Labor market regulation

  • Articles

Short-time work compensations and employment

Temporary government schemes can have a positive economic effect

10.15185/izawol.11 11 Cahuc, P

by Pierre Cahuc

Government schemes that compensate workers for the loss of income while they are on short hours (known as short-time work compensation schemes) make it easier for employers to temporarily reduce hours worked so that labor is better matched to output requirements. Because the employers do not lay off these staff, the schemes help to maintain permanent employment levels during recessions. However, they can create inefficiency in the labor market, and might limit labor market access for freelancers and those looking to work part-time.

Employment protection

Policymakers need to find the right balance between protecting workers and promoting efficient resource allocation and productivity growth

10.15185/izawol.12 12 Scarpetta, S

by Stefano Scarpetta

Laws on hiring and firing are intended to protect workers from unfair behavior by employers, to counter imperfections in financial markets that limit workers’ ability to insure themselves against job loss, and to preserve firm-specific human capital. But by imposing costs on firms’ adaptation to changes in demand and technology, employment protection legislation may reduce not only job destruction but also job creation, hindering the efficient allocation of labor and productivity growth.

The internet as a labor market matchmaker

How effective are online methods of worker recruitment and job search?

10.15185/izawol.18 18 Kuhn, P

by Peter J. Kuhn

Since the internet’s earliest days, firms and workers have used various online methods to advertise and find jobs. Until recently there has been little evidence that any internet-based tool has had a measurable effect on job search or recruitment outcomes. However, recent studies, and the growing use of social networking as a business tool, suggest workers and firms are at last developing ways to use the internet as an effective matchmaking tool. In addition, job boards are also emerging as important for the statistical study of labor markets, yielding useful data for firms, workers, and policymakers.

Do labor costs affect companies’ demand for labor?

The effect of overtime, payroll taxes, and labor policies and costs on companies’ product output and countries’ GDP

10.15185/izawol.3 3 Hamermesh, D

by Daniel S. Hamermesh

Higher labor costs (higher wage rates and employee benefits) make workers better off, but they can reduce companies’ profits, the number of jobs, and the hours each person works. Overtime pay, hiring subsidies, the minimum wage, and payroll taxes are just a few of the policies that affect labor costs. Policies that increase labor costs can substantially affect both employment and hours, in individual companies as well as the overall economy.

Does increasing the minimum wage reduce poverty in developing countries?

Whether raising minimum wages reduces—or increases—poverty depends on the characteristics of the labor market

10.15185/izawol.30 30 Gindling, T

by T. H. Gindling

Raising the minimum wage in developing countries could increase or decrease poverty, depending on labor market characteristics. Minimum wages target formal sector workers—a minority in most developing countries—many of whom do not live in poor households. Whether raising minimum wages reduces poverty depends not only on whether formal sector workers lose jobs as a result, but also on whether low-wage workers live in poor households, how widely minimum wages are enforced, how minimum wages affect informal workers, and whether social safety nets are in place.

How labor market institutions affect job creation and productivity growth

Key labor market institutions, and the policies that shape them, affect the restructuring that leads to economic growth

10.15185/izawol.38 38 Henrekson, M

by Magnus Henrekson

Economic growth requires factor reallocation across firms and continuous replacement of technologies. Labor market institutions influence economic dynamism by their impact on the supply of a key factor, skilled workers to new and expanding firms, and the shedding of workers from declining and failing firms. Growth-favoring labor market institutions include portable pension plans and other job tenure rights, health insurance untied to the current employer, individualized wage-setting, and public income insurance systems that encourage mobility and risk-taking.

Fixed-term contracts

Are fixed-term contracts a stepping stone to a permanent job or a dead end?

10.15185/izawol.45 45 Eichhorst, W

by Werner Eichhorst

Fixed-term contracts have become a major form of employment in Europe. Available evidence about whether temporary jobs are a stepping stone to a permanent employment or are a dead end is mixed. The usefulness of these jobs depends on the institutional and economic environment. Fixed-term contracts can be a pathway from unemployment to employment, but their potential as a stepping stone to permanent employment is undercut if there is a strong degree of segmentation in labor markets. If that is the case, the labor flexibility motive of employers ends up dominating the screening function in offering a fixed-term contract.

Introducing a statutory minimum wage in middle and low income countries

Successful implementation of a statutory minimum wage depends on context, capacity, and institutional design

10.15185/izawol.52 52 Margolis, D

by David N. Margolis

Motivations for introducing a statutory minimum wage in developing countries include reducing poverty, advancing social justice, and accelerating growth. Attaining these goals depends on the national context and policy choices. Institutional capacity tends to be limited, so institutional arrangements must be adapted. Nevertheless, a statutory minimum wage could help developing countries advance their development objectives, even where enforcement capacity is weak and informality is pervasive.

Designing labor market regulations in developing countries

Labor market regulation should aim to improve the functioning of the labor market while protecting workers

10.15185/izawol.57 57 Betcherman, G

by Gordon Betcherman

Governments regulate employment to protect workers and to improve labor market efficiency. However, employment regulations can be controversial, often complicated by opposing ideological views. Thus, it is important for policymakers in developing countries to base decisions on empirical evidence of the impacts of these regulations. The majority of the evidence suggests that most countries have set their regulations in the appropriate range. But it can be costly when countries either overregulate or underregulate their labor market.

Employment effects of minimum wages

When minimum wages are introduced or raised, are there fewer jobs? Global evidence says yes

10.15185/izawol.6 6 Neumark, D

by David Neumark

The potential benefits of higher minimum wages come from the higher wages for affected workers, some of whom are in poor or low-income families. The potential downside is that a higher minimum wage may discourage employers from using the low-wage, low-skill workers that minimum wages are intended to help. If minimum wages reduce employment of low-skill workers, then minimum wages are not a “free lunch” with which to help poor and low-income families, but instead pose a tradeoff of benefits for some versus costs for others. Research findings are not unanimous, but evidence from many countries suggests that minimum wages reduce the jobs available to low-skill workers.

Self-employment and poverty in developing countries

The right policies can help the self-employed to boost their earnings above the poverty level and earn more for the work they do

10.15185/izawol.60 60 Fields, G

by Gary S. Fields

A key way for the world’s poor—nearly half of humanity—to escape poverty is to earn more for their labor. Most of the world’s poor people are self-employed, but because there are few opportunities in most developing countries for them to earn enough to escape poverty, they are working hard but working poor. Two key policy planks in the fight against poverty should be: raising the returns to self-employment and creating more opportunities to move from self-employment into higher paying wage employment.

The consequences of trade union power erosion

Declining union power would not be an overwhelming cause for concern if not for rising wage inequality and the loss of worker voice

10.15185/izawol.68 68 Addison, J

by John T. Addison

The micro- and macroeconomic effects of the declining power of trade unions have been hotly debated by economists and policymakers. Nevertheless, the empirical evidence shows that the impact of the decline on economic aggregates and firm performance is not an overwhelming cause for concern. However, the association of declining union power with rising earnings inequality and a loss of direct communication between workers and firms is potentially more worrisome. This in turn raises the questions of how supportive contemporary unionism is of wage solidarity, and whether the depiction of the nonunion workplace as an authoritarian “bleak house” is more caricature than reality.

Gender quotas on boards of directors

Little evidence that gender quotas for women on boards of directors improve firm performance

10.15185/izawol.7 7 Smith, N

by Nina Smith

Arguments for increasing gender diversity on boards of directors range from ensuring equal opportunity to improving firm performance, but the empirical results are mixed and often negative. Current research does not justify gender quotas on grounds of economic efficiency. Furthermore, in most countries the number of women qualified to join boards of directors is limited, and it is not clear from the evidence that quotas lead to a larger pool of qualified female candidates in the medium and long term.

Environmental regulations and labor markets

Balancing the benefits of environmental regulations for everyone and the costs to workers and firms

10.15185/izawol.22 22 Deschenes, O

by Olivier Deschenes

Environmental regulations such as air quality standards can lead to notable improvements in ambient air quality and to related health benefits. 
But they impose additional production costs on firms and may reduce productivity, earnings, and employment, especially in sectors exposed to trade and intensive in labor. The limited empirical evidence suggests that the benefits are likely to outweigh 
the costs.

Does minimum age of employment regulation reduce child labor?

The global fight against child labor might be better served by focusing less on existing laws and more on implementation and enforcement

10.15185/izawol.73 73 Edmonds, E

by Eric V. Edmonds

Regulation of the minimum age of employment is the dominant tool used to combat child labor globally. If enforced, these regulations can change the types of work in which children participate, but minimum age regulations are not a useful tool to promote education. Despite their nearly universal adoption, recent research for 59 developing countries finds little evidence that these regulations influence child time allocation in a meaningful way. Going forward, coordinating compulsory schooling laws and minimum age of employment regulations may help maximize the joint influence of these regulations on child time allocation, but these regulations should not be the focus of the global fight against child labor.

Structural or cyclic? Labor markets in recessions

How should policy respond to higher unemployment?

10.15185/izawol.4 4 Lazear, E

by Edward P. Lazear

Persistent unemployment after recessions and the policies required to bring it down are the subject of an ongoing debate. One view suggests there are fundamental changes in the labor market that imply a long-term higher rate of unemployment, requiring the implementation of structural policy reforms. The alternative view is that the slow recovery of the economy is due to cyclic reasons coming from lack of demand which prevents unemployment from falling quickly. Knowing whether higher unemployment is caused by structural change in the labor market or whether the problem is cyclic determines how effective policy can be in addressing the problem.

Alternative dispute resolution

How different procedures might succeed in settling disputes

10.15185/izawol.71 71 Dickinson, D

by David L. Dickinson

Alternative dispute resolution procedures such as arbitration and mediation are the most common methods for resolving wage, contract, and grievance disputes, but they lead to varying levels of success and acceptability of the outcome depending on their design. Some innovative procedures, not yet implemented in the real world, are predicted to improve on existing procedures in some ways. But controlled tests of several procedures show that the simple addition of a nonbinding stage prior to binding dispute resolution can produce the best results in terms of cost (monetary and “uncertainty” costs) and acceptability.

International trade regulation and job creation

Trade policy is not an employment policy and should not be expected to have major effects on overall employment

10.15185/izawol.75 75 Winters, L

by L. Alan Winters

Trade regulation can create jobs in the sectors it protects or promotes, but almost always at the expense of destroying a roughly equivalent number elsewhere in the economy. At a product-specific or micro level and in the short term, controlling trade could reduce the offending imports and save jobs, but for the economy as a whole and in the long term, this position has neither theoretical support nor empirical evidence in its favor. Given that protection may have other—usually adverse—effects, understanding the difficulties in using it to manage employment is important for economic policy.

The effect of overtime regulations on employment

There is no evidence that being strict with overtime hours and pay boosts employment—it could even lower it

10.15185/izawol.89 89 Oaxaca, R

by Ronald L. Oaxaca

Regulation of standard workweek hours and overtime hours and pay can protect workers who might otherwise be required to work more than they would like to at the going rate. By discouraging the use of overtime, such regulation can increase the standard hourly wage of some workers and encourage work sharing that increases employment, with particular advantages for female workers. However, regulation of overtime raises employment costs, setting in motion economic forces that can limit, neutralize, or even reduce employment. And increasing the coverage of overtime pay regulations has little effect on the share of workers who work overtime or on weekly overtime hours per worker.

The shadow economy in industrial countries

Reducing the size of the shadow economy requires reducing its attractiveness while improving official institutions

10.15185/izawol.127 127 Enste, D

by Dominik H. Enste

The shadow (underground) economy plays a major role in many countries. People evade taxes and regulations by working in the shadow economy or by employing people illegally. On the one hand, this unregulated economic activity can result in reduced tax revenue and public goods and services, lower tax morale and less tax compliance, higher control costs, and lower economic growth rates. But on the other hand, the shadow economy can be a powerful force for advancing institutional change and can boost the overall production of goods and services in the economy. The shadow economy has implications that extend beyond the economy to the political order.

Employment and wage effects of extending collective bargaining agreements

Extending provisions of collective contracts to all workers in an industry or region may lead to employment losses

10.15185/izawol.136 136 Villanueva, E

by Ernesto Villanueva

In many countries, the minimum wages and working conditions set in collective bargaining contracts negotiated by a limited set of employers and unions are subsequently extended to all the employees in an industry. Those extensions ensure common working conditions within the industry, limit wage inequality, and reduce gender wage gaps. However, several studies suggest that those benefits come at the cost of reduced employment levels, especially during recessions. The income losses of workers who are displaced because of a collective contract extension can offset the wage gains among workers who keep their jobs.

A flexicurity labor market during recession

Long-term unemployment did not rise under the flexicurity model during the great recession, despite the large drop in GDP

10.15185/izawol.173 173 Andersen, T

by Torben M. Andersen

Before the great recession of 2008–2009, the “flexicurity” model (with flexibility for firms to adjust their labor force along with income security for workers through the social safety net) attracted attention for its ability to deliver low unemployment. But how did it fare during the recession, especially in Denmark, which has been highlighted as having a well-functioning flexicurity model? Flexible hiring and firing rules are expected to lead to large adjustments in employment in a recession. Did the high rate of job turnover continue or did long-term unemployment rise? And did the social safety net become overburdened?

Should severance pay be consistent for all workers?

Single, open-ended contracts with severance pay smoothly rising with seniority can decrease both unemployment and job losses

10.15185/izawol.174 174 García Pérez, J

by J. Ignacio García Pérez

The trend towards labor market flexibility in Europe has typically involved introducing legislation that makes it easier for firms to issue temporary contracts with low firing costs, while not changing the level of protection that is in place for permanent jobs. This has created a strong “dualism” in some European labor markets, which might affect turnover, wage setting, and human capital accumulation. In view of this, some economists propose replacing the existing system of temporary and permanent contracts by a single open-ended contract for new hires, with severance pay smoothly increasing with tenure on the job.

Active labor market policies and crime

Unemployment increases crime among youth, while active labor market policies can mitigate the problem

10.15185/izawol.185 185 Tranaes, T

by Torben Tranaes

Active labor market programs continue to receive high priority in wealthy countries despite the fact that the benefits appear small relative to the costs. This apparent discrepancy suggests that the programs may have a broader purpose than simply increasing employment—for instance, preventing anti-social behavior such as crime. Indeed, recent evidence shows that participation in active labor market programs reduces crime among unemployed young men. The existence of such effects could explain why it is the income-redistributing countries with greater income equality that spend the most on active labor market programs.

How are minimum wages set?

Countries set minimum wages in different ways, and some countries set different wages for different groups of workers

10.15185/izawol.211 211 Dickens, R

by Richard Dickens

The minimum wage has never been as high on the political agenda as it is today, with politicians in Germany, the UK, the US, and other OECD countries calling for substantial increases in the rate. One reason for the rising interest is the growing consensus among economists and policymakers that minimum wages, set at the right level, may help low-paid workers without harming employment prospects. But how should countries set their minimum wage rate? The processes that countries use to set their minimum wage rate and structure differ greatly, as do the methods for adjusting it. The different approaches have merits and shortcomings.

Employment effects of longer working hours

Extending work hours may reduce employment in the short term but may increase it in the long term if hourly pay remains constant

10.15185/izawol.216 216 Schank, T

by Thorsten Schank

Standard hours, a major component of total work hours, vary considerably across Europe. Many countries lowered their standard work hours during the 1980s and 1990s, attempting to boost employment by splitting up a fixed number of worker-hours among more workers. Germany has seen a partial reversal of the trend as several companies increased their standard hours to reduce their labor costs in the early 2000s. The employment effect of increased standard hours depends on the time horizon examined, how wages respond, whether employees collected overtime pay before the change, and the productivity of hours worked, among other factors.

Do minimum wages stimulate productivity and growth?

Minimum wage increases fail to stimulate growth and can have a negative impact on vulnerable workers during recessions

10.15185/izawol.221 221 Sabia, J

by Joseph J. Sabia

Proponents of minimum wage increases have argued that such hikes can serve as an engine of economic growth and assist low-skilled individuals during downturns in the business cycle. However, a review of the literature provides little empirical support for these claims. Minimum wage increases redistribute gross domestic product away from lower-skilled industries and toward higher-skilled industries and are largely ineffective in assisting the poor during both peaks and troughs in the business cycle. Minimum wage-induced reductions in employment are found to be larger during economic recessions.

The effects of minimum wages on youth employment and income

Minimum wages reduce entry-level jobs, training, and lifetime income

10.15185/izawol.243 243 Kalenkoski, C

by Charlene Marie Kalenkoski

Policymakers often propose a minimum wage as a means of raising incomes and lifting workers out of poverty. However, improvements in some young workers’ incomes as a result of a minimum wage come at a cost to others. Minimum wages reduce employment opportunities for youths and create unemployment. Workers miss out on 
on-the-job training opportunities that would have been paid for by reduced wages upfront but would have resulted in higher wages later. Youths who cannot find jobs must be supported by their families or by the social welfare system. Delayed entry into the labor market reduces the lifetime income stream of young unskilled workers.

Institutions and the support for market reforms

A combination of individual self-interest and good institutions determines the level of public support for market reforms

10.15185/izawol.258 258 Denisova, I

by Irina Denisova

Economic self-interest and social considerations are the key determinants of public support for market reforms in transition countries. However, political strategies that rely mainly on public support for pushing through economic reforms have limited relevance if the prevailing institutional environment is weak or corrupt. Poor governance and under-developed democracy significantly reduce the level of support. A good institutional framework allows the potential gains from reforms to be realized in a beneficial way, while corruption and poor governance deny the prospect of gains for individuals and for society.

Do economic reforms hurt or help the informal labor market?

The evidence is mixed on whether and how economic reforms benefit informal labor

10.15185/izawol.263 263 Kar, S

by Saibal Kar

The evidence is mixed on whether informal labor in developing countries benefits from trade and labor market reforms. Reforms lead to higher wages and improved employment conditions in the informal sector in some cases, and to the opposite effect in others. At a cross-country level, lifting trade protection boosts informal-sector employment. The direction and size of the impacts on informal-sector employment and wages are determined by capital mobility and the interactions between trade and labor market reforms and public policies, such as monitoring the formal sector. To guarantee best practice policymakers need to take these interdependencies into account.

Impacts of regulation on eco-innovation and job creation

Do regulation-induced environmental innovations affect employment?

10.15185/izawol.265 265 Horbach, J

by Jens Horbach

New environmental technologies (environmental/eco-innovations) are often regarded as potential job creators—in addition to their positive effects on the environment. Environmental regulation may induce innovations that are accompanied by positive growth and employment effects. Recent empirical analyses show that the introduction of cleaner process innovations, rather than product-based ones, may also lead to higher employment. The rationale is that cleaner technologies lead to cost savings, which help to improve the competitiveness of firms, thereby inducing positive effects on demand.

Do product market reforms stimulate employment, investment, and innovation?

Reducing entry barriers and increasing competition can be beneficial for the economy, under certain conditions

10.15185/izawol.266 266 Schiantarelli, F

by Fabio Schiantarelli

Most OECD countries have recently introduced product market reforms with the objective of lowering barriers to entry and increasing competition in many sectors, such as telecommunications, utilities, and transport. The timing and extent of regulatory reform have varied significantly, starting in the US in the early 1980s and in the mid-1990s in many European countries. Will these developments improve economic performance in terms of creating jobs, fostering investment, and encouraging innovations—all of which are important factors for policymakers?

Employment and rebellion in conflicted and fragile states

Jobs programs may not reduce rebellion

10.15185/izawol.271 271 Gilligan, M

by Michael J. Gilligan

In addition to the heart-breaking human costs, violent civil rebellion is a cause of chronic economic under-development. Employment programs with former combatants and at-risk youth have improved their livelihoods, but not their support for non-violence and respect for law. Rebel groups provide security and social benefits that formal employment does not offer, possibly making switching out of rebellion into formal employment unappealing. However, a jobs program that addressed the psycho-social motivations to join rebel groups resulted in significant reductions in crime and violence. This is an important step forward in our understanding of how to lure people away from violent rebellion.

Low-wage employment

Are low-paid jobs stepping stones to higher paid jobs, do they become persistent, or do they lead to recurring unemployment?

10.15185/izawol.276 276 Schnabel, C

by Claus Schnabel

Low-wage employment has become an important feature of the labor market and a controversial topic for debate in many countries. How to interpret the prominence of low-paid jobs and whether they are beneficial to workers or society is currently an open question. The answer depends on whether low-paid jobs are largely transitory and serve as stepping stones to higher-paid employment, whether they become persistent, or whether they result in repeated unemployment. The empirical evidence is mixed, pointing to both stepping-stone effects and “scarring” effects (i.e. long-lasting detrimental effects) of low-paid work.

Do youths graduating in a recession incur permanent losses?

Penalties may last ten years or more, especially for high-educated youth and in rigid labor markets

10.15185/izawol.281 281 Cockx, B

by Bart Cockx

The Great Recession that began in 2008–2009 dramatically increased youth unemployment. But did it have long-lasting, adverse effects on the careers of youths? Are cohorts that graduate during a recession doomed to fall permanently behind those that graduate at other times? Are the impacts different for low- and high-educated individuals? If recessions impose penalties that persist over time, then more government outlays are justified to stabilize economic activity. Scientific evidence from a variety of countries shows that rigid labor markets can reinforce the persistence of these setbacks, which has important policy implications.

Privatizing sick pay: Does it work?

Employer provision of sickness/disability benefits reduces take-up but may also have unintended effects

10.15185/izawol.324 324 Koning, P

by Pierre Koning

Public schemes for sickness benefits and disability insurance are often criticized for the lack of incentive they provide for preventive and reintegration activities by employers. To stimulate the interest of employers in engaging with these schemes, several modes of privatization could be considered, including the provision of sickness benefits by employers, “experience rating” of disability insurance costs, employer self-insurance, or insurance by private insurance providers. These types of employer incentives seem to lower sickness rates, but they also come at the risk of increased under-reporting and less employment opportunities for workers with disabilities or bad health conditions. Policymakers should be aware of this trade-off.

The economics of employment tribunals

Understanding how employment tribunals make decisions can guide reforms of employment dispute settlement

10.15185/izawol.331 331 Latreille, P

by Paul Latreille

Employment tribunals or labor courts are responsible for enforcing employment protection legislation and adjudicating rights-based disputes between employers and employees. Claim numbers are high and, in Great Britain, have been rising, affecting both administrative costs and economic competitiveness. Reforms have attempted to reduce the number of claims and to improve the speed and efficiency of dealing with them. Balancing employee protection against cost-effectiveness remains difficult, however. Gathering evidence on tribunals, including on claim instigation, resolution, decision making, and post-tribunal outcomes can inform policy efforts.