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Labor Regulations, Unions, and Social Protection in Developing Countries

Richard Freeman ()

Chapter Chapter 70 in Handbook of Development Economics, 2010, vol. 5, pp 4657-4702 from Elsevier

Abstract: This chapter reviews what economists have learned about the impact of labor market institutions, defined broadly as government regulations and union activity on labor outcomes in developing countries. It finds that:(1)Labor institutions vary greatly among developing countries but less than they vary among advanced countries. Unions and collective bargaining are less important in developing than in advanced countries while government regulations are nominally as important.(2)Many developing countries' compliance with minimum wage regulations produces spikes in wage distributions around the minimum in covered sectors. Most studies find modest adverse effects of the minimum on employment so that the minimum raises the total income of low-paid labor.(3)In many countries minimum wages spillover to the unregulated sector, producing spikes in the wage distributions there as well.(4)Employment protection regulations and related laws shift output and employment to informal sectors and reduce gross labor mobility.(5)Mandated benefits increase labor costs and reduce employment modestly while the costs of others is shifted largely to labor, with some variation among countries.(6)Contrary to the Harris-Todaro two-sector model in which rural-urban migration adjusts to produce a positive relation between unemployment and wages across regions and sectors, wages and unemployment are inversely related by the wage curve. (7)Unions affect nonwage outcomes as well as wage outcomes.(8)Cross-country regressions yield inconclusive results on the impact of labor regulations on growth while studies of country adjustments to economic shocks, such as balance of payments problems, find no difference in the responses of countries by the strength of labor institutions.(9)Labor institution can be critical when countries experience great change, as in China's growth spurt and Argentina's preservation of social stability and democracy after its 2001 2002 economic collapse. Cooperative labor relations tend to produce better economic outcomes.(10)The informal sector increased its share of the work force in the developing world in the past two decades. The persistence of large informal sectors throughout the developing world, including countries with high rates of growth, puts a premium on increasing our knowledge of how informal sector labor markets work and finding institutions and policies to deliver social benefits to workers in that sector.

Keywords: informal labor market; labor regulations; minimum wage; productivity; distribution of income (search for similar items in EconPapers)
JEL-codes: J01 J08 J30 J50 J51 J58 J80 O15 O17 (search for similar items in EconPapers)
Date: 2010
ISBN: 978-0-444-52944-2
References: View references in EconPapers View complete reference list from CitEc
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DOI: 10.1016/B978-0-444-52944-2.00008-2

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