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Knowing which workers are displaced in
restructuring episodes helps governments devise the right equity- and
efficiency-enhancing policies
Continuous enterprise restructuring is needed for
the transition and emerging market economies to become and remain
competitive. However, the beneficial effects of restructuring in the medium
run are accompanied by large worker displacement. The costs of displacement
can be large and long-lasting for some workers and for the economy. To
devise the right policy interventions, governments need to fully understand
which workers are displaced and what costs they bear.
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Reforming registration might not be enough to
persuade informal firms and workers to formalize—enforcement and other
reforms may also be needed
Informal firms make up a major share of the
economy in most developing countries. Expanding formalization could increase
government tax revenues, boost firm profits and national income, and
increase employee well-being by improving access to social security and
health and workers’ benefits. Reforms to encourage firms to register include
simplifying procedures, reducing the cost and time to register, and making
more information available on registration procedures. Reforms might not
result in higher registration and formalization. In some cases, better
enforcement and wider development policies might be needed as well.
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Although market failures mean employment
protection is necessary, excessive protection can be counterproductive
Employment protection legislation aims to shield
employees against unfair dismissal and earning reductions at the time of job
loss. Theory suggests that employment protection stabilizes employment over
cyclical upturns and downturns without necessarily increasing general
unemployment. However, recent evidence from transition and emerging
economies shows that employment protection legislation tends to raise
unemployment among disadvantaged groups, particularly youth, and may
increase informal work. Employment protection policies thus require careful
consideration of their unintended effects.
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Despite their theoretical benefits, flat taxes
have been tried only in a few formerly socialist countries
The potential economic outcomes resulting from a
flat rate of income tax have been the subject of an ongoing academic and
political debate. Many observers have suggested that the introduction of a
flat tax would be beneficial for a country’s economy, having a positive
influence on the labor market and the gross domestic product by enhancing
incentives to work, save, invest, and take risks. A flat tax also
significantly simplifies income taxation which increases tax compliance and
reduces tax planning, avoidance, and evasion. However, despite flat taxes
being on the political agenda in many countries, in practice their
implementation has mostly been restricted to the transition economy
countries of Eastern Europe. There is no one single flat tax system in place
in these countries though; one rate does not fit all.
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Some entrepreneurs and would-be entrepreneurs face financial and bureaucratic barriers to starting a business
Because entrepreneurial activity can stimulate job creation and long-term economic growth, promoting entrepreneurship is an important goal. However, many financial, bureaucratic, and social barriers can short-circuit the process of actually starting a business, especially in transition economies that lack established institutional systems and markets. The main obstacles are underdeveloped financial markets, perceptions of administrative complexity, political and economic instability, and lack of trust in institutions. Gender disparities in the labor market are also reflected in less entrepreneurial activity among women than men.
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Getting the incentives right for firms and
workers should be the priority in the labor formalization agenda
A large share of the population in emerging
market economies has no pension coverage, exposing them to the economic
risks arising from socio-economic and individual shocks. This problem, which
arises from having large informal (unregulated) sectors, affects not only
poor workers, but as many as half the newly or nearly middle class in some
emerging market economies. With very little social protection coverage
today, these workers will also be vulnerable in the future unless tax,
labor, and social policies change to encourage formalization. While
formalization would require substantial resources in the short-term, it
seems financially sustainable.
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In transition economies, better property rights
protection and rule of law enforcement can boost job creation and growth
In the transition from central planning to a
market economy in the 1990s, governments focused on privatizing or closing
state enterprises, reforming labor markets, compensating laid-off workers,
and fostering job creation through new private firms. After privatization,
the focus shifted to creating a level playing field in the product market by
protecting property rights, enforcing the rule of law, and implementing
transparent start-up regulations. A fair, competitive environment with
transparent rules supports long-term economic growth and employment creation
through the reallocation of jobs in favor of new private firms.
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Does formal work pay? Synthetic measurements of
taxes and benefits can help identify incentives and disincentives to formal
work
Evidence from transition economies shows that
formal work may not pay, particularly for low-wage earners. Synthetic
measurements of work disincentives, such as the formalization tax rate or
the marginal effective tax rate, confirm a significant positive correlation
between these measurements and the probability of informal work. These
measures are especially informative for impacts at lower wage levels, where
informality is highest. Policymakers who want to increase formal work can
use these measurements to determine optimal labor taxation rates for
low-wage earners and reform benefit design.
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A combination of individual self-interest and
good institutions determines the level of public support for market
reforms
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.
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The evidence is mixed on whether and how
economic reforms benefit informal labor
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.
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