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Labor Market Regulations and Productivity: Evidence from Chilean Manufacturing Plants


  • Rodrigo Álvarez
  • Rodrigo Fuentes


This paper analyzes the effect of minimum wage and labor market regulations on productivity. The main hypothesis to be tested is that an increase in the relative minimum wage could have a negative effect on total factor productivity (TFP) if there are important costs of adjustment like firing costs. Using data for the Chilean manufacturing industry for the period 1992 2005, we find that the effect of relative minimum wage is negative and significant. The quantitative effect on cumulative TFP for an industry in the 25th percentile of relative minimum wage increase was a decline of 5.3% for the period 1998-2005, but for an industry in the 75th percentile of relative minimum wage increase, the cumulative reduction in TFP was 10.2%, over the same period. We also find that the continuous reduction in unilateral trade restrictions and through free trade agreements has been productivity enhancing. This is especially true for those sectors with larger exposure to international trade.

Suggested Citation

  • Rodrigo Álvarez & Rodrigo Fuentes, 2011. "Labor Market Regulations and Productivity: Evidence from Chilean Manufacturing Plants," Documentos de Trabajo 396, Instituto de Economia. Pontificia Universidad Católica de Chile..
  • Handle: RePEc:ioe:doctra:396

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    References listed on IDEAS

    1. Sanchez-Paramo, Carolina & Schady, Norbert, 2003. "Off and running? Technology, trade and the rising demand for skilled workers in Latin America," Policy Research Working Paper Series 3015, The World Bank.
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    Cited by:

    1. World Bank, 2013. "Minimum Wage Policy : Lessons with a Focus on the ASEAN Region," World Bank Other Operational Studies 16687, The World Bank.

    More about this item


    TFP; minimum wage; firing costs; slowdown;

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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