Labour Institutions and Development Under Globalization

  • Servaas StormEmail author
  • Jeronim Capaldo


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.


Labour regulation Labour cost Balance-of-payments constrained growth Labour income share 


  1. Acharya, V. V., Baghai, R. P., & Subramanian, K. V. (2010). Labour laws and innovation (NBER working paper series no. 16484). Cambridge, MA.Google Scholar
  2. Adams, Z., Bishop, L., Deakin, S., Fenwick, C., Martinsson, S., & Rusconi, G. (2015). Labour regulation over time: New leximetric evidence. Mimeo. Available at:
  3. Agell, J. (2002). On the determinants of labour market institutions: Rent seeking vs. social insurance. German Economic Review, 3(2), 107–135.CrossRefGoogle Scholar
  4. 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.CrossRefGoogle Scholar
  5. Akerlof, G. A., & Yellen, J. (1986). Efficiency wage models of the labor market. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  6. Akyüz, Y. (2015). Internationalization of finance and changing vulnerabilities in emerging and developing economies. South Center Research Papers 2015/16.Google Scholar
  7. 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.Google Scholar
  8. Aleksynska, M., & Eberlein, F. (2016). Coverage of employment protection legislation. IZA Journal of Labour Policy, 5(17), 1–20.Google Scholar
  9. 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.Google Scholar
  10. Amin, M. (2009). Labor regulation and employment in India’s retail stores. Journal of Comparative Economics, 37(1), 47–61.CrossRefGoogle Scholar
  11. Amsden, A. H. (2001). The rise of the rest: Challenges to the west from late-industrializing economies. Oxford: Oxford University Press.CrossRefGoogle Scholar
  12. 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. Scholar
  13. 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.Google Scholar
  14. Belman, D., & Wolfson, P. J. (2014). What does the minimum wage do? Kalamazoo: W.E. Upjohn Institute for Employment Research.CrossRefGoogle Scholar
  15. Belser, P., & Sobeck, K. (2012). At what level should countries set their minimum wages? International Journal of Labour Research, 4(1), 105–128.Google Scholar
  16. Berg, J. (Ed.). (2015). Labour markets, institutions and inequality: Building just societies in the 21st century. Cheltenham: Edward Elgar.Google Scholar
  17. 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.Google Scholar
  18. Besley, T., & Burgess, R. (2004). Can labour regulation hinder economic performance? Evidence from India. Quarterly Journal of Economics, 119(1), 91–134.CrossRefGoogle Scholar
  19. 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.Google Scholar
  20. Bhorat, H., Kanbur, R., & Stanwix, B. (2017). Minimum wages in Sub-Saharan Africa: A primer. The World Bank Research Observer, 32(1), 21–74. Scholar
  21. 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.Google Scholar
  22. Bortz, P. G., & Kaltenbrunner, A. (2018). The international dimensions of financialization in developing and emerging economies. Development and Change, 49(2), 375–393.CrossRefGoogle Scholar
  23. 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.CrossRefGoogle Scholar
  24. 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.CrossRefGoogle Scholar
  25. 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.CrossRefGoogle Scholar
  26. Buchanan, J. (1996, April 25). Commentary on the minimum wage. Wall Street Journal, p. A20.Google Scholar
  27. Caballero, R., Cowan, K., Engel, E., & Micco, A. (2013). Effective labour regulation and microeconomic flexibility. Journal of Development Economics, 101(C), 92–104.CrossRefGoogle Scholar
  28. 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.Google Scholar
  29. Capaldo, J., & Izurieta, A. (2013). The imprudence of labor market flexibilization in a fiscally austere world. International Labour Review, 152(1), 1–26.CrossRefGoogle Scholar
  30. 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.Google Scholar
  31. D’Souza, E. (2010). The employment effects of labour legislation in India: A critical essay. Industrial Relations Journal, 41(2), 122–135.CrossRefGoogle Scholar
  32. Dasgupta, P., & Ray, D. (1986). Inequality as a determinant of malnutrition and unemployment: Theory. The Economic Journal, 96(384), 1011–1034.CrossRefGoogle Scholar
  33. Deakin, S. (2016). The contribution of labour law to economic development and growth (Centre for Business Research working paper no. 478). University of Cambridge.Google Scholar
  34. Deakin, S., Lele, P., & Siems, M. (2007). The evolution of labour law: Calibrating and comparing regulatory regimes. International Labour Review, 146(1), 133–162.CrossRefGoogle Scholar
  35. Fagerberg, J. (1988). International competitiveness. The Economic Journal, 98(391), 355–374.CrossRefGoogle Scholar
  36. 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.CrossRefGoogle Scholar
  37. Fenwick, C., & Novitz, T. (Eds.). (2010). Human Rights at Work: Perspectives on Law and Regulation. Oxford: Hart Publishing.Google Scholar
  38. 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.CrossRefGoogle Scholar
  39. 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.Google Scholar
  40. 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.
  41. 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.Google Scholar
  42. Hirschman, A. O. (1991). The rhetoric of reaction: Perversity, futility, jeopardy. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
  43. Huang, Y., Loungani, P., & Wang, G. (2014). Minimum wages and firm employment: Evidence from China (IMF working paper WP/14/184). Washington, DC: IMF.Google Scholar
  44. ILO. (2015). World employment and social outlook: The changing nature of jobs. Geneva: International Labour Office.Google Scholar
  45. ILO. (2016/17). Global wage report 2016/17. Geneva: International Labour Office.Google Scholar
  46. 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.Google Scholar
  47. Keynes, J. M. (1933). National self-sufficiency. The Yale Review, 22(4), 755–769.Google Scholar
  48. 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.CrossRefGoogle Scholar
  49. Kucera, D. (2002). Core labour standards and foreign direct investment. International Labour Review, 141(1–2), 31–69.CrossRefGoogle Scholar
  50. Kuddo, A., Robalino, D., & Weber, M. (2015). Balancing regulations to promote jobs. From employment contracts to unemployment benefits. Washington, DC: World Bank.Google Scholar
  51. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1997). Legal determinants of external finance. Journal of Finance, 52, 1131–1150.CrossRefGoogle Scholar
  52. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. Journal of Political Economy, 106, 1113–1155.CrossRefGoogle Scholar
  53. 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.Google Scholar
  54. Lall, S. (2000). The technological structure and performance of developing country manufactured exports, 1985–98. Oxford Development Studies, 28(3), 337–369.CrossRefGoogle Scholar
  55. Lazear, E. (1990). Job security provisions and employment. Quarterly Journal of Economics, 105(3), 699–726.CrossRefGoogle Scholar
  56. Lee, S., & McCann, D. (Eds.). (2011). Regulating for decent work. New directions in labour market regulation. London: Palgrave Macmillan.Google Scholar
  57. 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.CrossRefGoogle Scholar
  58. Leibenstein, H. (1957). Economic backwardness and economic growth. New York: Wiley.Google Scholar
  59. MacLean, N. (2017). Democracy in chains. The deep history of the radical right’s stealth plan for America. New York: Viking.Google Scholar
  60. Martin, J. P., & Scarpetta, S. (2012). Setting it right: Employment protection, labour reallocation and productivity. De Economist, 160(2), 89–166.CrossRefGoogle Scholar
  61. Mau, K., & Xuy, M. (2017). Rising wages and intra-country industry relocation: Evidence from China. Available at:
  62. 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: CEPIIGoogle Scholar
  63. McCombie, J. S. L., & Thirlwall, A. P. (Eds.). (2004). Essays on balance of payments constrained growth: Theory and evidence. London: Routledge.Google Scholar
  64. 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.CrossRefGoogle Scholar
  65. 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.CrossRefGoogle Scholar
  66. 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.Google Scholar
  67. 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.CrossRefGoogle Scholar
  68. Ocampo, J. A. (Ed.). (2005). Beyond reforms. structural dynamics and macroeconomic theory. Palo Alto: Stanford University Press.Google Scholar
  69. Ocampo, J. A., Rada, C., & Taylor, L. (2009). Growth and policy in developing countries. A structuralist approach. New York: Columbia University Press.CrossRefGoogle Scholar
  70. OECD. (2004). OECD Employment Outlook 2004. Paris: OECD.CrossRefGoogle Scholar
  71. OECD. (2016). Short-term labour market effects of structural reforms: Pain before the gain? OECD Employment Outlook 2016. Paris: OECD.Google Scholar
  72. Okun, A. M. (1975). Equality and efficiency: The big tradeoff. Washington, DC: Brookings Institution Press.Google Scholar
  73. Onaran, Ö., & Galanis, G. (2014). Income distribution and growth: A global model. Environment and Planning A, 46(10), 2489–2513.CrossRefGoogle Scholar
  74. Pierre, G., & Scarpetta, S. (2006). Employment protection: Do firms’ perceptions match with legislation? Economics Letters, 90(3), 328–334.CrossRefGoogle Scholar
  75. 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.Google Scholar
  76. Rama, M., & Artecona, R. (2000). A database of labor market indicators across countries. Washington, DC: World Bank, mimeo.Google Scholar
  77. Rodrik, D. (1998). Why do more open economies have bigger governments? Journal of Political Economy, 106(5), 997–1032.CrossRefGoogle Scholar
  78. 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.CrossRefGoogle Scholar
  79. Samaniego, R. M. (2006). Employment protection and high-tech aversion. Review of Economic Dynamics, 9(2), 224–241.CrossRefGoogle Scholar
  80. Samuelson, P. A. (1947). Foundations of economic analysis. Cambridge, MA: Harvard University Press.Google Scholar
  81. Schrank, A. (2014). Labour standards and economic development in Latin America: Competitors or complements? Brown Journal of World Affairs, 20(2), 265–273.Google Scholar
  82. Shapiro, H. (2007). Industrial policy and growth (DESA working paper no. 53). New York: UN-DESA.Google Scholar
  83. 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.CrossRefGoogle Scholar
  84. Soskice, D. (1997). German technology policy, innovation, and national institutional frameworks. Industry and Innovation, 4(1), 75–96.CrossRefGoogle Scholar
  85. Stiglitz, J. E. (1976). The efficiency wage hypothesis, surplus labour, and the distribution of income in LDCs. Oxford Economic Papers, 28(2), 185–207.CrossRefGoogle Scholar
  86. 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.CrossRefGoogle Scholar
  87. Storm, S. (2015). Structural change. Development and Change, 46(4), 666–699.CrossRefGoogle Scholar
  88. 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.Google Scholar
  89. Storm, S., & Naastepad, C. W. M. (2009). Labour market regulation and productivity growth: Evidence for 20 OECD countries. Industrial Relations, 48(4), 629–654.Google Scholar
  90. Storm, S., & Naastepad, C. W. M. (2012). Macroeconomics beyond the NAIRU. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
  91. Storm, S., & Naastepad, C. W. M. (2016). Bhaduri-Marglin meet Kaldor-Marx: Wages, productivity and investment. Review of Keynesian Economics, 5(2), 4–24.Google Scholar
  92. Streeck, W. (2004). Educating capitalists: A rejoinder to Wright and Tsakalotos. Socio-Economic Review, 2(3), 425–438.CrossRefGoogle Scholar
  93. 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.Google Scholar
  94. UNIDO. (2017). Industrial development report 2018. Demand for manufacturing: Driving inclusive and sustainable industrial development. Vienna.Google Scholar
  95. 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.CrossRefGoogle Scholar
  96. World Bank. (2003). Doing business: An independent evaluation report. Washington, DC: World Bank.Google Scholar
  97. World Bank. (2008). Doing business: An independent evaluation report. Washington, DC: World Bank.CrossRefGoogle Scholar
  98. World Bank. (2011). Doing business: Making a difference for entrepreneurs. Washington, DC: World Bank.Google Scholar
  99. World Bank. (2013). World development report 2013: Jobs. Washington, DC: World Bank.CrossRefGoogle Scholar
  100. World Bank. (2015). Doing business: Going beyond efficiency. Washington, DC: World Bank.Google Scholar
  101. World Bank. (2017). Doing business: Equal opportunities for all. Washington, DC: World Bank.Google Scholar

Copyright information

© The Author(s) 2019

Authors and Affiliations

  1. 1.Department of EconomicsDelft University of TechnologyDelftThe Netherlands
  2. 2.Global Development and Environment InstituteTufts UniversityMedford, SomervilleUSA

Personalised recommendations