Labor regulations in developing countries

1. Labor regulations in developing countries Tito Boeri (Bocconi University, IGIER and CEPR) Brooke Helppie (University of Michigan) Mario Macis (University of Michigan and IZA)

2. The role of labor market regulations • The process of economic growth (& globalization) generates risks (employment risk, income risk) • The market alone often cannot provide protection from such risks • Also, some institutions might be pre-requisite • e.g., unemployment insurance and efficient matching (Acemoglu and Shimer 1999)

3. Labor-market generated risks are higher in developing countries

4. Protecting workers from labor market risk • Employment risk • Employment protection (EPL) • Unemployment benefits (UB) • Earnings risk • Minimum wages (MW) • Mandated benefits (MB) • Keeping in mind… • Peculiarities of developing countries contexts • Interactions between institutions

5. Looking at the experience of developed economies is not enough • Middle-Low income countries have crucial peculiarities: • Weak law enforcement • Large informal sectors • Underdeveloped capital markets • Extensive informal credit and insurance networks •  “standard” theoretical predictions might fail to hold; extra care is needed when interpreting findings

6. Minimum wagesWhat does the theory say? • Ambiguous predictions • Competitive labor markets:  employment, wage and welfare of those who remain employed,  welfare of those who lose their job; deadweight loss • Imperfect labor markets: redistributive effects, unclear whether employment effects • Predictions also depend on institutional context • Compliance, enforcement, existence of uncovered sector(s), other regulations

7. Minimum wagesWhat is the evidence? • It depends on country, source of variation, methods, population of interest. Hard to identify general patterns. • Effects on wages: • Largest on workers earning close to the MW • Evidence of “spillover effects” throughout the distribution and in uncovered sectors • Effects on employment: •  employment of workers most likely to be directly affected • younger workers, females (Fajnzylber 2001, Montenegro-Pages 2004); blue collars (Suryahadi et al. 2003); employees of small firms (Rama 2001, Alatas-Cameron 2003) •  employment of workers who become relatively cheaper • males ages 55-64 (Feliciano 2008); white collars (Suryahadi et al. 2003) •  self-employment (Maloney and Nunez-Mendez 2004); mixed evidence of effects on informality

8. Minimum wagesKnowledge gaps • No research on long-run effects of MW in developing countries • Evidence from the US suggests important long-run consequences (e.g., Neumark-Nizalova 2007) • Limited, mixed evidence on effect of MW on poverty • Morley 1995:  in cross-section of LAC countries; Lustig-McLeod 1997:  in panel of countries; Neumark-Cunningham-Siga 2006 : no effect; Gindling-Terrell 2007: small effects • Limited or no research on effects of MW on other margins • E.g., hours, training, non-cash compensation (preliminary evidence from Thailand presented by Kilenthong-Macis 2010 suggests complex interactions) • Limited or no research on the political economy of MW setting • Neumark-Wascher 2004; Boeri 2009

9. Mandated benefitsWhat does the theory say? • MB: unambiguously $ pay, but employment might  or  depending on how much workers value the benefits. Net welfare effects might be positive. • However: • If benefits only given to a subset of workers, these might be discriminated against • E.g., might see  use of part-time, temporary work; smaller firm size; males • If a MW exists, negative employment effects might be severe even when benefits are highly valued Source: Helppie and Macis (2009)

10. Mandated benefitsWhat is the evidence? • Very few studies in developing Country contexts • Could (carefully) look at studies from developed countries: • Gruber 1994 (US): mandated health insurance coverage of childbearing costs  wages &  hours worked by women of prime childbearing age • Baker-Milligan 2005 (Canada): maternity leave  labor force participation of women before childbirth and  the rate of return to the same or similar job • The limited evidence from developing countries suggests similar effects • MacIsaac-Rama 1997 (Ecuador): evidence of wage shifting due to 13th-16thsalaries+other mandated benefits • Zveglich-van derMeulen Rodgers 2003 (Taiwan): no evidence of wage shifting;  hours and  employment but only after the laws began to be enforced

11. Mandated benefitsKnowledge gaps • Evidence from developing countries is essentially non-existent • Not just on mandated benefits, but also on in-kind compensation and its interaction with cash compensation • Benefits are heterogeneous in nature, beneficiaries, implementation, and enforcement: difficult to draw overarching conclusions • Unlikely that research will soon establish whether benefits are efficient or distortionary, good or bad for the economy • Research should aim at analyzing the effects of individual policies in individual countries or contexts, looking at efficiency, distributional, and informalizing effects

12. Employment ProtectionWhat does the theory say? • EPL is multi-dimensional institution • Severance payments, advance notice, procedural requirements, etc… • Conceptually, two components: Transfer & Tax • Dynamic search and matching models (e.g., Blanchard-Portugal 1998) predict reduced ability of employers to adjust labor to the desired level in response to shocks •  job turnover •  employment,  unemployment duration • Insider-Outsider dualism • However, in the presence of relationship-specific investments, MacLeod-Nakavachara 2007 predict: •  turnover,  productivity and possibly  employment

13. Employment ProtectionWhat is the evidence? • Early cross-country studies: • weak or no effects of EPL on employment • Heckman-Pages 2000 and 2004 • careful panel studies of LAC; impact of EPL on formal employment, and  on informal sector • Micco and Pages 2006 • diff-in-diffs methodology,  job flows,  value added and  employment (driven by  firm entry) • Lafontaine and Sivadasan (2009): • SAME firm (so same product, same technology) in a large sample of countries; finding: stricter EPL severely limits the ability of the firm to adjust labor in response to demand or productivity shocks

14. Employment ProtectionWhat is the evidence? (cont’d) • Latest developments: Focus on longitudinal, individual-level data, single countries, developing countries, attention to enforcement issues • Autor-Kerr-Kugler 2007 (USA):  turnover,  capital intensity,  unskilled empl,  skilled empl. • Kugler 1999 (Colombia) : reduction in firing costs  unemployment duration • Montenegro-Pages 2003 (Chile):  employment probability of women & younger workers relative to prime-age men • Garibaldi et al. 2004, Schivardi-Torrini 2005 (Italy):  effect on firm growth, esp. around the 15-employee threshold • Almeida-Carneiro 2008 (Brazil): focus on enforcement and find that stricter enforcement  firm size,  output and  capital stock

15. Employment ProtectionKnowledge Gaps • Interactions with other institutions have been recognized only very recently • EPL and capital markets • Bertola 2004: if financial markets are imperfect, EP can be beneficial • Bertola-Koeninger 2007: EPL reform easier if accompanied by increased access to capital markets • EPL and product market regulation • Koeninger-Prat 2007: PMR (sunk entry cost) increases the size of firms and has positive effect on job turnover • Fiori et al. 2007: employment gains from product market reforms in OECD countries were larger in countries with stricter EPL

16. Unemployment benefitsWhat does the theory say? • Contingent payments made to workers who lose their job • Traditional focus: consumption-smoothing gains vs. reduced job-search incentives • Issues that gained attention more recently: • UB increase unemployment duration by relaxing liquidity constraints (Chetty 2008) • UB might influence the extent and quality of job reallocation (Acemoglu-Shimer 1999,2000)

17. Unemployment benefitsWhat is the evidence? • UBs are very uncommon in developing countries • E.g., ij Africa, only four Countries offer UB (Algeria, Egypt, South Africa and Tunisia) • Evidence from developed economies suggests that: • UBs help smooth consumption during episodes of job loss (Gruber 1997), especially for households who are liquidity-constrained (Browning-Crossley 2001) • UBs increase unemployment duration (long list of citations), but Chetty 2008 suggests that it does so through liquidity effects rather than moral hazard effects • Many middle-income countries introduced UB for the first time in the past 10-20 years • Boeri-Macis 2009: UB associated with increased job turnover & shift from agriculture to services

18. High EPL, not much UB in middle-low income Countries

19. Summarizing • Growth & Globalization create risks for workers • Markets alone are unlikely to provide full protection for these risks • Challenge: Provide protection while at the same time minimizing distortions • Theoretical prediction often ambiguous, dependent on the underlying model. • Predicted effects depend on context (institutional, cultural, etc).  empirical analyses necessary

20. Summarizing (cont’d) • In some cases, the balance of theory & evidence gives relatively clear prescriptions: • To provide protection against employment risk, UB seem to work better than EPL b/c not detrimental to job turnover & reallocation • In other cases, “the jury is still out” • More research is needed to assess the complex effects of MW and MB