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Labor market"rigidity"and the success of economic reforms across more than one hundred countries

  • Forteza, Alvaro
  • Rama, Martin

The authors show that labor market policies and institutions affect the effectiveness of economic reform programs. They compare annual growth rates across 119 countries, using data from 449 World Bank adjustment credits and loans between 1980 and 1996. The results indicate that countries with relatively rigid labor markets experienced deeper recessions before adjustment and slower recoveries afterward. The results also disentangle the mechanisms through which labor market rigidity operates. They find that minimum wages and mandatory benefits do not hurt growth. But the relative size of organized labor (in government and elsewhere) appears to matter. Labor market rigidity seems to be relevant more for political reasons than for economic reasons. The authors'findings suggest that not enough attention has been paid to vocal groups (urban, middle-class groups) that stand to lose from economic reform. The implications of the findings for policymakers: There should be less focus on deregulating the labor market and more on defusing the opposition of (vocal) losers. The results are robust to changes in measurement, controls, and sample, and do not suffer from self-selection bias.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2521.

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Date of creation: 31 Jan 2001
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Handle: RePEc:wbk:wbrwps:2521
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  1. Squire, Lyn & Suthiwart-Narueput, Sethaput, 1995. "The impact of labor market regulations," Policy Research Working Paper Series 1418, The World Bank.
  2. Rama, Martin, 1997. " Labor Market Institutions and the Second-Best Tariff," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 299-314, June.
  3. Haltiwanger, John & Singh, Manisha, 1999. "Cross-Country Evidence on Public Sector Retrenchment," World Bank Economic Review, World Bank Group, vol. 13(1), pages 23-66, January.
  4. Arellano, Manuel, 1993. "On the testing of correlated effects with panel data," Journal of Econometrics, Elsevier, vol. 59(1-2), pages 87-97, September.
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  8. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  9. Xavier Sala-i-Martin, 1997. "I just ran four million regressions," Economics Working Papers 201, Department of Economics and Business, Universitat Pompeu Fabra.
  10. Carmen Pagés-Serra & James J. Heckman, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Research Department Publications 4227, Inter-American Development Bank, Research Department.
  11. Edwards, Sebastian, 1988. "Terms of Trade, Tariffs, and Labor Market Adjustment in Developing Countries," World Bank Economic Review, World Bank Group, vol. 2(2), pages 165-85, May.
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  13. Karras, Georgios, 1999. "Openness and the effects of monetary policy," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 13-26, January.
  14. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
  15. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  16. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614 Elsevier.
  17. Morris Goldstein & Peter Montiel, 1986. "Evaluating Fund Stabilization Programs with Multicountry Data: Some Methodological Pitfalls (Evaluation des programmes de stabilisation du Fonds à partir de données sur divers pays: quelques écueils," IMF Staff Papers, Palgrave Macmillan, vol. 33(2), pages 304-344, June.
  18. James J. Heckman, 1989. "Choosing Among Alternative Nonexperimental Methods for Estimating the Impact of Social Programs: The Case of Manpower Training," NBER Working Papers 2861, National Bureau of Economic Research, Inc.
  19. 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.
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  24. Mohsin S. Khan, 1990. "The Macroeconomic Effects of Fund-Supported Adjustment Programs," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 195-231, June.
  25. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  26. Easterly, William & Loayza, Norman & Montiel, Peter, 1997. "Has Latin America's post-reform growth been disappointing?," Policy Research Working Paper Series 1708, The World Bank.
  27. repec:umd:umdeco:rodriguez9901 is not listed on IDEAS
  28. 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, vol. 0(Fall 2000), pages 109-154, August.
  29. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: A Skeptic's Guide to Cross-National Evidence," NBER Working Papers 7081, National Bureau of Economic Research, Inc.
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