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Labor Regulations, Unions, and Social Protection in Developing Countries: Market distortions or Efficient Institutions?

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  • Richard B. Freeman

Abstract

This essay reviews what economists have learned about the impact of labor market institutions, defined broadly as government regulations and union activity on labor outcomes in developing countries. It finds that: 1) Labor institutions vary greatly among developing countries but less than they vary among advanced countries. Unions and collective bargaining are less important in developing than in advanced countries while government regulations are nominally as important. 2) Many developing countries compliance with minimum wage regulations produce spikes in wage distributions around the minimum in covered sectors. Most studies find modest adverse effects of the minimum on employment so that the minimum raises the total income of low paid labor. 3) In many countries minimum wages "spill-over" to the unregulated sector, producing spikes in the wage distributions there as well. 4) Employment protection regulations and related laws shift output and employment to informal sectors and reduce gross labor mobility. 5) Mandated benefits increase labor costs and reduce employment modestly while the costs of others are shifted largely to labor, with some variation among countries. 6) Contrary to the Harris-Todaro two sector model in which rural-urban migration adjust to produce a positive relation between unemployment and wages across regions and sectors, wages and unemployment are inversely related by the "wage curve". 7) Unions affect non-wage outcomes as well as wage outcomes. 8) Cross-country regressions yield inconclusive results on the impact of labor regulations on growth while studies of country adjustments to economic shocks, such as balance of payments problems, find no difference in the responses of countries by the strength of labor institutions. 9) 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. 10) The informal sector increased its share of the work force in the developing world in the past two decades. The persistence of large informal sectors throughout the developing world, including countries with high rates of growth, puts a premium on increasing our knowledge of how informal sector labor markets work and finding institutions and policies to deliver social benefits to workers in that sector.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14789.

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Date of creation: Mar 2009
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Publication status: published as Handbook of Development Economics Volume 5, 2010, Pages 4657–4702 Handbooks in Economics Cover image Chapter 70 – Labor Regulations, Unions, and Social Protection in Developing Countries: Market Distortions or Efficient Institutions?
Handle: RePEc:nbr:nberwo:14789

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Cited by:
  1. Wietzke, Frank-Borge, 2014. "Pathways from jobs to social cohesion," Policy Research Working Paper Series 6804, The World Bank.
  2. Elisa Gamberoni & Erik Von Uexkull & Sebastian Weber, 2010. "The Roles of Openness and Labor Market Institutions for Employment Dynamics during Economic Crises," World Bank Other Operational Studies 10155, The World Bank.
  3. Wietzke, Frank-Borge & McLeod, Catriona, 2013. "Jobs, wellbeing, and social cohesion : evidence from value and perception surveys," Policy Research Working Paper Series 6447, The World Bank.
  4. Zierahn, Ulrich, 2012. "Monocentric cities, endogenous agglomeration, and unemployment disparities," HWWI Research Papers 130, Hamburg Institute of International Economics (HWWI).
  5. Magruder, Jeremy R., 2013. "Can minimum wages cause a big push? Evidence from Indonesia," Journal of Development Economics, Elsevier, vol. 100(1), pages 48-62.
  6. James Heintz, 2010. "The Structure of Employment, Globalization, and Economic Crises: Rethinking Contemporary Employment Dynamics with a Focus on the U.S. and Japan," Working Papers wp242, Political Economy Research Institute, University of Massachusetts at Amherst.
  7. Bakis, Ozan & Polat, Sezgin, 2013. "Wage Inequality in Turkey: 2002-2010," GIAM Working Papers, Galatasaray University Economic Research Center 13-9, Galatasaray University Economic Research Center.
  8. Keifman, Saul N. & Maurizio, Roxana, 2012. "Changes in Labour Market Conditions and Policies: Their Impact on Wage Inequality during the Last Decade," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  9. Pieters, Janneke, 2013. "Report No. 58: Youth Employment in Developing Countries," IZA Research Reports 58, Institute for the Study of Labor (IZA).

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