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Labor market"rigidity"and the success of economic reforms across more than one hundred countries

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Author Info

  • Forteza, Alvaro
  • Rama, Martin

Abstract

The authors show that labor market policies and institutions affect the effectiveness of economic reform programs. They compare annual growth rates across 119 countries, using data from 449 World Bank adjustment credits and loans between 1980 and 1996. The results indicate that countries with relatively rigid labor markets experienced deeper recessions before adjustment and slower recoveries afterward. The results also disentangle the mechanisms through which labor market rigidity operates. They find that minimum wages and mandatory benefits do not hurt growth. But the relative size of organized labor (in government and elsewhere) appears to matter. Labor market rigidity seems to be relevant more for political reasons than for economic reasons. The authors'findings suggest that not enough attention has been paid to vocal groups (urban, middle-class groups) that stand to lose from economic reform. The implications of the findings for policymakers: There should be less focus on deregulating the labor market and more on defusing the opposition of (vocal) losers. The results are robust to changes in measurement, controls, and sample, and do not suffer from self-selection bias.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2521.

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Date of creation: 31 Jan 2001
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Handle: RePEc:wbk:wbrwps:2521

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Related research

Keywords: Achieving Shared Growth; Inequality; Health Economics&Finance; Labor Standards; Environmental Economics&Policies;

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References

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  1. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-88, December.
  2. Federico Echenique & Alvaro Forteza, 1997. "Are Stabilization Programs Expansionary?," Documentos de Trabajo (working papers) 0497, Department of Economics - dECON.
  3. Rama, Martin, 1999. "Public Sector Downsizing: An Introduction," World Bank Economic Review, World Bank Group, vol. 13(1), pages 1-22, January.
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  9. Rama, Martin, 1997. " Labor Market Institutions and the Second-Best Tariff," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 299-314, June.
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  16. Haltiwanger, John & Singh, Manisha, 1999. "Cross-Country Evidence on Public Sector Retrenchment," World Bank Economic Review, World Bank Group, vol. 13(1), pages 23-66, January.
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  24. Fallon, Peter R & Lucas, Robert E B, 1991. "The Impact of Changes in Job Security Regulations in India and Zimbabwe," World Bank Economic Review, World Bank Group, vol. 5(3), pages 395-413, September.
  25. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  26. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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