Abstract
Labour market regulation is a controversial area of public policy in both developed and developing countries. Mainstream economic analysis traditionally portrays legal interventions providing for minimum wages, unemployment insurance and (often only a modicum of) employment protection as ‘luxuries’ developing countries cannot afford. After decades of de-regulatory advice, international financial institutions have recently come to a less extreme position. But any such concessions to labour regulation are based on concerns for social stability or for short-term support to aggregate demand, while regulation continues to be viewed as harmful to economic efficiency in the long run. In this chapter, we take a deeper look at the impact of labour institutions on economic development in two ways. First, we propose a macroeconomic model of a balance-of-payments constrained “small” developing country open to trade and foreign capital. This helps us clarify the importance of a dynamic view of economic efficiency, as opposed to the static view embedded in mainstream policy advice. Secondly, we discuss the political economy of labour regulation. We argue that labour institutions promote economic development through positive effects on aggregate demand, labour productivity and technology.
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- 1.
Recent surveys of the literature include Freeman (2010), Lee and McCann (2011), Campos and Nugent (2012), Betcherman (2014), Berg (2015), Deakin (2016) and Brancaccio et al. (2018). Broecke et al. (2017) review 95 studies for 14 emerging countries and present a meta-analysis based on 56 of the studies (see Table 16.1).
- 2.
For an important intellectual biography of Buchanan, who not only advised the Pinochet dictatorship in Chile but also worked to build a radical-right social movement in the US, funded by the Koch brothers and a network of fellow wealthy donors, see MacLean (2017).
- 3.
Likewise, the OECD (2016, p. 126) writes in its OECD Employment Outlook, that “Most empirical studies investigating medium/long-term effects of flexibility-enhancing Employment Protection Legislation reforms suggest that they have, at worst, no or a limited positive effect on employment in the long run”.
- 4.
These studies on India have been criticized for faulty coding (of strength of EPL), incorrect interpretation of labour laws and ‘attribution bias’, that is incorrectly attributing lower productivity in a given state to EPL. Acharya et al. (2010), D’Souza (2010) and Sofi and Sharma (2015) provide a critique and more realistic findings for India.
- 5.
Likewise, a review of about 70 studies for high-income countries by Belman and Wolfson (2014, p. 21) finds that employment effects of higher minimum wages are close to zero and too small to be observable in aggregate employment or unemployment statistics.
- 6.
To illustrate: the labour market rigidity (LAMRIG) index developed by Campos and Nugent (2012) is argued to capture the rigidity of employment protection legislation. The LAMRIG index takes a value of 1.45 for Argentina, 2.25 for Brazil, and 1.42 for China during 2005–2009. Because the index is used as an interval variable, the strength of employment protection to Argentinean workers was almost exactly similar to the strength of job protection given to Chinese workers. Job protection in Brazil was more than 1.5 times more rigid than employment protection for workers in Argentina and China.
- 7.
As usual, when discussing international trade and finance, a ‘small’ country here indicates one whose economy is not large enough to influence the international price of traded goods and services, the exchange rate and other international macro prices.
- 8.
This is clearly visible starting from national accounts’ identity which states that the value of output equals the costs of production, or \( PX= WL+P\mathrm{A}A+\pi PX, \) where P is the average price level, X is the total output, W is the nominal wage, L is hours worked, A is energy and raw material inputs, PA is the price of energy and raw materials and ≠ is the profit share. Dividing both sides by X, and rearranging, gives the price-level equation underlying equation (3): \( P=\theta \left(ULC+\xi \right) \) where \( =\frac{W}{X/L}=\frac{W}{\lambda} \), \( \xi =\frac{A}{X}P\mathrm{A}, \) and \( \theta =\frac{1}{1-\pi} \). The labour share in income is defined as \( \psi =\frac{WL}{PX}=\frac{W/P}{\lambda} \), which is the ratio of the real wage and labour productivity. What these derivations show is that exporting firms have two reasons to lower ULC. First, a reduction in ULC lowers their price and improves international competitiveness (and hence exports). Second, to the extent that firms do not lower their prices in response to lower ULC, they will enjoy a higher profit share; this can be inferred from the definition of the real profit share which is \( \pi =1-\left(\psi +\frac{\xi}{P}\right) \), and assuming that all other factors remain unchanged.
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Storm, S., Capaldo, J. (2019). Labour Institutions and Development Under Globalization. In: Nissanke, M., Ocampo, J.A. (eds) The Palgrave Handbook of Development Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-14000-7_16
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