor Regulations, Unions, and Social Protection in Developing Countries : Market Distortions or Efficient Institutions ?” in Handbooks in Economics, ed. by D. Rodrik and M. Rosenzweig, Elsevier, vol. 5 of Handbook of Development Economics, 4657 - 4702.

(4)

National Evidence:

India and China

Research perspectives: the Better Work

The underlying theoretical framework:

Harris-Todaro

(5)

National Evidence:

India and China

undermine structural adjustment programs designed to cure balance of payments deficits or other economic ills

I

they stressed the need to shift resources from labor-intensive nontraded goods and services to capital-intensive traded goods sectors (→ Devaluation that would raise the price of tradeable goods compared to nontradeable goods and thus attract resources in the traded sector)

I

As long as tradeable goods were capital intensive, this would also shift the income distribution toward capital

I

The fear was that unions or other institutions that raised wages to preserve labor incomes would stop relative prices from moving in the desired direction

I

Labour market deregulation, part of the structural reforms package (Structural adjustments program)

I

Large declines in real minimum wages and average

earnings in many African and Latin American countries

during the 1980s

(6)

National Evidence:

India and China

But empirical evidence were weak..

I Freeman (1993) argued that extant evidence that labor institutions harmed economic development and stymied adjustments to macroeconomic problems per this were

“sparse and unconvincing”

I Fallon and Lucas (1991, 1993) were the most solid evidence (on India and Zimbabwe) but were seen as

“inconclusive” by Freeman (due to coincident factors)

I The literature has extended since then, but data availability is still a huge constraint

I Based on that, Freeman (2010) highlights 10 main

findings, presenting a much measured view than in the

World Bank’s 1990 proclamation

(7)

National Evidence:

India and China

I Labor institutions vary greatly among developing

countries but less than they vary among advanced

countries. Collective bargaining is weaker in developing

countries than in advanced countries while labor

regulations are nominally similar.

(8)

National Evidence:

India and China

(9)

National Evidence:

India and China

wages appear to be binding. They produce spikes in the distribution of wages around minimum. Most studies find that minimum wages reduce employment

sufficiently modestly so that minimums generally help the low paid.

I Contrary to Harris-Todaro type models, minimum wages induce spikes in the distribution of earnings in the informal sector in several countries, suggesting that minimum wages determine reservation wages of workers in those sectors.

I Wages and unemployment are negatively related across

geographic areas, consistent with the wage curve and

contrary to the Harris-Todaro model.

(10)

National Evidence:

India and China

I Mandated benefits increase labor costs and reduce employment modestly while the costs of others are shifted largely to labor, with some variation among countries.

I Some mandated benefits increase labor costs and reduce employment modestly, while the costs of others are shifted largely to workers and thus presumably do not impact employment.

I Unions are associated with higher wages and nonwage

shares of compensation and with lower turnover and less

dispersion of pay. Estimates of the union effects on

profits and productivity differ across countries.

(11)

National Evidence:

India and China

balance of payments problems, find no difference in the responses of countries by the strength of labor

institutions.

I Labor institution can be critical when countries

experience great change, as in China’s growth spurt and Argentina’s preservation of social stability and

democracy after its 2001-2002 economic collapse.

Cooperative labor relations tend to produce better economic outcomes

I In the 1990s-2000s, the informal sector’s share of employment increased or held steady in virtually all developing countries, including those with healthy growth and limited regulations. Even without

deregulating the formal sector, an increasing proportion

of workers in developing countries are working in largely

unregulated markets.

(12)

National Evidence:

India and China

(13)

National Evidence:

India and China

10 facts on labour market institutions (Freeman 2010) Early Works

Fallon and Lucas (1991), WBER Cross-Country Evidence

Botero et al. (2004), QJE Indexes of LMI: critics Bazillier (2008), WD

National Evidence: India and China

Besley and Burgess (2004), QJE on India Mayneris et al. (2016) on China

Research perspectives: the Better Work Program

(14)

National Evidence:

India and China

Fallon and Lucas (1991), “Impact of Changes in Job Security Regulations in India and Zimbabwe”

World Bank Economic Review

I Increase in job security

I

New employment law in Zimbabwe after the independence in 1980

I

Industrial Disputes Act (1976) in India

I Time-series data are used to assess the impact of these

changes on employment in different industries

(15)

National Evidence:

India and China

I Relative low growth of indusrial employment in the 70s/80s despite huge investments

I Some limited liberalization at the beggining of the 80s

I

Higher growth of industrial production but decline in industrial employment after 1982

I Growth of industrial wages leading to an increased dualism with agricultural wages

I Complex struture of minimum wages legislation, which vary from one state to the other, across industries and occupation

I Huge increase in union membership (+150% between

1966 and 1979)

(16)

National Evidence:

India and China

Economic and Social context in Zimbabwe

I Between the unilateral declaration of independence in 1964 to the 1974; 7.5% annual growth / 3.2%

employment growth and 7.2% manufacturing employment growth

I After 1974: civil war, emigration of white people, limited materiel access under trade sanctions: recession and decline in manufacturing and agricultural

employment

I After independence in 1980:

I

Rise in minimum wage in industry (27%) and in agriculture (43%)

I

Unions have grown in size and coverage

I

a brief boom in 1980-1981 (+9% of growth) followed by a stagnation in agriculture and industry

I

Growth of population > Growth of employment →

Concerns for unemployment (18% in 1982)

(17)

National Evidence:

India and China

requirement

I Coverage:

I

India: all establishments over 300 employees (extended to +100 employees in 1982)

I

Zimbabwe: Full coverage (except for temporary employment)

I Implementation

I

India: very difficult to obtain a permission for plant closure

I

Zimbabwe: long process to obtain a permission (one year)

I

No permission is necessary when agreement between parties on the termination of employment

I

Temporary employment was not an easy alternative

(strong pressure from trade unions in India, wage has to

be doubled in Zimbabwe)

(18)

National Evidence:

India and China

Empirical evidence: wages and hours of work

Wage and hours of work:

I Estimation of a wage equation

I

Increase in three industries in India

I

No evidence that it leads to lower wages (employers were not able to offset the effects of new regulations)

I

Role of trade unions

I Hours of works:

I

Various results accross industries (a rise in 3, a drop in 3, no changes in the others)

I

No evidence that substituting longer hours have been

the response to legislation changes

(19)

National Evidence:

India and China

I Industry labor demand equation:

I

Determinants of the logarithm of the number of employees: wage rate, logarithm of the output,

logarithm of shifts workerd per employee, and a dummy for the imposition of the job security regulations

I

In most estimates: positive impact of the lagged value of employment. It suggests that rapid ajustments are costly

I

Interaction btw job security dummy and lag employment: NS

I

Negative coefficient of the regulation dummy in 53 out

of 64 industries

(20)

National Evidence:

India and China

(21)

National Evidence:

India and China

Source: Fallon and Lucas (1991)

(22)

National Evidence:

India and China

I According to Freeman (1993), these evidence are “at least inconclusive”

I Coincident factors (independence in Zimbabwe)

I Identification of the causal impact

(23)

National Evidence:

India and China

10 facts on labour market institutions (Freeman 2010) Early Works

Fallon and Lucas (1991), WBER Cross-Country Evidence

Botero et al. (2004), QJE Indexes of LMI: critics Bazillier (2008), WD

National Evidence: India and China

Besley and Burgess (2004), QJE on India Mayneris et al. (2016) on China

Research perspectives: the Better Work Program

(24)

National Evidence:

India and China

Botero, Djankov, La Porta, Lopez-De-Silanes, Schleifer (2004), Quarterly Journal of Economics

I Until 2004, no cross-country evidence due to the lack of reliable indexes of labour market institutions

I This paper proposes a new approach for mesuring labour laws:

I

data on employment, collective relations and social security law in 85 countries and coding to measure worker protection

I Three major theories of institutional choice:

I

The Efficiency Theory

I

The Political Power Theory

I

The Legal Theory

(25)

National Evidence:

India and China

I Free labour markets are imperfect

I

Rents in the employment relationship and employers abuse workers to extract these rents, leading to both unfairness and inefficiency

I

Employers discriminate against disadvantaged groups

I

They underpay workers who are immobile

I

Invest in firm-specific capital

I

Fire workers who then need to be supported by the state

I

(...)

(26)

National Evidence:

India and China

I Four forms of labour market regulations:

I

Governments forbid discrimination in the labor market and endow the workers with some ¸ Sbasic rights ˇ T in the on-going employment relationships, such as maternity leaves or the minimum wage

I

Governments regulate employment relationships by, for example, restricting the range of feasible contracts and raising the costs of both laying off workers and increasing hours of work

I

In response to the power of employers against workers, governments empower labor unions to represent workers collectively, and protect particular union strategies in negotiations with employers

I

Governments themselves provide social insurance

against unemployment, old age, disability, sickness and

health, or death

(27)

National Evidence:

India and China

I North (1981): choice of institutions is dictated primarily by efficiency considerations

I

This approach broadly implies that countries choose a combination of labor market interventions to maximize social welfare → curing market failures

I Two implications:

I

First, if government intervention in the labor market in the form of worker protection is efficient, then it should not have large adverse consequences, such as

unemployment, withdrawal of people from the labor force, and the growth of the unofficial economy.

I

Second, if efficiency is the correct model, political

factors such as the power of the left or constraints on

government would not shape regulatory choices.

(28)

National Evidence:

India and China

Political Power

I Institutions are designed to transfer resources from those out of political power to those in power, as well as to entrench those in political power at the helm (Marx 1872, Olson 1993)

I

These theories imply that labor regulations are more protective of workers when leftist governments are in power

I

Such protection can restore efficiency if in a free market

workers are “abused”, or in lower efficiency if government

intervention leads to expropriation of capital by labor

(29)

National Evidence:

India and China

I Two varieties of political power theories:

1. The principal mode of political decision making is elections: regulations protecting workers (or at least employed workers) are introduced by socialist, social-democratic, and more generally leftist governments to benefit their political constituencies 2. Laws are shaped by the influence of interest groups:

labor regulations respond to the pressure from trade

unions, and should therefore be more extensive when

the unions are more powerful, regardless of which

government is in charge

(30)

National Evidence:

India and China

Legal theory

I Two very distinct legal traditions in Western Europe:

common law and civil law

I

Because most countries in the world received their basic legal structures in this involuntary way, these structures are exogenous to their economies.

I The legal theory holds that countries in different legal traditions utilize different institutional technologies for social control of business

I

Common law countries tend to rely more on markets and contracts

I

Civil law: regulation

(31)

National Evidence:

India and China

Source: Botero et al. (2004)

(32)

National Evidence:

India and China

Measures of Labour Regulation

I Three areas:

I

Employment Laws

I

collective relations laws

I

social security laws

I Formal legal rules

(33)

National Evidence:

India and China

Research perspectives: the Better Work Program Source: Botero et al. (2004)

(34)

National Evidence:

India and China

Research perspectives: the Better Work Source: Botero et al. (2004)

(35)

National Evidence:

India and China

the conditions of a job are specified and a worker cannot be fired”

I

Strictness of protection against alternative employment contracts (part-time labour or temporary contracts):

measure whether part-time workers are exempt from mandatory benefits of full-time workers and whether it is easier or less costly to terminate part-time workers than full-time workers

I

The cost of increasing working hours: they assume that the hypothetical firm in each country has each employee working at 1758 hours per year initially (Denmark’s maximum) and it wants to increase these numbers by 660 hours (to 2418 hours: Kenya’s maximum)

I

The economic cost of firing workers: they construct a

scenario where the standardized firm with 250 workers

fires 50 of them: 25 for redundancy and 25 without

cause

(36)

National Evidence:

India and China

Testing the theories

(37)

National Evidence:

India and China

Research perspectives: the Better Work Program Source: Botero et al. (2004)

(38)

National Evidence:

India and China

(39)

National Evidence:

India and China

laws vary with the level of economic development

I

→ This result is inconsistent with the implication of the efficiency hypothesis that rich countries should regulate less because they have fewer market failures

I Legal origin matters

I

Higher regulations in civil laws countries → legal theories

I Politics matter

I

Countries with longer histories of leftist or centrist governments have heavier regulation of labour markets

I

Higher union density is also associated with stronger labour laws

I

→ political power theories

(40)

National Evidence:

India and China

Effects on outcome

(41)

National Evidence:

India and China

Source: Botero et al. (2004)

(42)

National Evidence:

India and China

I “Some evidence” that:

I

Protective collective relations laws (but not others) are associated with a larger unofficial economy

I

More protective employment,collective relations, and social security laws lead to lower male (but not female) participation in the labor force

I

More protective employment laws lead to higher unemployment, especially of the young

I

More generous social security systems are associated with higher relative wages of privileged workers

I Legal origins as instrumental variables: similar results

I Causal impact?

(43)

National Evidence:

India and China

“All of this evidence does not provide much support for the

efficiency theory, namely that labor regulations cure market

failures, although of course it is possible that the adverse

outcomes we measure are unavoidable to alleviate capitalist

abuse of workers. The results are consistent with the view

that legal origins shape regulatory styles, and that such

dependence has adverse consequences for at least some

measures of efficiency.”

(44)

National Evidence:

India and China

Outline

Introduction

10 facts on labour market institutions (Freeman 2010) Early Works

Fallon and Lucas (1991), WBER Cross-Country Evidence

Botero et al. (2004), QJE Indexes of LMI: critics Bazillier (2008), WD

National Evidence: India and China

Besley and Burgess (2004), QJE on India Mayneris et al. (2016) on China

Research perspectives: the Better Work Program

(45)

National Evidence:

India and China

I In 2004, The World Bank starts publishing the Doing Business Report

I

175 countries, 10 criteria

I

One sub-index on labour regulation

I

The underlying theoretical framework is the one of Botero et al. (2004)

I

Most empirical studies on LMI in developing countries have used this index

I But his index has been criticized :

I

Berg and Cazes (2007), World Bank (2008, 2011, 2013), Alekzsynka and Cazes (2014)

I

Hypothesis: labour market institutions are a cost

I

De Jure index and not de facto

I

It does not take into account complementarities between

different LMI dimensions (Berg and Cazes 2007)

(46)

National Evidence:

India and China

I The World Bank takes into account these critics:

I

The index has been revised and it is not anymore included in the agregated index of Doing Business

I

No policy recommendations are made, based in this index

I But the index is still used widely

I Other LMI indexes often include this index as one

dimension

(47)

National Evidence:

India and China

Research perspectives: the Better Work Program Source: Aleksynska and Cazes (2014)

(48)

National Evidence:

India and China

A low correlation between different indexes

(49)

National Evidence:

India and China

Source: Aleksynska and Cazes (2014)

(50)

National Evidence:

India and China

In summary

I “It suggests that such indicators should be based on more balanced conceptual frameworks and robust methodological choices. This paper also showed that there is room for improving existing indicators.”

(Aleksynska and Cazes 2014)

(51)

National Evidence:

India and China

10 facts on labour market institutions (Freeman 2010) Early Works

Fallon and Lucas (1991), WBER Cross-Country Evidence

Botero et al. (2004), QJE Indexes of LMI: critics Bazillier (2008), WD

National Evidence: India and China

Besley and Burgess (2004), QJE on India Mayneris et al. (2016) on China

Research perspectives: the Better Work Program

(52)

National Evidence:

India and China

Labour Market Institutions or Labour Standards?

I These papers focus on labour market institutions

I

“the set of rules, practices and policies related to the labour markets and its participants (formal or informal, written or unwritten, universal or particular by the location or region), all of which affect how the labour market works” (ILO, International Training Centre).

I

Pissarides (2001):

1. Employment protection legislation;

2. The presence and size of a minimum wage;

3. Unemployment benefit, measured by both its generosity and its duration;

4. Union density and coverage, measured, respectively, by the fraction of employees who are union members and those who are covered by union agreements; and 5. The degree of centralization/coordination of wage

bargaining.

(53)

National Evidence:

India and China

I The 1998 Declaration on Fundamental Principles and Rights at Work sets a list of core labour standards

I These core labor standards represent the fundamental rights of workers, which can be applied all over the world irrespective of the stage of development.

I Core Labour Standards:

I

Freedom of Association and the right to collective bargaining (convention 87 and 98)

I

The elimination of all forms of forced and compulsory labour (convention 29 and 105)

I

The effective abolition of child labour (convention 138 and 182)

I

The elimination of discrimination in respect of

employment and occupation (convention 100 and 111)

(54)

National Evidence:

India and China

International Labour Standards

I The International Labour Organisation (ILO) is a tripartite organisation where each State is represented by its government, trade unions and employer

representatives.

I Labour Standards are global principles and rules governing work and professional conditions

I

They are multifaceted and may vary from one country to another depending on the stage of development, political, social and cultural conditions or institutions

I

ILO conventions: legally binding international treaties

that may be ratified by member states (189 conventions

today)

(55)

National Evidence:

India and China

World Development

I Debate in the 90s on the link btw labour standards and international trade (social clause). But limitations:

I

Many developing countries are completely against any kind of links between international trade and labor standards, for fear of a “hidden protectionism”

I

Trade sanctions can be counter-productive because they harm the people they are designed to help (Brown, 2000; Brown, Deardorff, Stern, 1996; Maskus, 997;

Srinivasan, 2004)

I

It is often the case that countries with very weak labor standards are not integrated into international trading.

Moreover, the export sectors have very often better standards than the others.

I Focus on the link btw labor standards and development

(56)

National Evidence:

India and China

I First step: Building of an index of effective enforcement of core labour standards

I

Use of Multiple correspondence analysis to build an agregated index

I

MCA is a mathematical technique allowing an analysis of different discrete variables by projecting on different axis the common information contained into these different variables.

I Second step: Effects on long-term per capita income

(57)

National Evidence:

India and China

Research perspectives: the Better Work Program Source: Bazillier (2008)

(58)

National Evidence:

India and China

I Empirical specification derived from the Mankiw, Romer and Weil (1992) model:

ln y _i = γ ₀ +γ ₁ ln(s _K )+γ ₂ ln n _i + g + δ+γ ₃ ln(h ^∗ )+γ ₄ ln(ls ^∗ )+

(1)

(59)

National Evidence:

India and China

I Typical argument: labour standards are endogenous to economic development

I Improvement of labour standards is a consequence and not a cause of development

I Instrumental strategy to tackle this issue

(60)

National Evidence:

India and China

Instruments

I Democracy:

I

Literature in political sciences showing a causal relation between democracy and Human Rights

I

Literature in psychology on the relation between perception of Human Rights and democracy

I

No consensus on the link between demoocracy and economic growth or development

I Non-elites participation:

I

Relations between rights and norms and the way to construct norms

I

A norm needs a social consensus that placed the right in the hand of a group of people (the corporate actor in the wording of Coleman).

I

If we assume that the individuals who will benefit from an improvement in labor standards are not part of the elite, it is crucial that the “nonelites” can participate in the democratic process, being able to access

institutional structures for political expression, or having

the opportunity to attain executive office. This is what

Pareto (1916) called the rotating of the elite.

(61)

National Evidence:

India and China

Source: Bazillier (2008)

(62)

National Evidence:

India and China

(63)

National Evidence:

India and China

I To give a quantitative assessment of this result, a one standard deviation change in the log variable of labor standards (0.88) will increase the GDP per capita by 44% (0.88 * 0.50)

I

Compared to 25% for a one standard deviation change in investment and 42% for a one standard deviation change in education

I

But it is a long process: change of the structure of the

economy, especially for labour market, new international

specialization...

(64)

National Evidence:

India and China

Outline

Introduction

10 facts on labour market institutions (Freeman 2010) Early Works

Fallon and Lucas (1991), WBER Cross-Country Evidence

Botero et al. (2004), QJE Indexes of LMI: critics Bazillier (2008), WD

National Evidence: India and China

Besley and Burgess (2004), QJE on India Mayneris et al. (2016) on China

Research perspectives: the Better Work Program

(65)

National Evidence:

India and China

Evidence from India”, Quarterly Journal of Economics

I Paper presented in the course “Empirical Devt. Econ.”

(see presentation here: goo.gl/P1dnZT)

I Here, only a short summary of main results

I

Diff-in-Diff approach exploiting the variation of labor regulations among Indian States

I

Coding of the legislation based on the reading of all

state level amendments to the Industrial Disputes Act of

1947 (113 amendments coded as neutral- pro-worker or

pro-employer)

(66)

National Evidence:

India and China

I Labor regulations may affect economic performance through two channels:

I

A relative price effect: ajustments costs → firms in the registered sector may substitute away from labor towards other labor saving inputs (capital). ↑ marginal cost of production and thus ↓ optimal output level

I

An expropriation effect: increase in workers’ bargaining power and increase the importance of hold-up problems in investment ↓ investments

I

Remark: no productivity effects are taken into account here

I Effets on workers are ambiguous

I

↑ labour costs → lower wages or lower employment

(67)

National Evidence:

India and China

lower level of investment, employment, productivity, and ouput in registered manufacturing

I It also increased informal sector activity

I Endogeneity

I

States with larger vested interests in manufacturing at the beginning of the period may have experienced greater pressure to pass pro-worker amendments

I

Use the average level of union membership before 1977 and match states based on unionizaton

I

Instrumental variable: union membership variable interacted with a dummy equals to one after 1977 (persistent shift in political control following the the declaration of a state of emergency by Indira Ghandi)

I

Other instrument: patterns of land tenure (correlated

with contemporary patterns of political development)

(68)

National Evidence:

India and China

Research perspectives: the Better Work Source: Besley and Burgess (2004)

(69)

National Evidence:

India and China

Research perspectives: the Better Work Program Source: Besley and Burgess (2004)

(70)

National Evidence:

India and China

(71)

National Evidence:

India and China

I Results are not robust to the inclusion of state specific time trends

I

Are these effects due to labor regulations per se or the consequences of a poor climate of labor relations?

I Are pro-workers and pro-employers regulations have symetrical effects?

I Are all “pro-workers reforms” likely to have homogenous effects?

I What effects on firms?

(72)

National Evidence:

India and China

Lesson 4: Labour Regulations in Developing Countries

Lesson 4: Labour Regulations in Developing Countries

Firm Performance and Development Master 2 Development Economics

Univ. Paris 1 Pantheon-Sorbonne

R´ emi Bazillier 1

Remi.Bazillier@univ-paris1.fr

http://remi.bazillier.free.fr

Outline

Introduction

10 facts on labour market institutions (Freeman 2010) Early Works

Fallon and Lucas (1991), WBER Cross-Country Evidence

Botero et al. (2004), QJE Indexes of LMI: critics Bazillier (2008), WD

National Evidence: India and China

Besley and Burgess (2004), QJE on India Mayneris et al. (2016) on China

Research perspectives: the Better Work Program

The traditional view on Labour Market Institutions by the World Bank

“Labor market policies-minimum wages, job security

I

The underlying theoretical framework:

Harris-Todaro

undermine structural adjustment programs designed to cure balance of payments deficits or other economic ills

they stressed the need to shift resources from labor-intensive nontraded goods and services to capital-intensive traded goods sectors (→ Devaluation that would raise the price of tradeable goods compared to nontradeable goods and thus attract resources in the traded sector)

As long as tradeable goods were capital intensive, this would also shift the income distribution toward capital

The fear was that unions or other institutions that raised wages to preserve labor incomes would stop relative prices from moving in the desired direction

Labour market deregulation, part of the structural reforms package (Structural adjustments program)

Large declines in real minimum wages and average

earnings in many African and Latin American countries

during the 1980s

But empirical evidence were weak..

I Freeman (1993) argued that extant evidence that labor institutions harmed economic development and stymied adjustments to macroeconomic problems per this were

“sparse and unconvincing”

I Fallon and Lucas (1991, 1993) were the most solid evidence (on India and Zimbabwe) but were seen as

“inconclusive” by Freeman (due to coincident factors)

I The literature has extended since then, but data availability is still a huge constraint

I Based on that, Freeman (2010) highlights 10 main

findings, presenting a much measured view than in the

World Bank’s 1990 proclamation

I Labor institutions vary greatly among developing

countries but less than they vary among advanced

countries. Collective bargaining is weaker in developing

countries than in advanced countries while labor

regulations are nominally similar.

wages appear to be binding. They produce spikes in the distribution of wages around minimum. Most studies find that minimum wages reduce employment

sufficiently modestly so that minimums generally help the low paid.

I Contrary to Harris-Todaro type models, minimum wages induce spikes in the distribution of earnings in the informal sector in several countries, suggesting that minimum wages determine reservation wages of workers in those sectors.

I Wages and unemployment are negatively related across

geographic areas, consistent with the wage curve and

contrary to the Harris-Todaro model.

I Mandated benefits increase labor costs and reduce employment modestly while the costs of others are shifted largely to labor, with some variation among countries.

I Some mandated benefits increase labor costs and reduce employment modestly, while the costs of others are shifted largely to workers and thus presumably do not impact employment.

I Unions are associated with higher wages and nonwage

shares of compensation and with lower turnover and less

dispersion of pay. Estimates of the union effects on

profits and productivity differ across countries.

balance of payments problems, find no difference in the responses of countries by the strength of labor

institutions.

I Labor institution can be critical when countries

experience great change, as in China’s growth spurt and Argentina’s preservation of social stability and

democracy after its 2001-2002 economic collapse.

Cooperative labor relations tend to produce better economic outcomes

I In the 1990s-2000s, the informal sector’s share of employment increased or held steady in virtually all developing countries, including those with healthy growth and limited regulations. Even without

deregulating the formal sector, an increasing proportion

of workers in developing countries are working in largely

unregulated markets.

10 facts on labour market institutions (Freeman 2010) Early Works

Fallon and Lucas (1991), WBER Cross-Country Evidence

Botero et al. (2004), QJE Indexes of LMI: critics Bazillier (2008), WD

National Evidence: India and China

Besley and Burgess (2004), QJE on India Mayneris et al. (2016) on China

Research perspectives: the Better Work Program

Fallon and Lucas (1991), “Impact of Changes in Job Security Regulations in India and Zimbabwe”

World Bank Economic Review

I Increase in job security

New employment law in Zimbabwe after the independence in 1980

Industrial Disputes Act (1976) in India

I Time-series data are used to assess the impact of these

changes on employment in different industries

I Relative low growth of indusrial employment in the 70s/80s despite huge investments

I Some limited liberalization at the beggining of the 80s

Higher growth of industrial production but decline in industrial employment after 1982

R´ emi Bazillier ¹