with Jeffrey B Nugent
March 2009
This paper studies the dynamics of labor market reform across a fairly
large number of both developing and developed
countries. Our point of departure is Botero et al. QJE 2004 which constructed
an Employment Laws Restriction Index for a
cross-section of 85 countries in 1997. Quite a few studies have attempted
to up-date similar indexes for large samples of
countries (e.g., World Bank's Doing Business project, the EU’s LABREF).
For going backwards in time, however, studies
have been limited to two regions (OECD (Blanchard and Wolfers 2000) and
Latin America (Heckman and Pages 2004)).
We develop a de jure index for Employment Laws Rigidity (ELR). The resulting
dataset LAMRIG covers up to
145 countries in 5-year averages from 1960-64 to 1995-99 and reveals sizable
variations across regions and over time. In
order to assess the usefulness of this index we conduct several exercises.
First, we restrict our analysis to the cross-section
for 1995-1999 (the period coinciding with that in Botero et al. 2004) and
repeat their analysis concerning the determinants
of labor market regulatory rigidities. For this cross-section, we fully
replicate their results, demonstrating the greater importance
of legal origins than those of per capita GDP and/or political factors.
Second, however, when we extend the analysis to the
panel and to changes over time, our results diverge from those of Botero
et al. (2004). For example, when we use a random-effects
model with clustered standard-errors at the country level to explain labor
market reform, the influence of legal origins is much
less significant, albeit still present. Third, we test for the relevance
of other determinants of labor market reforms, such as economic
and political crises, structural factors and other structural reforms.
Along with the reduced role of legal origins, we find that for the
role of reform inertia and per capita GDP the type of crises matter, that
financial reform seems unrelated to labor market reform,
and that trade liberalization seem to retard labor market reform.
For presentation at the IZA-fRDB Conference on "Tracking Structural Reforms," Milan, March 2009
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