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The Effect of Job Security Regulations on Labor Market Flexibility. Evidence from the Colombian Labor Market Reform

In: Law and Employment: Lessons from Latin America and the Caribbean

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  • Adriana D. Kugler

Abstract

Job security provisions are widely believed to reduce dismissals and hiring. In addition, in developing countries job security is believed to reduce compliance with labor regulations and to increase informal activity. Reductions in dismissal costs are, thus, often advocated as a way to increase labor market flexibility and to increase compliance with labor regulations. This paper analyzes the impact of a substantial reduction in dismissal costs introduced by the Colombian Labor Market Reform of 1990. A theoretical model illustrates the effect of dismissal costs when there is a noncompliant sector. The model shows the direct effect of a reduction in dismissal costs on increased turnover as well as the second order effects on wages and on the composition of the compliant and noncompliant sectors. Using microdata from the Colombian National Household Surveys, I exploit the temporal variability in dismissal costs together with the variability in coverage between formal and informal workers (who are not covered and were, thus, not directly affected by the reform). The differences-in-differences results indicate increased separations and accessions for formal workers relative to informal workers after the reform. Moreover, the increase in worker turnover was greatest among younger workers, more educated workers, and workers employed in larger firms who are most likely to have been affected by the reform. The estimates, together with the steady-state conditions of the model, suggest the reform contributed to 10% of the reduction in unemployment during the period of study.

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  • James J. Heckman & Carmen Pagés, 2004. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Books, National Bureau of Economic Research, Inc, number heck04-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10070.

    Handle: RePEc:nbr:nberch:10070

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    1. David H. Autor, 2000. "Outsourcing at Will: Unjust Dismissal Doctrine and the Growth of Temporary Help Employment," NBER Working Papers 7557, National Bureau of Economic Research, Inc.
    2. Joshua D. Angrist & Adriana D. Kugler, 2003. "Protective or counter-productive? labour market institutions and the effect of immigration on eu natives," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(488), pages F302-F331, 06.
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    5. Carmen Pagés-Serra & James J. Heckman, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Research Department Publications, Inter-American Development Bank, Research Department 4227, Inter-American Development Bank, Research Department.
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    12. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
    13. Adriana D. Kugler & Gilles Saint-Paul, 2004. "How Do Firing Costs Affect Worker Flows in a World with Adverse Selection?," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 22(3), pages 553-584, July.
    14. Hernanz, Virginia & Jimeno, Juan Francisco & Kugler, Adriana D., 2003. "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labour Market Reforms," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3724, C.E.P.R. Discussion Papers.
    15. Adriana Kugler & Juan F. Jimeno & Virginia Hernanz, . "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labor Market Reforms," Working Papers 2003-14, FEDEA.
    16. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(3), pages 699-726, August.
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    Cited by:
    1. Rodrigo Taborda & Juan Guataquí, 2011. "Manufacturing Employment and Wage Differentials After Structural Adjustment Reforms in Colombia: An Efficiency Wages Approach," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, Universidad de Antioquia, Departamento de Economía, issue 74, pages 87-117.
    2. A. Kugler, M. Kugler, 2008. "Labour Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia," Working Papers, Wilfrid Laurier University, Department of Economics eg0056, Wilfrid Laurier University, Department of Economics, revised 2008.
    3. von Below, David & Thoursie, Peter Skogman, 2010. "Last in, first out?: Estimating the effect of seniority rules in Sweden," Labour Economics, Elsevier, Elsevier, vol. 17(6), pages 987-997, December.
    4. Robalino, David A. & Vodopivec, Milan & Bodor, András, 2009. "Savings for Unemployment in Good or Bad Times: Options for Developing Countries," IZA Discussion Papers 4516, Institute for the Study of Labor (IZA).
    5. Ismihan, Mustafa, 2010. "A New Framework for Output-Unemployment Relationship: Okun’s Law Revisited," MPRA Paper 28135, University Library of Munich, Germany.
    6. Paola Roldán Vásquez & Carlos Ospino Hernández, 2009. "¿Quiénes terminan en la informalidad?: Impacto de las características y el tiempo de búsqueda," REVISTA DE ECONOMÍA DEL CARIBE, UNIVERSIDAD DEL NORTE.
    7. Kuddo, Arvo, 2009. "Labor laws in Eastern European and Central Asian countries : minimum norms and practices," Social Protection Discussion Papers 51698, The World Bank.
    8. Djankov, Simeon & Ramalho, Rita, 2009. "Employment laws in developing countries," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 3-13, March.
    9. Freeman, Richard B., 2010. "Labor Regulations, Unions, and Social Protection in Developing Countries," Handbook of Development Economics, Elsevier, Elsevier.
    10. von Below, David & Thoursie, Peter, 2008. "Last in, first out? Estimating the effect of seniority rules in Sweden," Working Paper Series, IFAU - Institute for Evaluation of Labour Market and Education Policy 2008:27, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    11. Armida Alisjahbana & Muhamad Purnagunawan, 2004. "The Impact of Job Security Regulations on Employment and Hours of Work: Empirical Evidence for Indonesia," Working Papers in Economics and Development Studies (WoPEDS), Department of Economics, Padjadjaran University 200405, Department of Economics, Padjadjaran University, revised Nov 2004.
    12. Kaplan, David S., 2009. "Job creation and labor reform in Latin America," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 91-105, March.
    13. Behaghel, Luc & Crépon, Bruno & Sédillot, Béatrice, 2008. "The perverse effects of partial employment protection reform: The case of French older workers," Journal of Public Economics, Elsevier, Elsevier, vol. 92(3-4), pages 696-721, April.
    14. P R Agénor, 2005. "The Analytics of Segmented Labor Markets," Centre for Growth and Business Cycle Research Discussion Paper Series, Economics, The Univeristy of Manchester 52, Economics, The Univeristy of Manchester.
    15. Kugler, Adriana D., 2005. "Wage-shifting effects of severance payments savings accounts in Colombia," Journal of Public Economics, Elsevier, Elsevier, vol. 89(2-3), pages 487-500, February.
    16. Bosch, Mariano & Goñi-Pacchioni, Edwin & Maloney, William, 2012. "Trade liberalization, labor reforms and formal–informal employment dynamics," Labour Economics, Elsevier, Elsevier, vol. 19(5), pages 653-667.

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