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Labor Regulations, Unions, and Social Protection in Developing Countries

In: Handbook of Development Economics

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  • Freeman, Richard B.

Abstract

This chapter 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 produces 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 spillover 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 is shifted largely to labor, with some variation among countries.(6)Contrary to the Harris-Todaro two-sector model in which rural-urban migration adjusts 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 nonwage 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.

Suggested Citation

  • Freeman, Richard B., 2010. "Labor Regulations, Unions, and Social Protection in Developing Countries," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4657-4702, Elsevier.
  • Handle: RePEc:eee:devchp:v:5:y:2010:i:c:p:4657-4702
    DOI: 10.1016/B978-0-444-52944-2.00008-2
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    More about this item

    Keywords

    informal labor market; labor regulations; minimum wage; productivity; distribution of income;
    All these keywords.

    JEL classification:

    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy
    • J80 - Labor and Demographic Economics - - Labor Standards - - - General

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