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The Effects of Labor Market Regulations on Employment Decisions by Firms: Empirical Evidence for Argentina

  • Guillermo Mondino
  • Silvia Montoya
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    There are few Latin American countries that produced such a remarkable turnaround in policies and outcomes as Argentina did in the 1990s. The large number of reforms yielded surprisingly strong growth and the near-disappearance of inflation. The change of `economic paradigm` led to behavioral changes that reflected themselves in a number of other areas. Perhaps the most striking change took place in the labor market, where job creation and destruction reigned in earnest. There, where reforms were moderate, high open unemployment was the result. This paper looks at the potential effect regulations might have on labor demand dynamics. In particular, we try to ascertain how movements in labor costs influence firms` decisions regarding job creation. The paper first presents descriptive evidence on who benefits from regulations and how much they cost. The evidence is based on PHS Microdata and identifies the effects on individuals` labor market outcomes stemming from varying regulations. The paper then turns to labor demand estimation. We exploit a panel data set that comprises some 1,300 manufacturing firms for the period 1990-1996. The panel provides information on employment and hours worked, as well as overtime hours, wages and physical production. We exploit the hours worked/jobs relation to shed some light on labor market dynamics. It is found that regulations do have a sizable and significant negative effect on employment decisions. In particular, it appears that severance payment regulations do hurt employment decisions. It is also found that firms rationally substitute workers for a more intensive use of hours.

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    File URL: http://www.iadb.org/research/pub_hits.cfm?pub_id=R-391&pub_file_name=pubR-391.pdf
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    Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 3091.

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    Date of creation: May 2000
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    Handle: RePEc:idb:wpaper:3091
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    1. Katharine G. Abraham & Susan N. Houseman, 1994. "Does Employment Protection Inhibit Labor Market Flexibility? Lessons from Germany, France, and Belgium," Book chapters authored by Upjohn Institute researchers, in: Rebecca M. Blank (ed.), Social Protection Versus Economic Flexibility: Is There a Trade-off?, pages 59-93 W.E. Upjohn Institute for Employment Research.
    2. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
    3. Giuseppe Bertola, 1991. "Labor Turnover Costs and Average Labor Demand," NBER Working Papers 3866, National Bureau of Economic Research, Inc.
    4. Daniel S. Hamermesh & Gerard Pfann, 1992. "Turnover and the Dynamics of Labor Demand," NBER Working Papers 4204, National Bureau of Economic Research, Inc.
    5. Victor Aguirregabiria & Cesar Alonso-Borrego, 2014. "Labor Contracts And Flexibility: Evidence From A Labor Market Reform In Spain," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 930-957, 04.
    6. Joseph Antos, 1983. "Analysis of Labor Cost: Data Concepts and Sources," NBER Chapters, in: The Measurement of Labor Cost, pages 153-182 National Bureau of Economic Research, Inc.
    7. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    8. 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.
    9. Bentolila, Samuel & Saint-Paul, Gilles, 1992. "The macroeconomic impact of flexible labor contracts, with an application to Spain," European Economic Review, Elsevier, vol. 36(5), pages 1013-1047, June.
    10. Robert S. Smith & Ronald G. Ehrenberg, 1981. "Estimating Wage-Fringe Trade-Offs: Some Data Problems," NBER Working Papers 0827, National Bureau of Economic Research, Inc.
    11. Hamermesh, Daniel S, 1995. "Labour Demand and the," Economic Journal, Royal Economic Society, vol. 105(430), pages 620-34, May.
    12. Carola Pessino & Indermit S. Gill, 1996. "Determinants of Labor Demand in Argentina. Estimating the Benefits of Labor Policy Reform," CEMA Working Papers: Serie Documentos de Trabajo. 114, Universidad del CEMA.
    13. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December.
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