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

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.