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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

  • Adriana D. Kugler

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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This chapter was published in:
  • 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, May.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10070.
    Handle: RePEc:nbr:nberch:10070
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
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    2. Kugler, Adriana D. & Pica, Giovanni, 2004. "Effects of Employment Protection and Product Market Regulations on the Italian Labour Market," CEPR Discussion Papers 4216, C.E.P.R. Discussion Papers.
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    13. David H. Autor & John J. Donohue & Stewart J. Schwab, 2006. "The Costs of Wrongful-Discharge Laws," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 211-231, May.
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    17. 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.
    18. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
    19. 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, vol. 113(488), pages F302-F331, 06.
    20. Carmen Pagés-Serra, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
    21. Heckman, James J. & Robb, Richard Jr., 1985. "Alternative methods for evaluating the impact of interventions : An overview," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 239-267.
    22. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
    23. Adriana Kugler & Juan F. Jimeno & Virginia Hernanz, . "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labor Market Reforms," Working Papers 2003-14, FEDEA.
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