Politics & Policies, Report

Labour Market Regulations : Policy makers do not necessarily have a comprehensive approach

Mariya Aleksynska and Martin Schindler provide descriptive statistics showing that there exists substantial heterogeneity in labor market institutions across regions and income groupings, and that much of the sample variation is driven by institutional changes over time in low- and middle-income countries in Labor Market Regulations in Low-, Middle- and High-Income Countries: A New Panel Database published bu imf.org. (Adapted excerpts by Job Market Monitor)

Labor markets, and the policies and institutions that shape them, play a key role in the functioning of modern economies and have substantial welfare implications. The importance of labor market issues has been increasingly reflected in economic policy discussions where, according to Freeman (2007, p. 3) “[q]uestions regarding labor market institutions [have] replaced macroeconomic policy at the center of much policy debate in advanced economies.” The medium-term impact of the current global crisis on labor market outcomes is likely to underscore the need for reallocation of workers from declining industries to those with better growth prospects, while at the same time ensuring that labor market institutions achieve equity and social insurance objectives.

Labor market institutions and their impact on economic outcomes have been widely studied in many OECD countries, but much less so in others. Consistent comparative analysis of labor market institutions in developing economies has so far been hindered by a lack of comprehensive panel data. This paper aims to fill part of this gap in data coverage. Building on an intensive data-collection effort, it documents a new panel dataset on labor market regulations covering a broad sample of countries during 1980-2005 representing all income groups and regions. The labor market indicators in this database cover three key areas of labor market regulations: minimum wages, unemployment benefits, and employment protection. The dataset is based on de jure labor market institutions, as enshrined in current legislation, distinguishing it from surveybased datasets that aim to describe de facto institutions.

The paper documents labor market regulations during 1980–2005 in 91 countries.  All indicators are at an annual frequency, allowing for the dating of major changes in regulation, and are based on data from a variety of sources, including the ILO, OECD and national agencies.

Unemployment Insurance

Two unemployment insurance (UI) indicators are built to capture different aspects of unemployment insurance systems:

  • The level of UI benefits captures the generosity of the unemployment benefit system and is measured by the gross replacement rate (GRR), that is, the ratio of UI benefits a worker receives relative to the worker’s last gross earning. The database contains GRR measures for the first year of unemployment, the second year of unemployment, and the average of the two.
  • The number of UI benefit recipients is calculated as the number of individuals who, at a given point in time, receive UI benefits. Relative to the number of unemployed, it can proxy the extent and reach, or exclusivity, of the UI system in a given country and thus provide complementary information to the generosity of the UI system.

One lesson that can be drawn from these descriptive statistics is that substantial differences in labor market institutions exist between advanced and developing economies, as well as between regions. Substantial variation in labor institutions can also be observed over time in developing economies, to a much larger extent than in advanced countries during the same time period. These large variations in labor market regulations across countries and time suggest that much can be learned from including developing economies in studies of the effects of labor market regulations.

Interesting patterns also emerge when considering the correlations between different types of labor market institutions. In general, the various regulations are fairly uncorrelated, by itself suggesting that policy makers do not necessarily view the various aspects of labor market reform as part of an overall package.

This is surprising as one might expect that policy makers either fine-tune regulations by offsetting higher regulations in one area with lower regulations in another (negative correlation) or, alternatively, that countries fall into different camps, some with low regulations on all or most dimensions, and others choosing the opposite strategy (positive correlation).

Possibly, the absence of any correlation in the full sample reflects a mix of different countries pursuing different reform strategies. Further research could shed more light on this.


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