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The JKP Blog Has Moved
October 07, 2014 | Contribution by

The Jobs and Development Blog has a new home on the World Bank's site: https://blogs.worldbank.org/jobs/

Jobs & Development blog banner

This move is part of a broader effort to integrate the Jobs Knowledge Platform (JKP) with the World Bank Jobs Cross-Cutting Group, which was officially launched in July 2014.
 
For three years, the JKP has been a hub to promote knowledge exchange and sharing about how to address the global jobs challenge. While the site will stay live for the near future, most of our activities and discussions will take place at our new blog site, and the World Banks "Jobs and Development" topic page - the new home of the Jobs Cross-Cutting Group. We hope you will visit the new sites to keep updated on how the World Bank and its partners are approaching the jobs challenge.

 

Remittances from Qatar:  Less-informed Families Receive Less
September 08, 2014 | Contribution by

Robertas Zubrickas is a Senior Research Associate at the University of Zurich.

Over the past decade, there has been an almost exponential rise in international remittances. We know from recent research that remittances are critical for the well-being of individual households in developing countries – helping them to emerge from poverty, send their children to school, and invest in small enterprises, health, education and housing. Yet not much is known about determinants of remittance flows within transnational households (those with one or more members working abroad), an increasingly important topic for policy makers with the sums involved.

The window washer

"The Window Washer", Qatar, ​Photo Credit: Flickr @ Omar Chatriwala

Given that the geographical separation might not allow the wife to be fully aware of her migrant husband’s earnings abroad, and given that a discrepancy in information matters for economic outcomes, the question arises:  Does awareness matter for remittances? In particular, will the husband remit less if his wife cannot observe his earnings? Our study “Asymmetric Information about Migrant Earnings and Remittance Flows” (done jointly with Ganesh Seshan), which focuses on Qatar and India, shows that the answer is “absolutely”, with higher earners benefiting more from the lack of awareness than lower earners.

From Qatar to Kerala

Migration into Qatar and other oil-producing countries of the Arabian Gulf took off in the 1970s with rising oil prices that subsequently fueled a large construction boom. In fact, in 2011 there were an estimated 17 million contract workers in the Arabian Gulf countries alone, mostly from developing countries. For our study, we decided to focus on Qatar, where about 90% of the 1.7 million population age 15 or older are foreign born, rendering it the nation with the highest share of immigrants in the world. And we picked the Indian state of Kerala, which until recently accounted for more than half of the Indian migrants to the Gulf.

To assess differences in information about overseas earnings, we collected migrants’ reports about their earnings and contrasted these reports with the reports about their earnings collected from the remittance recipients. To our knowledge, this is the first study using a matched household dataset that collects such cross-reports on remittance flows.  Our key findings are twofold:

Observation 1: More earnings, more discrepancy in information. Wives report on average only about 79% of their husbands' earnings, which signifies a substantial discrepancy in information. Moreover, underreporting is not uniform across households – it is more prevalent in households with higher earning migrants. In particular, we observe the gap between wives’ and husbands’ reports to widen in husbands’ earnings (see figure below).

Graph

Observation 2: More discrepancy in information, less remittance.  Underreporting is associated with lower remittances. In the sample, a wife who understates her husband’s earnings by the average amount receives 15 percent less in annual remittances than a wife who has perfect information about her husband’s earnings. Hypothetically, closing this information gap about foreign earnings would be associated in India with an increase in annual remittances of $432 – or nearly two months worth of monthly household expenses. Furthermore, data show that husbands remit on average 58 cents from every dollar of below-the-median income, but only 17 cents from every dollar above the median income.

Work Abroad as a Family Investment Project

What explains our observations? First, we are able to rule out the explanation that differences in information arise from subjective biases in reporting behavior. A more probable and natural explanation for differences in information – as also suggested by the evidence on remittance behavior of Tongan migrants to New Zealand – is that husbands tend to hide overseas earnings from their wives to reduce pressure to remit. But harder questions are why husbands are more truthful about their income when it is low and why they remit a larger share of a lower income. To answer these questions, we approach migration as a family investment project. A family sends its member abroad for work and expects the migrant to remit a share of earnings, which, however, are observable by the family only if it tries to verify the report (for example, by making inquiries in a migrant network).

 When verification costs are not trivial, the most efficient “expectation” for remittances that the family can impose on the migrant takes the form of a simple remittance threshold – which is what occurs in the most efficient loan contract if a costly audit is involved. Namely, if the migrant remits less than the remittance threshold on his account of low income, then the family can take the effort to verify his reported account of income (and punish him if he is found lying). On the other hand, no verification is undertaken if the migrant remits at least the threshold. Thus, it implies that the migrant, once capable of meeting the minimum expectation for remittances, may choose to be silent about any additional income earned and send no additional remittance thereof. As this implication is strongly supported by our empirical observations, it suggests that the same economic arguments that apply to investment contracting also apply to forming expectations for remittances and actual remittance behavior.

Our work signifies the role of information for remittance flows by demonstrating a direct connection between how much families receive in remittances and how much they know about foreign earnings. As more awareness benefits remittance recipients and, accordingly, their countries, a desirable policy is to improve it. Particular measures at the disposal of policy makers in remittance-receiving countries would be improving financial literacy and means of communication.

Jobs and the “Great Recession” – Part 2
July 29, 2014 | Contribution by

Adriana Kugler is a Full Professor at the McCourt School of Public Policy, Georgetown University. 


"My Medicaid Matters" rally on Capitol Hill, September 21, 2011. Photo credit: Flickr @SEIU

As the dust settles from the U.S. "Great Recession" and the ensuing global recession, many theories circulate about both the nature of the recessions and the success or failure of government economic policies to reinvigorate economies. A welcome perspective to this debate is Adriana Kugler, a Full Professor in Georgetown University’s McCourt School of Public Policy and the Chief Economist at the U.S. Department of Labor in 2011-2012.

On the U.S. policy side, she tells us that the package of policies aimed at boosting aggregate demand (including stimulus money, the Recovery Act, Work Opportunity Tax Credits, and even Medicaid) were effective in lowering unemployment. That said, a lesson learned is that some of these outlays at the state level could have been better targeted — for example, spent on education or income-support programs. As for the longer-term policies (including unemployment benefits, skills assessments, and job search and entrepreneurial training) they, too, worked well. But Kugler cautions that the long-term unemployment rate is still too high and the United States is "not out of the woods" (see figure below).

U.S. long-term unemployment still too high
 
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(See Part 1 for insights on the nature of the recession and the resulting high unemployment.)​

Jobs and the “Great Recession” – Part 1
July 24, 2014 | Contribution by

Adriana Kugler is a Full Professor at the McCourt School of Public Policy, Georgetown University.

 
A "sign of the times?", Arizona, November 19, 2009. Photo credit: Flickr @Nick Bastian


As the dust settles from the U.S. "Great Recession" and the ensuing global recession, many theories circulate about both the nature of the recessions and the success or failure of government economic policies to reinvigorate economies. A welcome perspective to this debate is Adriana Kugler, a Full Professor in Georgetown University's McCourt School of Public Policy and the Chief Economist at the U.S. Department of Labor in 2011-2012.

She tells us that the "Great Recession" (Dec. 2007 — June 2009) — compared to past U.S. recessions (dating back to the 1960s) — stands out in two key ways: (i) the depth of the crisis (a much bigger drop in aggregate demand) and (ii) the fact that government jobs didn't contribute to the jobs recovery (see figure below). As for the 5.5 percentage-point rise in the unemployment rate — a higher increase than even the 4.8-point-rise in the 1980s — Kugler estimates that two-thirds of this was cyclical (associated with business cycles) and one-third was structural (associated with issues like a skills or geographical mismatch). However, she plays down worries about a growing skills mismatch, citing recent employer surveys that show that this is a lesser problem than in the past. And she insists that it hasn't been a "jobless" recovery.

Government jobs not pulling their weight in U.S. recovery
 
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(Part 2 will examine policy issues and labor mobility.)

Juggling Labor, Credit, and Crops in Zambia
July 21, 2014 | Contribution by

Kelsey Jack is an Assistant Professor of Economics at Tufts University.

When one part of the local economy fails, it spills over into other parts of the economy. Maybe this isn't so surprising. However, recent research in Zambia highlights a less obvious link: farmers who can't get access to credit during the hungry season (January to March) increase their off-farm labor supply, drive down wages, and maybe even undermine their own agricultural yields. This matters greatly given that small-scale farming remains the primary source of income for the vast majority of the rural population in Zambia, with typically low levels of productivity and farming income. Fortunately, there is new evidence that providing consumption loans can help farmers invest in their own fields, and — we hope — boost their productivity.


Experimental harvest of provitamin A-enriched orange maize, Zambia, 2010.
Photo credit: Flickr @CIMMYT

Coping with not enough credit for food

A few years ago, two colleagues (Günther Fink of the Harvard School of Public Health and Felix Masiye of the University of Zambia) and I began working in rural Zambia on projects ranging from health and the environment to agriculture. As we spoke to rural smallholder farmers around the country, we kept hearing the same story. Farmers described how they ran out of food in the "hungry season" (the months leading up to harvest time) (see figure), which forced them to cope by resorting to working ganyu, a term for casual day labor typically done on nearby farms. But this meant neglecting their own fields, which hurt their own harvests. Thus, farmers were essentially borrowing against their future harvest, lending out their most available asset — their own labor.

Seasonal patterns in rural Zambia

Source: Midline survey data, Chipata Food Loan Project.

We wondered if other ways of accessing food were available — such as through a loan with reasonable interest — would farmers prefer to take that option. To try to answer this question, we used a randomized control trial that offered short-run food loans to farmers in randomly selected villages in Chipata District in the eastern part of Zambia. We offered farmers in selected villages up to three bags of maize flour during the hungry season (enough to cover the consumption needs of an average household over a three-month period) and asked them to repay in maize after the harvest.

The outcome was extremely positive. First, farmers wanted the loans: 95 percent of those offered the loan took it up. Second, farmers were able and willing to repay: among those who took out a loan, over 95 percent repaid in full. But most important, there were positive effects on consumption, the labor supply, and wages. Specifically, when compared to a randomly assigned control group, the farmers with loans missed almost 50 percent fewer meals and were forced to look for ganyu 25 percent less often. Most remarkably, local wages increased substantially. (See our paper, "Seasonal Credit Constraints and Agricultural Labor Supply: Evidence from Zambia" for more details on the study and a summary of related literature).

Our findings contribute to a growing literature, mostly coming out of anthropology, that documents the consumption-smoothing role that ganyu plays for small farmers in Southern Africa. This, in turn, relates to the larger economic literature that documents how households cope with periods of shortage or urgent need when they don't have access to credit. While other studies have shown that labor supply does adjust to help families cope, its role in helping to address seasonal shortages has only been addressed through one previous study on seasonal migration in Bangladesh (Bryan, Chowdhury and Mobarak 2013). The bottom line is that together these studies point to poorly functioning credit markets that distort the off-farm labor supply decisions of poor farmers and hurt other laborers by lowering wages.

Weighing loans to finance consumption

So what can be done to help poor farmers gain access to credit? Traditionally, loans to finance consumption, especially for the poor, haven’t been seen as viable, largely because the spillover from the credit market to the labor market in rural developing countries hasn't been well understood. But if we can document effects on agricultural yields from higher consumption and less off-farm labor, that may change. Indeed, if higher yields in one year translate into less ganyu in the next year, then a loan intervention may help farmers escape from a regular cycle of low yields, hunger, and off-farm labor. To test this assertion, we are in the middle of scaling up the project to learn more about the effects on agricultural yields. More findings to come!​

Polish Education: A Mixed Success
July 14, 2014 | Contribution by

Maciej Lis is Senior Economist at the Institute for Structural Research (IBS), Warsaw.
 

Over the past 25 years, Poland has made tremendous progress on the economic front — closing by half the GDP per capita gap with developed countries. However, it now needs new engines of growth to keep the pace, lower the high youth unemployment rate — at 24 percent — and make better use of the available labor. One way to achieve this would be improving human capital, which is also essential for further structural change — such as reducing the agricultural sector's role, modernizing industry, and enhancing productivity in services.

Laying cobblestone
Laying cobblestones in Krakow. Photo credit: Flickr @Let Ideas Compete

That is why it's encouraging to see better international educational test scores in recent years in Poland for 15-years old (PISA) and the working population (PIAAC), on top of higher enrollment rates in tertiary education over the past 15 years. Yet, some concerns must still be raised about the overall quality of education and skills preparation for a workforce in an increasingly high-tech, dynamic, globalized world. Keep in mind that although educational systems strongly influence the formation of skills, it might take 10 to 20 years for a higher quality education to be felt in the labor market. Thus, an accurate diagnosis of current educational output is crucial for not only assessing the impact of educational changes but also the anticipated future shape of the labor force — and thus the country's future growth potential.

High Marks for Progress in Most Areas

Let's start with the good news. In the latest round of PISA (Programme for International Student Assessment) testing, Polish 15-year-olds were counted among the best in the OECD in terms of achievement in math, reading, and science tests (see Figure 1). These achievements occurred after a period of little progress in scores between 2003 and 2009. That said, Polish teenagers were already in the forefront of the European Union (EU) as early as 2003. Polish high school students outperform not only their peers from Western and Eastern Europe but also their older colleagues. This means that today's 15 -year-olds would outperform the gymnasium (junior high school) graduates from 3, 6, or 9 years ago, if travelling in time were possible. Moreover, the most recent improvements in skills extends to top, medium, and weak students — in other words, a reduction in the percentage of students who cannot cope with even the simplest problems was accompanied by an increase in the percentage of those being able to solve complex problems. In earlier PISA testing rounds, it was mainly the weaker students who improved.

Figure 1: Major educational advances except in problem-solving
(PISA scores in Poland, Finland, U.S., and whole OECD: 2000-2012)


Source: OECD

The improvement in skills of Polish students is affirmed by the results of the PIAAC (Programme for the International Assessment of Adult Competencies) study, which investigates the skills of the population aged 16-65 (see Figure 2). The gap between Poland and the OECD average disappears for the youngest cohort (16-19) in all three dimensions studied — problem solving, numeracy, and literacy. Still, Poland has a ways to go to catch up with Finland.

Figure 2: The younger the better
PIAAC 2012 results by age group


Source: OECD

Problem Solving Poses a Major Problem

The not-so-good news is that solving creative problems is much more difficult for Polish students, according to an additional PISA module (see Figure 1). They are clearly below the OECD average, with the top gap in the OECD between results from other tests and creative problems solving. In other words, math and reading test results would imply that good as well as weak students would score much better when solving creative problems. Moreover, Poland is behind the United States in this module, although it is ahead in the other modules. Even the PIAAC score in problem-solving puts Poland below the OECD average except for the youngest cohort (see Figure 2). Complicating factors might be Poland's lower level of urbanization and lower level of technological saturation compared with not only top scorers like Korea and Japan but also regional neighbors like Estonia and the Czech Republic.

One other educational measure — Poland's specific gymnasium final exam — raises additional worries (see Figure 3). The raw scores of the exam cannot be easily compared among cohorts, owing to fluctuations in the level of difficulty of tests in subsequent years. However, this problem could be dealt with by using appropriate statistical techniques that would yield comparable results over time. The conclusions are not very optimistic: the results in math and science have worsened since 2008, although those for the humanities have remained stable

Figure 3: A mixed report card at the gymnasium level
(Standardized gymnasium test score in Poland)


Source: pwe.ibe.edu.pl

Origins and Outlook

What might be driving the improvements in some areas? First, the education system has benefitted from greater demographic changes in recent years, resulting in fewer schools (especially primary schools in rural areas), smaller class sizes, and the typical merging of gymnasiums with secondary schools (rather than with primary schools) in one building. Second, although commuting to schools in larger agglomerations is more cumbersome and costly, it enables children from vulnerable backgrounds to catch up more quickly. Third, the core syllabus for gymnasiums has been sharpened and made more cohesive between successive levels of education. Fourth, there might be a delayed benefit of the rising tertiary education enrollment in the 1990s and the sharp rise in the percentage of university graduates aged 25-29 — up from 8 percent in 1995 to 42 percent in 2012 — given the vital role of family in skills formation.

Certainly the overall better report card for Polish teenagers bodes well for their and Poland's future. However, it is far too early to declare the educational system a great success, given the disappointing results on problem-solving skills — an essential tool for succeeding in the labor market — and employer complaints about ill-equipped youth (a reflection also of problems with vocational schools and even universities). But improvement on the skills front will be much tougher than adjusting the educational syllabus to international standards, a situation that many countries have to contend with.

Literacy Unplugged, Bollywood-style
July 02, 2014 | Contribution by

Brij Kothari is Professor of Communication at the Indian Institute of Management, Ahmedabad, and the Founder of PlanetRead.
 

In India, the formal sector accounts for only 6% of the total labor force of nearly 500 million. This means that the bulk of labor participation is in the informal sector, trapped in a vicious cycle of low skills, low wages, and low productivity. If these individuals are to have a fair chance at not only upping their job skills, perhaps through vocational training, but also leveraging these gains on social and emerging technological fronts to escape their cycle of poverty, they must have basic functional literacy (not just nominal "literacy"). However, the vast majority of these individuals do not. The encouraging news is that there are numerous efforts under way to dramatically turn this situation around — including a successful program of using subtitles for Bollywood movies (see "Better Late than Never" in Education and Skills 2.0: New Targets and Innovative Approaches, 2014).


Photo credit: Still from Jodhaa Akbar with Same Language Subtitling, Copyright Disney UTV.
Note: Subtitle in image reads "In the folds of these moments."

How Literate is Literate?

Although independent India's literacy rate rose from 18% in the first national census (1951) to 74% in the most recent round (2011), an astonishing 50-60% of the so-called "literates" cannot read the day's newspaper headline, or a Grade 2 level text, in their own language. That is not to say that they are fully illiterate either, because most of them can identify at least a few letters and are, therefore, best thought of as, "early-literate" but functionally illiterate. How high is functional illiteracy? Based on my research (with Tathagata Bandyopadhyay; see Can India's 'literates' read?, 2011) and ASER's findings year after year about the poor state of reading achievement in Grade 5, I estimate that around 400 million "literate" Indians are actually functionally illiterate. This is in addition to the 273 million who are officially illiterate.

India's "ability to read a newspaper headline rate," if there were such a measure, would hover in the 30-37% range. No government would like its galloping literacy rate to be punctured with a statement like this. But if a government does not acknowledge the reality of its nation's literacy quality, it is unlikely to do much about it. A big problem is that the literacy rate in many countries, like India, is simply measured by asking individuals to self-report for all household members if they are "literate" or "illiterate." Even a slight variation on the question, like "Can you read a newspaper?" would give an accurate measure of functional literacy. We have found that people's response to this question is highly correlated to tests that measure an ability to read any simple text functionally. People report accurately because the question is specific and, in their perception, easily subject to verification. One could even replace "newspaper" with "bus board" or "letter" as proxies for functional literacy.

While governments do focus on the challenge of getting illiterates off the starting block, they are swift to label this achievement as "literacy" because all the incentives revolve around getting the literacy rate up. From the government's perspective, the functional literacy rate is best left unmeasured lest the problem surface officially. The state, therefore, gets off the hook of having to also plan for the more arduous and longer transition of early-literates to functional literacy.

Improving Literacy, Bollywood-style

How does one transition 400 million early-literates in India to functional literacy? The essence of a solution lies in creating conditions that allow for at least a few minutes of easy reading engagement, every day and throughout life. This is possible if reading itself becomes an integral part of something people do every day, like, watching television. In India, 750 million people watch, on average, two hours of TV every day. Bollywood-style films and film-based content is a dominant genre in a large number of Indian languages. What if we subtitled the lyrics of all existing film songs on TV — in the same language? Word for word, what you hear is what you read. This was a question we first posed in 1996, calling our approach "Same Language Subtitling" (SLS). It causes automatic and inescapable reading engagement among early-readers (and readers alike) whenever they happen to watch film songs with SLS. Anyone with some letter familiarity cannot but try to read along, as confirmed by a body of eye-tracking research. Viewers like to read along to songs for its Karaoke-like experience and to know the song lyrics.

Since 2006, SLS has been implemented on 10 weekly half-hour song-based TV programs, in as many languages, currently delivering reading practice to 200 million weak-reading TV viewers in India. As we have slowly scaled up, we have done rigorous testing to ensure that SLS is working, and we now have strong evidence that it is a proven solution on the scale that is required. The Indian Institute of Management, Ahmedabad (IIM-A) and the Nielsen-ORG Center for Social Research studied the effects of SLS in 3,179 households during 2002-2007, demonstrating that exposure to 30 minutes of SLS per week increased the functional literacy rate from 25% to 56% among students with at least five years of schooling (see PlanetRead for the latest studies). Plus, the cost is minuscule. For example, with a viewership of 20 million, one U.S. dollar can give 30 minutes of daily reading practice for about 1,000 people per year.

IIM-A and PlanetRead are now on course to deliver regular reading practice to all the 750 million TV viewers in India at present, and growing rapidly. More than half the viewers are also weak-readers. The goal is to implement SLS on all songs on TV in India, in all languages, through national policy. The strategy is to scale up in India first and let that speak as a model for expansion to other countries, especially in South Asia and Sub-Saharan Africa, on popularly watched song-based programming, in the local language. The latest update in this narrative is that the Broadcasting Corporation of India (Prasar Bharati), the national TV network (Doordarshan), and the Planning Commission have supported, in principle, the scaling up of SLS nationally.

In India and many other countries, the problem of low quality of literacy is real, if under-researched, and seldom acknowledged officially. Yet we feel strongly that the SLS solution is proven and cost-effective. So what is holding back broadcast policy in India and other low literacy nations from considering SLS seriously? What is holding back private networks with a genuine interest in doing "well" (ratings do go up) by doing "good?" These questions are not easily answered. But at its core, policy-making generally lacks the risk-taking ability required to advance social innovation in a time-bound manner. On the other hand, private networks may need to do much more to bring — what might sometimes be a peripheral interest in doing good — to a place where doing well and doing good are inseparable.

Labor Regulations Must Account for Both Jobs and Welfare
June 20, 2014 | Contribution by

Carmen Pagés is Chief of the Labor Markets and Social Security Unit at the Inter-American Development Bank (IDB).


Photo Credit: Youth and Employment Program, Ministry of Labor.


Why do labor regulations matter and should they protect workers or jobs, especially in developing countries? Carmen Pagés — Chief of the Labor Markets and Social Security Unit at the Inter-American Development Bank (IDB) — tells the JKP that labor regulations matter for jobs and productivity, including which types of jobs get created (formal or informal) and in which sectors. But they also matter — and greatly — for social insurance and welfare, and thus for how inclusive growth is. For a while now, she says, the thinking has been that it's better to protect workers and let the markets decide freely whether to create or destroy jobs. But that thinking is starting to change a bit because of the high costs of unemployment on society. What is needed, she says, is a new model for labor regulations that takes into account both jobs and welfare. As for the informal sector, she emphasizes that these workers also need social protection, perhaps via universal social insurance, which would be funded through general government revenues. She also votes for a more humble and less dogmatic approach to policy making — one that takes a trial and error approach (as doctors do), ever mindful of possible adverse side-effects.

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Avoiding the Extremes in Labor Regulations
June 17, 2014 | Contribution by

Gordon Betcherman is a Professor in the School of International Development and Global Studies, University of Ottawa.

Man working inside a large reinforced steel tube
Man working inside a large reinforced steel tube, Phillippines.
Photo credit: Flickr @Nonie Reyes, World Bank Photo Collection

As governments debate labor market regulations — a highly controversial topic, sometimes for ideological reasons — it is vital to base decisions on empirical evidence. Thus, a welcome addition to the debate is the work of Gordon Betcherman — a Professor in the School of International Development and Global Studies, University of Ottawa — who contends that the key challenge for policy makers is to avoid the extremes of over- and under-regulation. As he tells the JKP, most countries are on a "plateau." That is, although society could still benefit from labor reforms aimed at greater efficiency or better work protection, labor regulations aren't the binding constraint on the country's number of jobs or overall productivity. Rather, he says, policy makers should be giving greater attention to developing human capital (better job skills), ensuring that cities function well, and adopting good trade policies. However, there are some countries on "cliffs," which means they are paying in economic and social terms. One cliff is over-regulation, where regulations exacerbate imperfections or create new ones; the other is under-regulation, where regulations don't address imperfections. Going forward he calls for more research on: (i) developing tools to assess whether a country's regulatory framework may be on a cliff or approaching the cliff; and (ii) developing tools to understand how labor regulations are redistributing income among different types of workers.

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(For more, see Betcherman's policy note "Developing labor market regulations in developing countries" for IZA's World of Labor; David A. Robalino's blog "Getting Labor Market Regulations Right"; and Carmen Pagés' upcoming blog on the topic.)

Getting Labor Market Regulations Right
June 12, 2014 | Contribution by

David A. Robalino is a Lead Economist and Labor and Youth Team Leader at the World Bank.
 

Most countries regulate the way minimum wages are set, whether workers can be dismissed and how, and the type of compensation that employers have to pay. But many critics of these regulations contend that such policies undercut job creation. While it is understood that labor regulations are important to protect workers and create good jobs, questions regarding what is the right policy mix and how best to design and implement them remain a source of debate. The most recent review of the research in the World Bank's 2013 World Development Report on Jobs shows that, in most cases, these regulations don't have much impact on employment. At the same time, not regulating labor markets at all can expose workers to abuse and inadequate working conditions. What does all this mean for policy makers? The answer appears to be first setting the right objectives for these regulations and then ensuring that they are appropriately designed.


A construction worker finishes sealing glass, Kuala Lumpur, Malaysia.
Photo credit: Flickr @World Bank Photo Collection

Implications for Minimum Wages

Minimum wages can be useful, for instance, when labor markets aren't competitive and employers can impose wages that are too low — what economists call the extreme of labor market "under-regulation" as opposed to "over-regulation." In those cases, minimum wages not only don't reduce employment but they also can increase it, and as Gordon Betcherman (University of Ottawa) tells the JKP, both workers and society as a whole stand to benefit.

At the same time, minimum wages aren't the best instrument to fight poverty or guarantee a given standard of living. Other targeted transfers are likely to be more effective, particularly given that a majority of the poor don't benefit from minimum wages (see T. H. Gindling's IZA World of Labor note on "Does increasing the minimum wage reduce poverty in developing countries?"). Thus, if minimum wages are regulated, it's important to have the right process to set their level over time. One alternative is to rely on independent technical bodies that, at predetermined dates, study what the level of the minimum wage should be in consultations with the relevant stakeholders.

Implications for Regulations on Dismissal Procedures

It's also a good policy to protect workers from the risk of job loss. But making dismissals illegal or asking employers to receive authorization from a third party and pay compensation (severance pay) might not be the way to go — neither for workers nor employers (see my article with Michael Weber on why severance pay isn't an efficient mechanism to protect workers).

A better option is giving employers the needed flexibility to manage their human resources in response to business needs while making sure that workers have sufficient time to plan the transition to a new job and receive adequate financial support and access to quality employment services. In this case, employers can be mandated to provide adequate advance notice before a dismissal and contribute to a fund that is used to pay unemployment benefits, along with services such as job search assistance, counseling, and retraining. Governments at the same time need to be able to ensure the appropriate management of the fund and find the right service providers.

Some of these measures and other practical ideas are discussed in a short manual on labor regulations that the World Bank’s Labor and Youth Team is putting together in collaboration with the International Labour Organization (ILO) and the International Trade Unions Confederation (ITUC). The latter just posted a blog with a list of the worst places to have a job. You don't have to agree with the list but it's clear that in some cases the problem isn't "over-regulation" but the lack of it. And as Carmen Pagés (Inter-American Development Bank) reminds us, we should start to think more like medical doctors, whose guiding principle is to "first, do no harm," and think carefully about the impacts that changes in labor regulations have on labor markets. Both extremes — "under-regulation" and "over-regulation" — are likely to be welfare decreasing.

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For more on this topic, see the upcoming JKP interviews with both Betcherman and Pagés and Betcherman"s IZA World of Labor policy note, "Designing labor market regulations in developing countries."

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