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.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 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.
References
Acharya, V. V., Baghai, R. P., & Subramanian, K. V. (2010). Labour laws and innovation (NBER working paper series no. 16484). Cambridge, MA.
Adams, Z., Bishop, L., Deakin, S., Fenwick, C., Martinsson, S., & Rusconi, G. (2015). Labour regulation over time: New leximetric evidence. Mimeo. Available at: http://www.postkeynesian.net/downloads/downloads/events/Deakin_2015.pdf
Agell, J. (2002). On the determinants of labour market institutions: Rent seeking vs. social insurance. German Economic Review, 3(2), 107–135.
Aghion, P., Burgess, R., Redding, S. J., & Zilibotti, F. (2008). The unequal effects of liberalization: Evidence from dismantling the License Raj in India. American Economic Review, 98(4), 1397–1412.
Akerlof, G. A., & Yellen, J. (1986). Efficiency wage models of the labor market. Cambridge: Cambridge University Press.
Akyüz, Y. (2015). Internationalization of finance and changing vulnerabilities in emerging and developing economies. South Center Research Papers 2015/16.
Aleksynska, M., & Cazes, S. (2014). Comparing indicators of labour market regulations across databases: A post scriptum to the employing workers debate (Conditions of work and employment series no. 50). Geneva: ILO.
Aleksynska, M., & Eberlein, F. (2016). Coverage of employment protection legislation. IZA Journal of Labour Policy, 5(17), 1–20.
Aleksynska, M., & Schindler, M. (2011). Labor market regulations in low-, middle- and high-income countries: A new panel database. Washington, DC: IMF WP No. 11/154.
Amin, M. (2009). Labor regulation and employment in India’s retail stores. Journal of Comparative Economics, 37(1), 47–61.
Amsden, A. H. (2001). The rise of the rest: Challenges to the west from late-industrializing economies. Oxford: Oxford University Press.
Bahmani, M., Harvey, H., & Hegerty, S. W. (2013). Empirical tests of the Marshall-Lerner condition: A literature review. Journal of Economic Studies, 40(3), 411–443. https://doi.org/10.1108/01443581311283989.
Basu, K., & Felkey, A. J. (2008). A theory of efficiency wage with multiple unemployment equilibria: How a higher minimum wage law can curb unemployment (IZA discussion paper no. 3381). Bonn: The Institute for the Study of Labour.
Belman, D., & Wolfson, P. J. (2014). What does the minimum wage do? Kalamazoo: W.E. Upjohn Institute for Employment Research.
Belser, P., & Sobeck, K. (2012). At what level should countries set their minimum wages? International Journal of Labour Research, 4(1), 105–128.
Berg, J. (Ed.). (2015). Labour markets, institutions and inequality: Building just societies in the 21st century. Cheltenham: Edward Elgar.
Berg, J., & Cazes, S. (2008). Policymaking gone awry: The labor market regulations of the doing business indicators. Comparative Labor Law & Policy Journal, 29(4), 349–382.
Besley, T., & Burgess, R. (2004). Can labour regulation hinder economic performance? Evidence from India. Quarterly Journal of Economics, 119(1), 91–134.
Betcherman, G. (2014). Labour market regulations. What do we know about their impacts in developing countries? (Policy research working paper 6819). Washington, DC: World Bank.
Bhorat, H., Kanbur, R., & Stanwix, B. (2017). Minimum wages in Sub-Saharan Africa: A primer. The World Bank Research Observer, 32(1), 21–74. https://doi.org/10.1093/wbro/lkw007.
Blecker, R. A. (2010). Long–run growth in open economies: Export-led cumulative causation or a balance-of-payments constraint? In G. Harcourt & P. Kriesler (Eds.), Handbook of post-Keynesian economics (Vol. I). Oxford: Oxford University Press.
Bortz, P. G., & Kaltenbrunner, A. (2018). The international dimensions of financialization in developing and emerging economies. Development and Change, 49(2), 375–393.
Botero, J., Djankov, S., La Porta, R., F. Lopez-de-Silanes, & Shleifer, A. (2004). The regulation of labour. Quarterly Journal of Economics, 119, 1339–1382.
Brancaccio, E., Garbellini, N., & Giammetti, R. (2018). Structural labour market reforms, GDP growth and the functional distribution of income. Structural Change and Economic Dynamics, 44, 34–45. Early-on line.
Broecke, S., Forti, A., & Vandeweyer, M. (2017). The effect of minimum wages on employment in emerging economies: A survey and meta-analysis. Oxford Development Studies, 45(3), 366–391.
Buchanan, J. (1996, April 25). Commentary on the minimum wage. Wall Street Journal, p. A20.
Caballero, R., Cowan, K., Engel, E., & Micco, A. (2013). Effective labour regulation and microeconomic flexibility. Journal of Development Economics, 101(C), 92–104.
Campos, N., & Nugent, J. (2012). The dynamics of the regulation of labour in developing and developed countries since 1960 (William Davidson Institute working paper no. 1037). University of Michigan.
Capaldo, J., & Izurieta, A. (2013). The imprudence of labor market flexibilization in a fiscally austere world. International Labour Review, 152(1), 1–26.
Capaldo, J., & Izurieta, A. (2018). Macroeconomic effects of 21st century trade and investment agreements: The case of the trans-pacific partnership. Development and Change, 49(4), 951–977.
D’Souza, E. (2010). The employment effects of labour legislation in India: A critical essay. Industrial Relations Journal, 41(2), 122–135.
Dasgupta, P., & Ray, D. (1986). Inequality as a determinant of malnutrition and unemployment: Theory. The Economic Journal, 96(384), 1011–1034.
Deakin, S. (2016). The contribution of labour law to economic development and growth (Centre for Business Research working paper no. 478). University of Cambridge.
Deakin, S., Lele, P., & Siems, M. (2007). The evolution of labour law: Calibrating and comparing regulatory regimes. International Labour Review, 146(1), 133–162.
Fagerberg, J. (1988). International competitiveness. The Economic Journal, 98(391), 355–374.
Fehr, E., Goette, L., & Zehnder, C. (2009). A behavioral account of the labor market: The role of fairness concerns. Annual Review of Economics, 1(1), 355–384.
Fenwick, C., & Novitz, T. (Eds.). (2010). Human Rights at Work: Perspectives on Law and Regulation. Oxford: Hart Publishing.
Forteza, A., & Rama, M. (2006). Labor market “rigidity” and the success of economic reforms across More than 100 Countries. Journal of Policy Reform, 9(1), 75–106.
Freeman, R. B. (2010). Labour regulations, unions, and social protection in developing countries: Market distortions or efficient institutions? In D. Rodrik & M. R. Rosenzweig (Eds.), Handbook of development economics (Vol. V). Amsterdam: Elsevier.
Heckman, J. J. (2007). Comments on are protective labor market institutions at the root of unemployment? A critical review of the evidence by David Howell, Dean Baker, Andrew Glyn, and John Schmitt. Capitalism and Society, 2(1): Article 5. http://cepr.net/documents/publications/Heckman.pdf
Heckman, J. J., & Pagès, C. (2004). Law and employment: Lessons from Latin America and the Caribbean (NBER working paper no. 10129). Cambridge, MA: National Bureau of Economic Research.
Hirschman, A. O. (1991). The rhetoric of reaction: Perversity, futility, jeopardy. Cambridge, MA: Harvard University Press.
Huang, Y., Loungani, P., & Wang, G. (2014). Minimum wages and firm employment: Evidence from China (IMF working paper WP/14/184). Washington, DC: IMF.
ILO. (2015). World employment and social outlook: The changing nature of jobs. Geneva: International Labour Office.
ILO. (2016/17). Global wage report 2016/17. Geneva: International Labour Office.
IMF. (2016). Time for a supply side boost? Macroeconomic effects of labor and product market reforms in advanced economies. In World Economic Outlook 2016 (pp. 101–142). Washington, DC: IMF.
Keynes, J. M. (1933). National self-sufficiency. The Yale Review, 22(4), 755–769.
Kohler, P., & Storm, S. (2016). CETA without blinders: How cutting “trade costs and more” will cause unemployment, inequality, and welfare losses. International Journal of Political Economy, 45(4), 257–293.
Kucera, D. (2002). Core labour standards and foreign direct investment. International Labour Review, 141(1–2), 31–69.
Kuddo, A., Robalino, D., & Weber, M. (2015). Balancing regulations to promote jobs. From employment contracts to unemployment benefits. Washington, DC: World Bank.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1997). Legal determinants of external finance. Journal of Finance, 52, 1131–1150.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. Journal of Political Economy, 106, 1113–1155.
La Porta, R., F. Lopez-de-Silanes, Shleifer, A., & Vishny, R. (2000). Agency problems and dividend policies around the world. Journal of Finance, Vl58, 3–27.
Lall, S. (2000). The technological structure and performance of developing country manufactured exports, 1985–98. Oxford Development Studies, 28(3), 337–369.
Lazear, E. (1990). Job security provisions and employment. Quarterly Journal of Economics, 105(3), 699–726.
Lee, S., & McCann, D. (Eds.). (2011). Regulating for decent work. New directions in labour market regulation. London: Palgrave Macmillan.
Lee, S., McCann, D., & Torm, N. (2008). The World Bank’s “Employing workers” index: Findings and critiques – A review of recent evidence. International Labour Review, 147(4), 416–432.
Leibenstein, H. (1957). Economic backwardness and economic growth. New York: Wiley.
MacLean, N. (2017). Democracy in chains. The deep history of the radical right’s stealth plan for America. New York: Viking.
Martin, J. P., & Scarpetta, S. (2012). Setting it right: Employment protection, labour reallocation and productivity. De Economist, 160(2), 89–166.
Mau, K., & Xuy, M. (2017). Rising wages and intra-country industry relocation: Evidence from China. Available at: http://www.mingzhixu.com/uploads/2/2/9/3/22931630/2017_reallocation.pdf
Mayneris, F., Poncet, S., & Zhang, T. (2014). The cleansing effect of minimum wages: Minimum wage rules, firm dynamics and aggregate productivity in China. CEPII Working Paper No. 2014-16. Paris: CEPII
McCombie, J. S. L., & Thirlwall, A. P. (Eds.). (2004). Essays on balance of payments constrained growth: Theory and evidence. London: Routledge.
Nataraj, S., Perez-Arce, F., Srinivasan, S. V., & Kumar, K. B. (2014). The impact of labor market regulation on employment in low-income countries: A meta-analysis. Journal of Economic Surveys, 28(3), 551–572.
Neto, A. S. M., & Porcile, G. (2017). Destabilizing austerity: Fiscal policy in a BOP-dominated macrodynamics. Structural Change and Economic Dynamics, 43(1), 39–50.
Nissanke, M. (2015). ‘Linking economic growth to poverty reduction under globalization: A case for harnessing globalization for the poor in Sub-Saharan Africa.’ Chapter 8. In A. McKay & E. Thorbecke (Eds.), Economic growth & poverty reduction in Sub-Saharan Africa. Oxford: Oxford University Press.
Nissanke, M., & Thorbecke, E. (2010). ‘Comparative analysis of globalization-poverty nexus in Asia, Latin America and Africa.’ Chapter 1. In M. Nissanke & E. Thorbecke (Eds.), The poor under globalization in Asia, Latin America, and Africa. Oxford: Oxford University Press.
Ocampo, J. A. (Ed.). (2005). Beyond reforms. structural dynamics and macroeconomic theory. Palo Alto: Stanford University Press.
Ocampo, J. A., Rada, C., & Taylor, L. (2009). Growth and policy in developing countries. A structuralist approach. New York: Columbia University Press.
OECD. (2004). OECD Employment Outlook 2004. Paris: OECD.
OECD. (2016). Short-term labour market effects of structural reforms: Pain before the gain? OECD Employment Outlook 2016. Paris: OECD.
Okun, A. M. (1975). Equality and efficiency: The big tradeoff. Washington, DC: Brookings Institution Press.
Onaran, Ö., & Galanis, G. (2014). Income distribution and growth: A global model. Environment and Planning A, 46(10), 2489–2513.
Pierre, G., & Scarpetta, S. (2006). Employment protection: Do firms’ perceptions match with legislation? Economics Letters, 90(3), 328–334.
Pierre, G., & Scarpetta, S. (2007). How labor market policies can combine workers’ protection with job creation: A partial review of some key issues and policy options (Social protection and labor policy and technical notes 41439). Washington, DC: The World Bank.
Rama, M., & Artecona, R. (2000). A database of labor market indicators across countries. Washington, DC: World Bank, mimeo.
Rodrik, D. (1998). Why do more open economies have bigger governments? Journal of Political Economy, 106(5), 997–1032.
Rose, A. K. (1991). The role of exchange rates in a popular model of international trade. Does the ‘Marshall-Lerner’ condition hold? Journal of International Economics, 30, 301–316.
Samaniego, R. M. (2006). Employment protection and high-tech aversion. Review of Economic Dynamics, 9(2), 224–241.
Samuelson, P. A. (1947). Foundations of economic analysis. Cambridge, MA: Harvard University Press.
Schrank, A. (2014). Labour standards and economic development in Latin America: Competitors or complements? Brown Journal of World Affairs, 20(2), 265–273.
Shapiro, H. (2007). Industrial policy and growth (DESA working paper no. 53). New York: UN-DESA.
Sofi, I. A., & Sharma, P. (2015). Does employment protection legislation matter in a dualistic labour market? Panel evidence from the Indian manufacturing sector. Labour Studies Journal, 40(2), 149–168.
Soskice, D. (1997). German technology policy, innovation, and national institutional frameworks. Industry and Innovation, 4(1), 75–96.
Stiglitz, J. E. (1976). The efficiency wage hypothesis, surplus labour, and the distribution of income in LDCs. Oxford Economic Papers, 28(2), 185–207.
Stiglitz, J. E. (2017). Industrial policy, learning, and development. In J. Page & F. Tarp (Eds.), The practice of industrial policy: Government–business coordination in Africa and East Asia (WIDER Studies in Development Economics) (pp. 23–39). Oxford: Oxford University Press.
Storm, S. (2015). Structural change. Development and Change, 46(4), 666–699.
Storm, S., & Isaacs, G. (2016). Modelling the impact of a national minimum wage in South Africa: Are general equilibrium models fit for purpose? (Research brief 1). University of the Witwatersrand, Johannesburg: CSID.
Storm, S., & Naastepad, C. W. M. (2009). Labour market regulation and productivity growth: Evidence for 20 OECD countries. Industrial Relations, 48(4), 629–654.
Storm, S., & Naastepad, C. W. M. (2012). Macroeconomics beyond the NAIRU. Cambridge, MA: Harvard University Press.
Storm, S., & Naastepad, C. W. M. (2016). Bhaduri-Marglin meet Kaldor-Marx: Wages, productivity and investment. Review of Keynesian Economics, 5(2), 4–24.
Streeck, W. (2004). Educating capitalists: A rejoinder to Wright and Tsakalotos. Socio-Economic Review, 2(3), 425–438.
Thirlwall, A. P. (1979). The balance of payments constraint as an explanation of international growth rate differences. Banca Nazionale del Lavoro Quarterly Review, 128, 45–53.
UNIDO. (2017). Industrial development report 2018. Demand for manufacturing: Driving inclusive and sustainable industrial development. Vienna.
Wade, R. H. (2018). What room for the developmental state in an era of financialization, global production chains and knowledge monopoly? Development and Change, 49(2), 518–546.
World Bank. (2003). Doing business: An independent evaluation report. Washington, DC: World Bank.
World Bank. (2008). Doing business: An independent evaluation report. Washington, DC: World Bank.
World Bank. (2011). Doing business: Making a difference for entrepreneurs. Washington, DC: World Bank.
World Bank. (2013). World development report 2013: Jobs. Washington, DC: World Bank.
World Bank. (2015). Doing business: Going beyond efficiency. Washington, DC: World Bank.
World Bank. (2017). Doing business: Equal opportunities for all. Washington, DC: World Bank.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2019 The Author(s)
About this chapter
Cite this chapter
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
Download citation
DOI: https://doi.org/10.1007/978-3-030-14000-7_16
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-13999-5
Online ISBN: 978-3-030-14000-7
eBook Packages: Economics and FinanceEconomics and Finance (R0)