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Labor Market Regulation & Standards

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Flexible labor legislation is essential for promoting the creation of new businesses, growth of established firms, and job creation. A task of the labor law and other labor market institutions is to balance the need to protect workers’ rights with the need to increase flexibility in the labor market, and to establish a more conducive environment for the creation of productive employment opportunities and the enhancement of social dialogue.

Regulation of the labor market ranges from how employers contract for the services of labor to the nature of the exchange – including the rights and responsibilities of the parties, the terms and conditions of work, and the resolution of disputes. Labor law protects workers from arbitrary or unfair treatment while addressing labor market failures to deliver efficient and equitable outcomes, such as insufficient information, potential discrimination against vulnerable groups and incomplete insurance of workers against the risks of losing their job. Perhaps more than any other series of exchanges involving capital, the functioning of the labor market has a direct impact on the welfare of workers and their families. For this reason, combined with the scope of cultural, institutional, legal, and political aspects involved, this area of regulation represents an important, visible, and often controversial aspect of public policy.

The relatively recent dramatic increase in international trade and use of global supply chains by multinational corporations has generated widespread concern over working conditions and regulatory capacity in developing countries. This site provides information on domestic public policy, international standards, and private sector initiatives related to regulating the labor market.

Related Employment Policy Primer Papers ¦ Related Employment Policy Primer Note ¦ Other Related Resources

Related Employment Policy Primer Papers

Key Characteristics of Employment Regulation in the Middle East and North Africa (785kb pdf)
Social Protection Discussion Paper No. 1006
by Diego Angel-Urdinola and Arvo Kuddo with support from Kimie Tanabe and May Wazzan
June 2010

This note is a tool to provide policymakers and international organizations with a regional diagnose of how labor regulation affects labor market outcomes in MENA and inform client governments about strategic approaches to employment creation through labor policy and reform.

Labor Laws in Eastern European and Central Asian Countries: Minimum Norms and Practices (1.1mb pdf)
Social Protection Discussion Paper No. 0920
by Arvo Kuddo
October 2009

This study focuses on internationally accepted labor standards and norms governing the individual employment contract, including ILO conventions and recommendations, EU labor standards (Directives) and the European Community Social Charter (Charter of Fundamental Social Rights of Workers). The study also analyzes relevant provisions in the main labor law of each Eastern European and Central Asian (ECA) country associated with commencing or terminating employment and during the period of employment. References are made to relevant practices from EU15 countries. Overall, despite similar origin of country labor laws, the current set of labor regulations in the region provides a wide array of legal solutions. The minimum content of the employment contract in most ECA countries coincides, and goes beyond, the requirements of the labor standards even in the countries that are non-signatories of relevant treaties. Some of these entitlements, however, have the potential to adversely affect labor market participation.

Non-performance of the Severance Pay Program in Slovenia (204kb pdf)
Social Protection Discussion Paper No. 0901
Milan Vodopivec, Lilijana Madzar and Primož Dolenc
January 2009

Combining information from the Firm Survey of Labor Costs with the information about claims filed with the Guarantee Fund by workers whose employers defaulted on their severance pay obligations, the paper analyzes the so-called non-performance problem of severance pay – the fact that coverage, and thus legal entitlement, does not guarantee the actual receipt of the benefit – as experienced in Slovenia in 2000. The findings are threefold: (i) one-third of total obligations incurred by firms failed to be honored and only a small portion of defaulted severance pay claims was reimbursed by the Guarantee Fund; (ii) while both men and women seem to be equally affected, workers older than 40 were disproportionally represented among those whose severance pay claims failed to be honored; and, (iii) among firms that incurred severance pay liabilities, larger and more productive firms were more likely to observe their fiduciary obligations and pay them out. These findings corroborate the weaknesses of severance pay as an income protection program, pointing to the large scale of the non-performance problem and the inequities created by it.

Can the Introduction of a Minimum Wage in FYR Macedonia Decrease the Gender Wage Gap? (143kb pdf)
Social Protection Discussion Paper No. 0837
Diego F. Angel-Urdinola
December 2008

This paper relies on simple framework to understand the gender wage gap in FYR Macedonia and then simulates how the gender wage gap would behave after the introduction of a minimum wage. First, it presents a new – albeit simple – decomposition of the wage gap into three factors: (i) a wage level factor, that measures the extent to which the gender gap is driven by differences in wage levels among low-skilled workers of opposite sex; (ii) an skills endowment factor, that quantifies the extent to which the gender wage gap is driven because the share of high-skilled workers differs by gender; and a (iii) returns to education factor, that measures the extent to which the gender gap exists is driven by differences by gender in returns to education. Second, the paper presents simple set of simulations that indicate that the introduction of a minimum wage in FYR Macedonia could contribute to decrease the gender wage gap by up to 23%. Nevertheless, in order to get a significant improvement in the wage gap a rather high minimum wage may required, which may contribute to reductions in employment.

Labor Regulations in Developing Countries: A Review of the Evidence and Directions for Future Research (328kb pdf)
Social Protection Discussion Paper No. 0833
Tito Boeri, Brooke Helppie and Mario Macis
October 2008

The authors provide a critical review of the empirical evidence on the effects of labor market regulations in developing countries, and they highlight the main knowledge gaps and the directions for future research. The analysis focuses mainly on minimum wages, unemployment insurance, employer-provided benefits, and employment protection legislation. The authors pay equal attention to the efficiency and distributional effects of regulations. Even though the focus of the analysis is on the effects of labor regulations in developing countries, the authors refer to the evidence from developed countries whenever it proves relevant, and when no evidence from developing countries is available. One of the main themes of this critical survey is that the specific context of developing countries is often radically different than that of developed economies, and that neglecting these specificities in the theoretical models can lead to incorrect predictions and misguided interpretations of the empirical findings.

The Incentives to Invest in Job Training: Do Strict Labor Codes Influence this Decision? (290kb pdf)
Social Protection Discussion Paper No. 0832
Rita Almeida and Reyes Aterido
October 2008

This paper studies the link between labor market regulations and the incentives of firms to invest in the human capital of their employees. The authors explore a firm level data set across several developing countries and compare the supply of formal training programs for firms exposed to different degrees of de facto labor regulations. The findings show that a more flexible labor code tends to be associated with a smaller investment in job training. However, this effect is small and heterogeneous. Reforms that simultaneously accelerate the diffusion of temporary contracts and increase the protection of permanent workers tend to generate negative effects on the firm’s investment in human capital.

Mandated Benefits, Employment, and Inequality in a Dual Economy (590kb pdf)
Social Protection Discussion Paper No. 0823
Rita Almeida and Pedro Carneiro
August 2008

The authors study the effect of enforcement of labor regulation in Brazil, an economy with a large informal sector and strict labor law. Enforcement affects mainly the degree of compliance with mandated benefits (severance pay, health and safety) in the formal sector; and the registration of informal workers. The authors find that stricter enforcement leads to higher unemployment but lower income inequality. The authors also show that, at the top of the formal wage distribution, workers bear the cost of mandated benefits by receiving lower wages. This is not true at the bottom, because of downward wage rigidity. As a result, formal sector jobs at the bottom of the wage distribution become more attractive, inducing the low skilled self-employed to search for formal jobs.

Enforcement of Labor Regulation and Firm Size (353kb pdf)
Social Protection Discussion Paper No. 0814
Rita Almeida and Pedro Carneiro
May 2008

This paper investigates how enforcement of labor regulation affects firm size and other firm characteristics in Brazil. The authors explore firm level data on employment, capital, and output, city level data for economic city characteristics and new administrative data measuring enforcement of regulation at the city level. Since enforcement may be endogenous, the authors instrument this variable with the distance between the city where the firm is located and surrounding enforcement offices, while controlling for a very rich set of city characteristics (such as past levels of informality in the city). The authors present suggestive evidence of the validity of this instrument. The authors find that stricter enforcement of labor regulation constrains firm size.

Are All Labor Regulations Equal? Assessing the Effects of Job Security, Labor Dispute and Contract Labor Laws in India (310kb pdf)
Social Protection Discussion Paper No. 0713
Ahmad Ahsan and Carmen Pagés
June 2007

This paper studies the economic effects of legal amendments on different types of labor laws. The authors examine the effects of amendments to labor dispute laws, and amendments to job security legislation. The authors also identify the effects of legal amendments related to the most contentious regulation of all: Chapter Vb of the Industrial Disputes Act, which stipulates that firms with 100 or more employees cannot retrench workers without government authorization. The authors find that laws that increase job security or increase the cost of labor disputes substantially reduce registered sector employment and output but do not increase the labor share. Labor-intensive industries, such as textiles, are the hardest hit by laws that increase job security while capital-intensive industries are most affected by higher labor dispute resolution costs. The authors also find that the widespread and increasing use of contract labor may have brought some output and employment gains but did not make up for the adverse effects of job security and dispute resolution laws.

Labor Market Regulation: International Experience in Promoting Employment and Social Protection (207kb pdf)
Social Protection Discussion Paper No. 0128
Gordon Betcherman, Amy Luinstra, and Makoto Ogawa
December 2001

Reviews international experience and empirical evidence on topics such as hiring and contracting, dismissals, wage determination, enforcement, and dispute resolution.

Costs and Benefits of Collective Bargaining: A Survey (139kb pdf)
Social Protection Discussion Paper No. 0120
Toke Aidt and Zafiris Tzannatos
September 2001

This paper provides a systematic review of the relevant literature with a specific focus on the role that collective bargaining plays in shaping macroeconomic performance. We focus on comparative studies of labor market institutions in the OECD area that try to disentangle the impact of different institutional approaches to collective bargaining from other determinants of macroeconomic performance.

Related Employment Policy Primer Notes

Addressing the Employment Effects of the Financial Crisis: Role of Wage Subsidies and Reduced Work Schedules (120kb pdf)
Employment Policy Primer Note No. 14, September 2009

Employment Protection Regulations and Rules for Hiring and Terminations (42kb pdf)
Also available in French (151kb pdf) and Spanish (157kb pdf)
Employment Policy Primer Note No. 1, December 2002

Other Related Resources

Institutions and Labor Market Outcomes in Sub-Saharan Africa (544kb pdf)
World Bank Policy Research Working Paper No. 4721
Louise Fox and Ana Maria Oviedo
September 2008

The authors use firm-level survey data from the manufacturing sector in 20 Sub-Saharan African countries to explore the links between labor market regulations and net job creation. A first look at firm characteristics, perceptions, and the dynamics of employment at the firm level suggests that labor regulations are not the main "binding constraint" on job creation. Other issues seem more important at this level of development. The analysis estimates the determinants of net job creation incorporating the legal origin of the country as a proxy for regulation. The findings show that, after controlling for other firm-level characteristics, legal origin is uncorrelated with net job creation in the short run.

Job Creation, Core Labor Standards & Poverty Reduction in Africa
The objective of this German Trust Fund Project is to provide the analytical foundation upon which to base future pro-poor labor market policies and interventions in low-income countries.

Core Labor Standards Toolkit
General information on the ILO's four fundamental principles and rights at work. Resources for staff completing CAS diagnostic of core labor standards.

Unions and Collective Bargaining: Economic Effects in a Global Environment
A new comprehensive reference book on the macro- and micro-economics of trade unions and collective bargaining. Available for purchase.