Impact of Labor Market Regulation on Employment in Low Income Countries (LICs)

World Bank

Background

Controversy over the design of labor market policy often centers on achieving the delicate balance between preventing worker exploitation by guaranteeing basic rights, and avoiding loss of productivity or employment through excessive regulation.

Collectively, the empirical literature documenting the impact of labor market regulation on employment is extensive and long-standing. However, much of this evidence focuses on developed or middle-income countries, resulting in a comparative dearth of literature that analyzes the impact of such policies in low-income countries (LICs).

Methods

RAND researchers systematically reviewed available research on the impact of labor market regulation on employment in LICs. The team identified and included four studies from LICs, 11 studies from recent LICs, and two cross-country studies, based on the relevance of the study method and context, as well as study quality. Given the small number of studies identified from LICs, the team also drew lessons from the experience of countries that were LICs until recently.

To evaluate the evidence, the team used a framework synthesis and also conducted a meta-regression analysis (MRA) of the few comparable minimum wage studies in the formal sector.

Conclusions

The evidence for LICs (and recent LICs) points to there being a negative effect of regulations on formal employment, and a compensating positive effect on informal employment. The effect on overall employment rates, and on unemployment, is ambiguous. The effect of labor regulations by gender is also ambiguous.

Findings

Research Team

Shanthi Nataraj, co-principal investigator
Krishna Kumar