Research on Employing Workers

Are all labor regulations equal? Evidence from Indian manufacturing

Ahmad Ahsan and Carmen Pagés

Taking advantage of variation across Indian states in labor reforms, this paper studies the economic effects of labor dispute resolution legislation (DL) and employment protection legislation (EPL) in the manufacturing sector. We find that laws that increase the cost of dispute resolution or employment protection substantially reduce registered sector employment and output, although the cost of industrial dispute regulation on output is larger. There is evidence of strong complementarities on labor laws: The output or employment costs of EPL are larger in states and periods where it is more difficult to resolve disputes, and not very important when such costs are low. Workers do not benefit from EPL or DL, as they do not increase the labor share or the wage bill, although EPL has a small positive effect on earnings per worker. Labor-intensive industries, such as textiles, are the hardest hit by amendments that increase employment protection while capital-intensive industries are the most affected by laws that increase the cost of labor dispute resolution.

Can Labor Regulation Hinder Economic Performance? Evidence from India

Timothy Besley and Robin Burgess

This paper investigates whether the industrial relations climate in Indian states has affected the pattern of manufacturing growth in the period 1958-1992. We show that states which amended the Industrial Disputes Act in a pro-worker direction experienced lowered output, employment, investment, and productivity in registered or formal manufacturing. In contrast, output in unregistered or informal manufacturing increased. Regulating in a pro-worker direction was also associated with increases in urban poverty. This suggests that attempts to redress the balance of power between capital and labor can end up hurting the poor.

Computer Usage and Labour Regulation in India's Retail Sector

Amin Mohammad

A recent survey of 1,948 retail stores in India conducted by the World Bank's Enterprise surveys shows that 19 per cent of all stores use computers. In the state of Kerala, the figure is as high as 40 per cent. Using this survey, we estimate the effect of computer usage on labour employment. Our findings show that this effect depends on the stringency of the underlying labour laws. Stricter labour laws magnify the labour displacing effect of computers significantly.

Employment Dynamics in Indian Industry: Adjustment Lags and the Impact of Job Security Regulations

Sudipta Dutta Roy

The mismatch in output and employment growth phases witnessed by Indian industry in the 1960s and 1970s and the puzzle of jobless growth during the 1980s drew attention to the possible adverse impact of the Industrial Disputes (Amendment) Acts of 1976 and 1982. The Government of India recently mooted a proposal to relax the provisions of the Acts to enhance the flexibility of the labour market. We investigate the extent of impact of job security legislation through an analysis of dynamic inter-related factor demand functions. Our findings provide evidence of significant lags in employment adjustment. We find evidence, however, that these existed even in the period preceding the formal introduction of job security legislation, and that the impact of job security regulations, contrary to popular perception, was minimal.

Employment laws in developing countries

Simeon Djankov, Rita Ramalho

We survey the research on the effect of employment laws in developing countries, using papers published since 2004. The survey is further supported by cross-country correlation analyses. Both exercises show that developing countries with rigid employment laws tend to have larger informal sectors and higher unemployment, especially among young workers. A number of countries, especially in Eastern Europe and West Africa, have recently undergone significant reforms to make employment laws more flexible. Conversely, several countries in Latin America have made employment laws more rigid. These reforms are larger in magnitude than any reforms in developed countries and their study can produce new insights on the benefits of labor regulation.

Employment protection, firm selection, and growth

Markus Poschke

How do firing costs affect aggregate productivity growth? To address this question, a model of endogenous growth through selection and imitation is developed. It is consistent with recent evidence on firm dynamics and on the importance of reallocation for productivity growth. In the model, growth is driven by selection among heterogeneous incumbent firms and is sustained as entrants imitate the best incumbents. In this framework, firing costs not only induce misallocation of labor, but also affect growth by affecting firms’ exit decisions. Importantly, charging firing costs only to continuing firms raises growth by promoting selection. Also charging them to exiting firms is akin to an exit tax, hampers selection, and reduces growth—by 0.1 percentage points in a calibrated version of the model. With job turnover very similar in the two settings, this implies that the treatment of exiting firms matters for growth. In addition, the impact on growth rates is larger in sectors where firms face larger idiosyncratic shocks, as in services. This fits evidence that recent EU–U.S. growth rate differences are largest in these sectors and implies that firing costs can play a role here.

Employment protection reforms, employment and the incidence of temporary jobs in Europe: 1996–2001

Lawrence M. Kahn

This paper uses longitudinal data on individuals from the European Community Household Panel over the 1996–2001 period to investigate the impact of reforms of employment protection systems in nine countries on the incidence of employment and of temporary jobs for wage and salary workers. Important features of the research design include the use of individual fixed effects models as well as the inclusion of country-specific trends in the dependent variable. A robust finding is that policies making it easier to create temporary jobs on average raise the likelihood that wage and salary workers will be in temporary jobs. This effect is felt primarily when the regional unemployment rate is relatively high. However, there is no evidence that such reforms raise employment. Thus, these reforms, while touted as a way of jump-starting individuals' careers in the job market, appear rather to encourage a substitution of temporary for permanent work.

Enforcement of Labor Regulation and Firm Size

Rita Almeida and Pedro Carneiro

This paper investigates how the enforcement of labor regulation affects firm size and other firm characteristics in Brazil. We explore firm level data on employment, capital, and output, city level data on economic characteristics and new administrative data measuring enforcement of regulation at the city level. Since enforcement may be endogenous, we instrument this variable with the distance between the city where the firm is located and surrounding enforcement offices, while controlling for a rich set of city characteristics (such as past levels of informality in the city). We present suggestive evidence of the validity of this instrument. We find that stricter enforcement of labor regulation constrains firm size, and leads to higher unemployment.

Entry Regulation as a Barrier to Entrepreneurship*

Leora Klapper, Luc Laeven and Raghuram Rajan

Using a comprehensive database of European firms, we study the effect of market entry regulations on the creation of new limited-liability firms, the average size of entrants, and the growth of incumbent firms. We find that costly regulations hamper the creation of new firms, especially in industries that should naturally have high entry. These regulations also force new entrants to be larger and cause incumbent firms in naturally high-entry industries to grow more slowly. Our results hold even when we correct for the availability of financing, the degree of protection of intellectual property, and labor regulations.

Firm Performance and Regulation Explaining International Differences in Entrepreneurship: The Role of Individual Characteristics and Regulatory Constraints*

We use a micro dataset that collects information across individuals, countries, and time to investigate the determinants of entrepreneurial activity in thirty-seven developed and developing nations. We focus both on individual characteristics and on countries’ regulatory differences. We show that individual characteristics, such as gender, age, and status in the workforce are important determinants of entrepreneurship, and we also highlight the relevance of social networks, self-assessed skills, and attitudes toward risk. Moreover, we find that regulation plays a critical role, particularly for those individuals who become entrepreneurs to pursue a business opportunity. The individual characteristics that are impacted most by regulation are those measuring working status, social network, business skills, and attitudes toward risk.

Gender Gaps in Unemployment Rates in OECD Countries

Ghazala Azmat, Maia Guell and Alan Manning

In some OECD countries the male and female unemployment rates are very similar but in others (notably the Mediterranean countries) the female unemployment rate is much higher than the male. Explaining these cross-country differences is the subject of this article. We show that, in countries where there is a large gender gap in unemployment rates, there is a gender gap in both flows from employment into unemployment and from unemployment into employment. We conclude that differences in human capital accumulation between men and women interacted with labor market institutions is an important part of the explanation.

How Doing Business Jeopardises Institutional Reform

Benito Arruñada

Simplifying business formalisation and eliminating outdated formalities is often a good way of improving the institutional environment for firms. Unfortunately, the World Bank's Doing Business project is harming such policies by promoting a reform agenda that gives them priority even in countries lacking functional business registers, so that the reformed registers keep producing valueless information, but faster. Its methodology also promotes biased measurements that impede proper consideration of the essential tradeoffs in the design of formalisation institutions. If Doing Business is to stop jeopardising its true objectives and contribute positively to scientific progress, institutional reform and economic development, then its aims, governance and methodology need to change.

How Shortening the Potential Duration of Unemployment Benefits Affects the Duration of Unemployment: Evidence from a Natural Experiment

Jan C. Van Ours and Milan Vodopivec

In this article we investigate the disincentive effects of shortening the potential duration of unemployment insurance (UI) benefits. We identify these disincentive effects by exploiting changes in Slovenia's unemployment insurance system—a "natural experiment" that involved substantial reductions in the potential duration of benefits for four groups of workers plus no change in benefits for another group (which served as a natural control). We find that the change had a positive effect on the exit rate from unemployment—to new jobs and other options—for unemployment spells of various lengths and for several categories of unemployed workers.

Job Creation and Labor Reform in Latin America

David S. Kaplan

This paper studies the effects of labor-regulation reform using data for 10,396 firms from 14 Latin American countries. Firms are asked both how many permanent workers they would have hired and how many they would have terminated if labor regulations were made more flexible. I find that making labor regulations more flexible would lead to an average net increase of 2.08 percent in total employment. Firms with fewer than 20 employees would benefit the most, with average gains in net employment of 4.27 percent. Countries with more regulated labor markets would experience larger gains in total employment. These larger gains in total employment, however, would be achieved through higher rates of hiring and higher rates of termination. These results may explain why there is substantial opposition to labor reforms despite the predicted gains in efficiency and total employment.

Job Security Provisions and Employment

Edward Lazear

European countries have enacted various job security provisions over the last thirty years. Employers are required to pay workers on separation or to give advance notice of termination. In anything less than a perfectly functioning market, there are effects of the provisions on employment. Incumbents are more likely to retain their jobs, but new workers are less likely to be hired. An examination of the European data suggests that severance pay requirements reduce employment.

Labor regulation and employment in India's retail stores

Mohammad Amin

A new dataset of 1948 retail stores in India shows that 27% of the stores find labor regulations as a problem for their business. Using these data, we analyze the effect of labor regulations on employment at the store level. We find that flexible labor regulations have a strong positive effect on job creation. Our estimates show that labor reforms are likely to increase employment by 22% of the current level for an average store. We also address the issue of informality in India's retail sector. Our findings suggest that more flexible labor laws can encourage firms to operate in the more efficient formal retail sector. According to our estimates, labor reforms could reduce the level of informality by as much as 33%.

Trade Reforms, Labor Regulations, and Labor-Demand Elasticities: Empirical Evidence from India

Rana Hasan, Devashish Mitra and K.V. Ramaswamy

Using industry-level data disaggregated by states, this paper finds a positive impact of trade liberalization on (the absolute values of) labor demand elasticities in the Indian manufacturing sector. The magnitudes of these elasticities turn out to be negatively related to protection levels that vary across industries and over time. Furthermore, we find that these elasticities are not only larger in size for Indian states with more flexible labor regulations, they are also impacted there to a larger degree by trade reforms. Finally, we find that the reforms have led to a reduction in the share of labor in total output and value added, possibly due to the reduction in the bargaining power of workers.

Multinationals and Anti-Sweatshop Activism

Ann Harrison and Jason Scorse

During the 1990s, anti-sweatshop activists campaigned to improve conditions for workers in developing countries. This paper analyzes the impact of anti-sweatshop campaigns in Indonesia on wages and employment. Identification is based on comparing the wage growth of workers in foreign-owned and exporting firms in targeted regions or sectors before and after the initiation of anti-sweatshop campaigns. We find the campaigns led to large real wage increases for targeted enterprises. There were some costs in terms of reduced investment, falling profits, and increased probability of closure for smaller plants, but we fail to find significant effects on employment. (JEL F23, J31, J81, L67, O14, O15)

Operations of ‘Unfettered’ Labor Markets: Exit and Voice in American Labor Markets at the Turn of the Century

Price Fishback

No abstract

Regulation and Growth*

Siemon Djankov, Caralee McLiesh and Rita Ramalho

Using objective measures of business regulations in 135 countries, we establish that countries with better regulations grow faster. Improving from the worst quartile of business regulations to the best implies a 2.3 percentage point increase in annual growth.

Short-Time Compensation, Job Security, and Employment Contracts: Evidence from Selected OECD Countries

Marc Van Audenrode

In this paper, a model of optimal employment contracting describes differences across countries in firing restrictions and short-time compensation systems for workers forced to work shorter hours to avoid layoff. The model predicts that the existence of a short-time compensation system will generate major fluctuations in working hours only if the short-time compensation system is more generous than the traditional unemployment insurance system. A test performed for ten OECD countries shows that in countries with generous short-time compensation systems, the speed of adjustment of total hours worked is higher than in the United States, despite a much slower adjustment in the number of workers employed.

The Consequences of Labor Market Flexibility: Panel Evidence Based on Survey Data

Rafael Di Tella and Robert MacCulloch

We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984-1990. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long-run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. We also find evidence consistent with the hypothesis that inflexible labor markets produce “jobless recoveries” and introduce more unemployment persistence.

The cost of "doing business" and labour regulation: The case of South Africa

Paul Benjamin, Haroon Bhorat and Halton Cheadle

The "Employing Workers" indices compiled from the World Bank's Doing Business (DB) survey for 2006 presented mixed results as to the nature and extent of labour regulation in South Africa. Arguing that these measures – with their narrow focus on legislation – provide only a partial picture, the authors suggest and investigate three possible extensions to the DB framework with the aim of achieving a more realistic representation of labour regulation in practice, namely: "micro-legislation", labour market institutions and judicial interpretation. They conclude with a plea for taking account of the crucial importance of these features in the assessment of labour regulation frameworks.

The Impact of Employment Protection Mandates on Demographic Temporary Employment Patterns: International Microeconomic Evidence

Lawrence M. Kahn

This article uses 19948 International Adult Literacy Survey microdata for Canada, Finland, Italy, the Netherlands, Switzerland, the UK and the US to study the impact of employment protection laws (EPL) on joblessness and temporary employment by demographic group. More stringent EPL raises relative non-employment rates for youth, immigrants, and, possibly, women, controlling for demographic variables and country dummies. For wage and salary workers, EPL raises the relative incidence of temporary employment for the low skilled, youth, native women, and especially immigrant women. These effects are often stronger in countries with higher levels of collective bargaining coverage.

The Investment Climate and the Firm: Firm-Level Evidence from China

Hallward-Driemeier, Mary, Scott Wallsten, and Lixin Colin Xu

The importance of a country's "investment climate" for economic growth has recently received much attention. The authors address the general lack of appropriate data for measuring the investment climate and its effects. The authors use a new survey of 1,500 Chinese enterprises in five cities to more precisely define and measure components of the investment climate, highlight the importance of firm-level data for rigorous analysis of the investment climate, and investigate empirically the effects of this comprehensive set of measures on firm performance in China. Overall, their firm-level analysis reveals that the main determinants of firm performance in China are international integration, entry and exit, labor market issues, technology use, and access to external finance.

The Regulation of Labor*

Juan C. Botero, Simeon Djankov, Rafael La Porta, Florencio Lopez-De-Silanes and Andrei Shleifer

We investigate the regulation of labor markets through employment, collective relations, and social security laws in 85 countries. We find that the political power of the left is associated with more stringent labor regulations and more generous social security systems, and that socialist, French, and Scandinavian legal origin countries have sharply higher levels of labor regulation than do common law countries. However, the effects of legal origins are larger, and explain more of the variation in regulations, than those of politics. Heavier regulation of labor is associated with lower labor force participation and higher unemployment, especially of the young. These results are most naturally consistent with legal theories, according to which countries have pervasive regulatory styles inherited from the transplantation of legal systems.

The Responsiveness of Entrepreneurs to Working Time Regulations

Frank Stephen, David Urbano and Stefan van Hemmen

In this article, we analyse the impact of enforcement practices (proxied by judicial formalism) and the regulation of working time on entrepreneurial activity by opportunity. We find that higher enforcement formalism mitigates the negative impact exerted by rigid working time regulations on the number of entrepreneurs. While it is agreed that regulatory rigidities may increase labour transaction costs, we show that entrepreneurs are less sensitive to labour regulations the higher the level of enforcement formalism in which they operate. Higher formalism is associated with lower enforcing efficiency and lower probability of being punished for transgressing laws. A policy implication is that encouraging labour flexibility might not improve conditions for entrepreneurial activity in procedurally formalist countries. This is due to the fact that, in those countries, flexibility de facto characterises employment relations, no matter what the law says.

The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India

Philippe Aghion, Robin Burgess, Stephen Redding and Fabrizio Zilibotti

We study whether the effects on registered manufacturing output of dismantling the “License Raj”- a system of central controls regulating entry and production activity in this sector vary across Indian states with different labor market regulations. The effects are found to be unequal across Indian states with different labor market regulations. In particular, following de-licensing, industries located in states with pro-employer labor market institutions grew more quickly than those in pro-worker environments.

Trade, regulations, and income*

Caroline Freund and Bineswaree Bolaky

We examine the relationship between openness and per-capita income using cross-country data from 126 countries. We find that trade leads to a higher standard of living in flexible economies, but not in rigid economies. Business regulation, especially on firm entry, is more important than financial development, higher education, or rule of law as a complementary policy to trade liberalization. Specifically, after controlling for the standard determinants of per-capita income, our results imply that a 1% increase in trade is associated with more than a one-half percent rise in per-capita income in economies that facilitate firm entry, but has no positive income effects in more rigid economies. The findings are consistent with Schumpeterian “creative destruction”, which highlights the importance of new business entry in economic performance, and with previous firm-level studies showing that the beneficial effects of trade liberalization come largely from an intra-sectoral reallocation of resources.

Unemployment Benefits, Unemployment Duration, and Post-Unemployment Jobs: A Regression Discontinuity Approach

Rafael Lalive

No abstract

What Hides behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets

Olivier Blanchard and Pedro Portugal

Behind similar unemployment rates in the United States and Portugal hide two very different labor markets. Unemployment duration is three times longer in Portugal than in the United States. Symmetrically, flows of workers into unemployment are three times lower in Portugal. These lower flows come in roughly equal proportions from lower job creation and destruction, and from lower worker flows given job creation and destruction. A plausible explanation is high employment protection in Portugal. High employment protection makes economies more sclerotic; but because it affects unemployment duration and worker flows in opposite directions, the effect on unemployment is ambiguous.