A New Dataset of Labour Market Reform/Rigidity Indexes for Up

to 145 Countries since 1960: LAMRIG

Nauro F Campos Jeffrey B NugentBrunel University, University of Southern CaliforniaCEPR, KOF and IZA

For presentation at the fRDB-IZA “Tracking Structural Reforms” Workshop,

Milan, Friday 13 March 2009

Focus of this paper

• Labour Market Reform

• We equate reform with flexibility (but not implying desirability)

• More LM reform means less LM rigidity

• Based exclusively on de jure (not de facto) considerations

• Emphasis on the legal framework (labour laws), not social norms etc.

Two Main Objectives

• Extend the Botero et al QJE 2004 index (originally for 85 countries in 1997) (a) to more countries and (b) more importantly to extend it backwards in time to 1960 where possible.

• Assess the adequacy and potential use of the resulting extended indexes in the database (LAMRIG) by: replicating the Botero analysis of thir determinants for (a) the enlarged cross-section data, (b) its extension to panel data and (c) extending the list of determinants of LMR to additional considerations like structural factors, other reforms and crises

Motivation (1)• If you are not a labour economist, why would

you care about LMR?– 1. Because from a political economy angle, LMR

is one of the most difficult reforms to accomplish– 2. Costs and benefits of LMR are

large/widespread and very controversialPowerful players involved (e.g., labour unions, the state, large employers)3. For examining the relative importance of different theoretical determinants as in Botero et al 2004, efficiency, politics and Legal Origins

Motivation (2)• 4. LMR Reforms occur with less external

interference (e.g. by IFIs and neighbours) than other reforms making for more natural (except perhaps EU)

• 5. While de jure reforms may not be enforced, resulting in big gap, in this case the gap between de facto and de jure should be smaller (Botero et al cite Bertola, Boeri and Cazes 2000) demonstrating that enforcement influenced by the same factors

• 6. Due to the difficulty of de jure LM reforms, perhaps more reversals can be found than with other reforms

What did we do?

• 1.We extend the Botero et al QJE 2004 index:– from 85 to up to 145 countries – from one year (1997) to 5-year averages between

1960/64 to 1995/99 2.Assess the validity and potential usefulness of the LAMRIG index by

– replicating Botero et al analysis of alternative theories of the determination of these indexes

– extending their results in terms of: (a) dynamics (from levels to changes), and (b) examining a more extensive set of potential LMR determinants

Outline1. Introduction and motivation 2. Construction of the LAMRIG Dataset of Labor

Market Rigidity Indexes (LMR) 3. Variations in LAMRIG’s LMR over time by region

and Country (China, India, Jordan, Zambia)4. Empirical Specification5. Assessing Botero’s model empirically:

– Replicating Botero et al cross-section estimates– Then extending to panel with over time and more

countries (and to changes instead of levels)– Evaluate additional LMR determinants

6. Conclusions and future research

Measuring LMR and Constructing LAMRIG

• (1) Blanchard and Wolfers: EP for OECD • (2) Heckman and Pages JS for LAC• (3) Botero, Djankov, La Porta, Lopez-de-

Silanes and Shleifer (2004) ELR for 1997• (1), (2) are similar and include

observations for late 1990s, we combine them with (3) using (3) as the base since it is consistent across countries.

• Then (3) is extended backwards based on the over time indexes of (1) , (2)

Further Steps: the LAMRIG index

• Horizontal Extension : Botero et al extended to more countries using Doing Business Surveys for 2003 and 2007 and then extending backwards on the basis of changes in labor laws (NATLEX, etc.).

• Vertical Extension: The extensions backwards in time for countries included in Botero et al, facilitated by making use of their detailed appendix of sub-indexes (37 columns) on their website

Sources of Information on Changes in Labor Laws

• National Employment Laws registered in NATLEX or LEXIDIN websites

• National level searches for both data and analyses of the labor laws over time

• Again these are made consistent with the Botero et al indexes by making use of the Sub-components

• A few isolated studies for single countries that have over time indexes already(India)

Patterns Across Country Groupings

• By Region• By Income Group

• General: For many countries there is little change in LMR over time. Reforms are difficult

• First by Region►:

Labor Market Rigidity Across Regions Since 1960

1

1.2

1.4

1.6

1.8

2

2.2

2.4

1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99

Latin America Asia Europe (US, Can, NZ, Aus) Sub-Saharan Africa Transition Middle East and North Africa

Comments

• Regions display quite different patterns– Europe and LAC Inverted-U over time– Transition: Secular decline– SSA and MENA: Very mild U-shape

• Hypothesis: Regional Patterns in LMR Reforms are Similar to these in Another Difficult Reforms: Agricultural Prices

Similar Patterns in Other Difficult Reforms(such as Preferential Agriculture, de facto)

[0 = neutral, subsidized when > 0, taxed when < 0]

Unlike the More Similar Patterns Across Regions in Not As Difficult Reforms

(such as Financial Liberalization, de jure)

Labor Market Rigidity Across Per Capita Income Groups Since 1960

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99

Low income Low-mid income High-mid income High income

BACK TO LMRs: Now Across Income Groups

Divergent Patterns Again Across Regions

• Inverted U in High Income• U-shaped in Low Income and Lower

Middle

Some Country Patterns(China, India, Jordan, Zambia)

• Botero et al – Contrasted New Zealand and Portugal, which despite similar

GDPPC had different Legal Origins and ELRs: NZ Low; Portugal High

– But at beginning of 1970s, Portugal’s ELR was not that high

• India: Started Low, gradual increase• China: Started high but has gradually

declined• Jordan: High but finally fell in late

1990s• Zambia: Inverted U Pattern Over time

Table 1Country 1970-4 1975-9 1980-4 1985-9 1990-4 1995-9

New Zealand

1.06 1.06 1.06 1.06 1.06 1.06

Portugal 1.41 2.15 2.4 2.4 2.38 2.36

India 1.1 1.15 1.2 1.3 1.3 1.3

China 2 2 2 1.8 1.62 1.62

Jordan 1.7 1.7 1.7 1.7 1.7 1.46

Zambia 1.05 1.05 1.05 1.3 1.3 1.15

Some Factors Identified in Cases• India: Prior approval of layoffs became gradually more strict

. States also. Very few requests approved despite other reforms.

• China: Loosened ties of workers to housing and food rations: Alternative contracts

• Jordan: Monarchy aimed at maintaining legitimacy. ELRsremained high even after privatization

• Only when much stronger efforts made by govt. to promote pvt. Sector is there reform

• General: Little in what we found that pointed to role of legal origins, except perhaps the transition of China to market economy ) Similar to remark of Deakin, Lele and Siems2007 . Yet legal origins theory should be path dependent

Assessing Validity of LAMRIG and its

Consistency with Botero et al Model to more counties

and Changes over time: Any deeper Determinants?

These are the first econometric results reported in Botero et al.

This is their composite index

Replicating Botero et al Model with LAMRIG

Still Replicating Botero• Botero et al 2004– “In this paper we examine these laws in 85 countries

through the lens of three major theories of institutional choice: the efficiency theory, the political power theory, and the legal theory.”

• They first contrast GDP (efficiency theory) to legal origins (legal theory), see previous tables.

• Botero et al finds LO (legal origins) dominates efficiency which was insignificant, the only type of regulation where these authors did not find it to be significant– In our results with GDP income per capita is always significant

• Next Botero et al go into political factors (political power theory) so as to check whether Legal Origins in their case still dominates

• We have various political variables, but not exactly the ones they have (lagged)

Lags!!!

Extending Botero et al with other determinants

We focus on four main sets of LMR determinants besides GDPPC and Legal Origins

– Structural factors

– Political factors (crises)

– Economic crises (shocks)

– Relationship with other reforms

Interpretation• GDP pc holds: richer countries reform more;

French LO less LMR• Inequality (Gini) and fuel exports (% of total

X) may hurt reform (raise LMR)• foreign aid and gov’t size may boost reform

(lower LMR) But not significant• Only significant structure variable favorable to

reform: Share of Agric. Why? Less unionization in agriculture, more difficult to enforce, so why bother to regulate? Seasonality:Dominance of short term contracts

Interpretation• GDP pc effect holds: richer countries reform more; • Lagged Dependent Variable Shows negative effect

implying convergenceFrench and socialist LO bad for LMR but effects

small• Econ crises effect is mixed: debt and cab hinder

reform, gdp fall and duration help • Political crises effect: strikes are bad for LMR, but

civil and intl war and assassinations are good .

Interpretation of Results with LMR Changes

• Core results remain: Per Capita GDP Helps, Lagged LMR Makes Reform More Likely (Convergence) only partly offset by French and Socialist Legal Origins

• More trade liberalization, less LMR reform (except no relation for PWT trade openness! Or BMP)

• Financial development may be good for reform, although coefficients insignificant

• Some experiments with all factors: GDP Fall Crisis and Trade Lib findings robust

Conclusions(1) LAMRIG Levels: Botero results hold for LO but not GDPPC(2) Changes in LAMRIG: Civil Law origin measures still exert significant though smaller (+) influences than when as in the Botero it is LAMRIG level but GDPPC has significant (-) effect (unlike Botero). Convergence term seems to go against Botero

(3) Influence of Structural variables: only the share in agriculture in GDP - seems to help LAMRIG reform.

(4) Influence of crises: For both economic and political, the type of crisis seems to matter, some having positive and others having negative influences on LMR.

(5) Influence of other reforms: Consistent with other studies, labor market reforms may be affected significantly by other reforms. Our evidence, based on 2 of 3 measures used, is that lagged trade reform may set back labor market reform.

Future research• Additional robustness checks • Improvements in some of the measures of variables • Further improve on LAMRIG indexes by digging

deeper into the ever-improving availability of information on labor laws over time

• Improve estimation techniques FE instead of RE, GMM

• Possibly like some researchers on OECD countries to annualize the LAMRIG indexes as well as the related variables used to explain changes therein over time,

• To extend the use of LAMRIG to examine effects on (a) labor market outcomes as Botero and (b) reforms: financial, privatization and (c) determine robustness and reason for the harmful effect of Trade Reforms (Milanovic & Squire) Is it uncertainty?