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Labor Market "Rigidity" and the Success of Economic Reforms Across more than One Hundred Countries

  • Alvaro Forteza


    (Departmento de Economía, Facultad de Ciencias Sociales, Universidad de la República)

  • Martín Rama


    (Development Research Group, World Bank)

This paper shows that labor market policies and institutions have an impact on the effectiveness of economic reform programs. The analysis compares annual growth rates across 119 countries, using data from 449 adjustment credits and loans given by the World Bank between 1980 and 1996. The results indicate that countries with relatively “rigid” labor markets experienced deeper recessions before adjustment and slower recoveries afterwards. The paper also disentagles the mechanisms through which labor market “rigidity” operates. It finds that minimum wages and mandatory benefits have a marginal impact only. The size and strength of organized labor, on the other hand, appear to be crucial. Labor market rigidity thus seem to be relevant for political reasons, more than for economic reasons. The paper shows that these findings are robust to changes in the sample and specification. Overall, the results suggest that insufficient attention has been paid to the compensation of vocal groups who stand to lose from economic reforms.

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Paper provided by Department of Economics - dECON in its series Documentos de Trabajo (working papers) with number 0600.

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Length: 47 pages
Date of creation: Jun 2000
Date of revision:
Handle: RePEc:ude:wpaper:0600
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  17. repec:umd:umdeco:rodriguez9901 is not listed on IDEAS
  18. Rama, Martin, 1997. " Labor Market Institutions and the Second-Best Tariff," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 299-314, June.
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