Labor markets and institutions

Institutions have important consequences for the performance of households, companies, governments, and entire markets—they determine the welfare of nations. Contributions to this subject area explore the underlying mechanisms and the politico-economic determinants of such structures. Many provide background analyses that offer evidence on how new institutions and policies would affect labor markets.

  • The shadow economy in industrial countries Updated

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

    Dominik H. Enste, October 2024
    The shadow (underground) economy has a major impact on society and economy 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 fewer 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 fostering institutional change and boosting the overall production of goods and services in an economy. The shadow economy has implications on the political order and institutional change.
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  • Entrepreneurs and their impact on jobs and economic growth Updated

    Productive entrepreneurs can invigorate the economy by creating jobs and new technologies, and increasing productivity

    Alexander S. Kritikos, October 2024

    Entrepreneurs, creators of new firms, are a rare species. Even in innovation-driven economies, only 1–2% of the work force starts a business in any given year. Yet entrepreneurs, particularly innovative entrepreneurs, are vital to the competitiveness of the economy and may establish new jobs. The gains of entrepreneurship are only realized, however, if the business environment is receptive to innovation. In addition, policymakers need to prepare for the potential job losses that can occur in the medium term through “creative destruction” as entrepreneurs strive for increased productivity.

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  • Estimating the return to schooling using the Mincer equation Updated

    The Mincer equation gives comparable estimates of the average monetary Returns of one additional year of education

    Harry Anthony Patrinos, August 2024
    The Mincer equation—arguably the most widely used in empirical work—can be used to explain a host of economic, and even non-economic, phenomena. One such application involves explaining (and estimating) employment earnings as a function of schooling and labor market experience. The Mincer equation provides estimates of the average monetary returns of one additional year of education. This information is important for policymakers who must decide on education spending, prioritization of schooling levels, and education financing programs such as student loans.
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  • Does increasing the minimum wage reduce poverty in developing countries? Updated

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

    T. H. Gindling, August 2024
    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.
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  • Unemployment benefits and unemployment Updated

    The challenge of unemployment benefits is to protect workers while minimizing undesirable side effects

    All developed economies have unemployment benefit programs to protect workers against major income losses during spells of unemployment. By enabling unemployed workers to meet basic consumption needs, the programs protect workers from having to sell their assets or accept jobs below their qualifications. The programs also help stabilize the economy during recessions. If benefits are too generous, however, the programs can lengthen unemployment and raise the unemployment rate. The policy challenge is to protect workers while minimizing undesirable side effects.
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  • The effects of public sector employment on the economy Updated

    The size and wage level of the public sector affect overall employment volatility and the economy

    Public sector jobs are established by governments to directly provide goods and services. Governments may also choose to regulate the size of the public sector in order to stabilize targeted national employment levels. However, economic research suggests that these effects are uncertain and critically depend on how public wages are determined. Rigid public sector wages lead to perverse effects on private employment, while flexible public wages lead to a stabilizing effect. Public employment also has important productivity and redistributive effects.
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  • Public or private job placement services — Are private ones more effective? Updated

    Outsourcing to the private sector can only be effective if the service quality can be contracted on

    Gesine Stephan, May 2024
    Expenditures on job placement and related services make up a substantial share of many countries’ gross domestic products. Contracting out to private providers is often proposed as a cost-efficient alternative to the state provision of placement services. However, the responsible state agency has to be able and willing to design and monitor sufficiently complete contracts to ensure that the private contractors deliver the desired service quality. None of the empirical evidence indicates that contracting-out is necessarily more effective or more cost-efficient than public employment services.
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  • Entrepreneurship for the poor in developing countries Updated

    Well-designed entrepreneurship programs show promise for improving earnings and livelihoods of poor workers

    Yoonyoung Cho, May 2024
    Can entrepreneurship programs be successful labor market policies for the poor? A large share of workers in developing countries are self-employed (mostly own-account workers without paid employees, often interchangeably used as micro entrepreneurs). Their share among all workers has not changed much over the past two decades in the developing world. Entrepreneurship programs provide access to finance (or assets) and advisory and networking services as well as business training with the aim of boosting workers’ earnings and reducing poverty. Programs vary in design, which can affect their impact on outcomes. Recent studies have identified some promising approaches that are yielding positive results, such as combining training and financial support.
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  • The labor market in Brazil, 2001–2022 Updated

    Brazil’s long-lasting recession has hurt the poor and has reversed inequality trends

    In the first decade of the 21st century, the Brazilian economy experienced an important expansion followed by a significant decline in inequality. The minimum wage increased rapidly, reducing inequality with no negative effects on employment or formality. This resulted from economic growth and greater supply of skilled labor. However, from 2014-2021, real wages were stagnant, and unemployment rates surged. Inequality rose again, although only marginally. Some positive signs emerged in 2022, although it is still too early to know whether they mark a return to past trends or a recovery from the pandemic.
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  • Compensating displaced workers Updated

    Job displacement is a serious earnings risk and the displaced are typically poorly insured

    Donald O. Parsons, February 2024
    Job displacement is a serious earnings risk to long-tenured workers, both through spells of unemployment and through reduced wages on subsequent jobs. Less developed countries often rely exclusively on government mandated employer-provided severance pay to protect displaced workers. Higher income countries usually rely on public unemployment insurance and mandated severance pay. Beyond these options, more administratively demanding plans have been proposed, including UI savings accounts and “actual loss” wage insurance, though real-world experience on either model is lacking.
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