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CATEGORIES :
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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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.)

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."

Daniel Hamermesh is a Professor of Economics at University of Texas at Austin, and Royal Holloway, University of London.

A major topic of debate right now in many industrial countries — like France, Germany, Switzerland, the United Kingdom, and the United States — is whether to raise or even just introduce minimum wages. Advocates cite the need for better working conditions, while critics worry that higher labor costs will raise unemployment and possibly deter growth as businesses retrench. Who's right? Or are both sides right? To learn more, the JKP spoke with Daniel Hamermesh — a Professor of Economics at University of Texas at Austin, and Royal Holloway, University of London — who recently examined how labor costs affect companies' demand for labor.

Are you on board?
National minimum wage campaign, London, 2008.
Photo credit: Flickr @Nina Jean (https://www.flickr.com/photos/nicasaurusrex/)

He says that studies show, as economists would expect, that higher labor costs (like minimum wages, overtime pay, and health benefits) reduce employment and/or the hours worked by individual employees — meaning that this loss must be traded off against the benefits that higher earnings might provide to specific groups of workers. Thus, the key question becomes by how much employment falls when labor costs increase. The best estimate going, Hamermesh says, is that a 10% increase in labor costs generally will lead to a 3% decrease in the number of employees (or to a 3% reduction in the hours they work, or to some combination of both) — hence the oft-cited "3 for 10" rule. As for the United States, he says, any losses from higher minimum wages shouldn't be very big because minimum wages are so low compared to most other industrial countries (see table).

Some industrial countries have much higher minimum wages than others
Minimum wages compared to the average and median wages in selected countries, 2011
Country Minimum wage as a fraction of the:
Average wage Median wage
Australia
Canada
France
Japan
Netherlands
Spain
UK
US
0.45
0.40
0.48
0.33
0.42
0.35
0.38
0.28
0.54
0.45
0.60
0.38
0.47
0.44
0.47
0.38

Source: OECD data. http://stats.oecd.org/BrandedView.aspx?oecd_bv_id=lfs-data-en&doi=data-00313-en (data extracted June 3, 2013 from OECD iLibrary).


For more on the topic, see Hamermesh's policy note "Do labor costs affect companies' demand for labor?" for IZA's World of Labor.
 
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By Gladys Lopez-Acevedo, Lead Economist, Office of the Chief Economist, World Bank

One of the residual effects of the recent global financial crisis has been a jobless recovery — with 200 million people worldwide (including 75 million under the age of 25) unemployed. Yet a major problem continues to be uncertainty on the part of policymakers and practitioners as to how to create jobs, especially good jobs.

 
An electronic road pricing signboard in Singapore. 01-18-09 © Sivakumar Sathiamoorthy


What can be done? This was the topic of a recent high-level Conference on Employment Centered Strategies in Seoul Korea (March 21-22), organized by the Korean Development Institute and the World Bank. The sessions ranged from the global environment and labor markets to specific problems such as technology upgrading. The session I participated in explored innovation, technological progress, and employment — and I found the presentation by Professor Wong Poh Kam (National University of Singapore) particularly intriguing. Essentially, he used Singapore's experience with "innovative entrepreneurship" to suggest a possible way forward.

Does innovative entrepreneurship help growth and jobs?

After about a decade of research by economists, Wong asserts that there is now sufficient empirical evidence that innovative entrepreneurship boosts growth, but the results on employment are mixed. Whether the results are positive or negative, he says, depends on several factors, especially the type of entrepreneurship — those based on being innovative, as opposed to being developed out of necessity, do best. Moreover, the effect on employment is uneven over time, usually high at the beginning, then lower, but possibly up again. Policies for innovative entrepreneurship are different than traditional ones for small and medium size enterprises because the former focuses on new firms — usually fast and young innovative firms like those found in Silicon Valley (with the emphasis on advanced knowledge).

Is there a role of government? Wong argues that there is, as Taiwan and Israel have shown. This approach suggests the need to transform the traditional university model into an "entrepreneurial university" as an integral part of any reform package. Other elements include a financing system for early stage high tech start-ups, plus labor market policies and education to increase the supply of entrepreneurs.

How Singapore has fared

Since the mid-2000s, Singapore has vigorously supported innovative entrepreneurship by implementing a series of measures that include:

  • • Intensification of public investment in research and development and innovation.
  • • Promotion of venture capital, business angel investment to finance high tech startups.
  • • Liberalization of regulations for small and medium-size enterprises.
  • • Attracting foreign entrepreneurs, promoting Singapore as a regional entrepreneurial hub.
  • • Reforming the education system to encourage creativity and innovation and inculcate an entrepreneurial mindset.
This approach contrasts with the previous emphasis on leveraging foreign capital, talent, and technology, which was less successful in nurturing indigenous high tech entrepreneurship. Moreover, because the unemployment rate is very low — less than 3 percent in the past five years — the focus is on fostering innovative entrepreneurship with high value added, not just employment creation per se.

Have these measures succeeded? Wong says there is preliminary evidence that this shift in direction in the country is working. First, in the past five years, there has been a significant increase in the creation of high tech firms, outpacing the creation of non-high-tech firms in the country. The growth in new high tech manufacturing firms has been especially high, reaching 9 percent of the average annual growth rate between 2004 and 2009 (Figure 1).



Second, the high tech start-ups exhibit a higher likelihood of surviving compared to firms in the non-high tech sector — with the difference in the survival rates most pronounced after four to seven years. Third, start-ups represent about 9 percent of Singapore employment (Figure 2).



Jobs versus growth strategies

Singapore's story was especially interesting in the context of the Korean seminar because, as the World Bank's World Development Report 2013 on Jobs points out, the two countries have successfully combined long-term economic growth with rapid poverty reduction and strong social cohesion — but they have relied on jobs strategies at different points in time. After independence, Singapore focused on jobs to reduce high unemployment and inter-ethnic tension, and later, raise labor costs to encourage higher-value-added activities. But when a recession occurred, it switched to focusing on jobs. Conversely, Korea abandoned development planning in 1996 and in 2010 adopted a jobs strategy for the next decade, focusing on increasing the employment rate of the working-age population (15-64 years) to a minimum of 70 percent — the average among industrial economies.
By David A. Robalino, Lead Economist — Labor and Youth Team Leader, the World Bank
 
As classic unemployment insurance (UI) spreads in the developing world, the debate is heating up over the best way to design unemployment benefit programs. It’s an issue that I’ve been working on for some time, but unfortunately, there has been little good evidence about the impact of these programs on workers' incentives and their ability to find jobs. Most of the research so far has referred to OECD countries, where UI is the most common public income support program for the unemployed. But the situation is more complicated in developing countries, with their large informal sectors, which offer a relatively easy way for unemployed people to pick up some income — undetected by the government — while they continue to receive UI benefits.
 
BR033S06 World Bank
Construction Workers in Brazil. June 16, 2009 © World Bank Photo Collection
 
 
A recent paper on UI in Argentina turns up some badly needed evidence and offers an interesting policy recommendation. The authors, Hernan Ruffo and Martin Gonzalex-Rozada (Torcuato Di Tella University), examine how UI — funded in Argentina by a 1.5 percent payroll tax on employers — affects unemployment duration and reemployment wages. It shows, as expected by many, that the generosity of the unemployment benefit (given by the level and duration) increases the duration of the unemployment spell, but it doesn't really help workers find better jobs (such as those that pay a higher wage). However, the level of the benefit does seem to improve wages somewhat, although not the unemployment duration. These findings suggest, as Ruffo recently told the JKP, that policy makers should err on the side of offering more generous benefits instead of longer durations.
 
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But I think we can do even better in solving the fundamental problem with classic UI — the existence of both implicit subsidies to workers who don't do their best in trying to find jobs and implicit taxes on the "savings" of workers who spend less time unemployed.
 
Relying on a mix of insurance and savings accounts
 
Another way to tackle the problem, which Michael Weber and I pursue in a recent paper, is to make the subsidies and taxes explicit, and then try to find a combination that provides sufficient protection to workers and better incentives to find jobs. This can be done by simply tracking what each individual contributes to and gets out of the system; basically calculating the balance in their "unemployment accounts." In the traditional UI (like in Argentina), the positive balances are taxed at a 100 percent rate to cover the accounts in deficit. We suggest reducing the tax on savings and instead using general revenues or consumption taxes.
 
Some of you might recognize that this is similar to the unemployment individual savings accounts (UISAs), a more recent instrument, which is typically found in Latin America countries like Chile and Brazil. In UISAs the tax on savings is zero but workers can't have negative balances in their accounts — that is, they receive unemployment benefits as long as they have savings. The problem is that for certain workers it isn't easy to accumulate sufficient savings to finance adequate unemployment benefits. Thus, a given level of subsidies is needed (which Chile does through a solidarity fund).
 
However, the model we propose is a more general design that has classic UI and classic UISAs as two extremes — in one the tax on savings is zero, in the other it is 100 percent. But there is no reason to fall into either of these extremes. What countries need to decide is the optimal level of benefits and their duration (the Argentinean paper provides some guidance) and then find the best way to finance the subsidies needed to cover those with negative balances — a tax on savings can be part of the financing mechanism.
 
In addition, conditionalities to receive benefits should be limited to the participation in job-search and training activities — and not include employment status, which is very difficult to enforce when there are large informal sectors. New technologies such as smart cards with biometric identification can be used to monitor these conditionalities.
 
Hopefully, this way of think about unemployment benefits will facilitate the, sometimes ideological, debate between the virtues and flaws of UI and UISAs.
By Mary Hallward-Driemeier, Lead Economist, Office of the Chief Economist, the World Bank

Many of the hardest hit countries during the recent financial crisis were in Eastern Europe — and now the prospect of a "jobless recovery" is a real concern. Although the level of output has risen and growth has resumed, unemployment rates are still above pre-crisis levels, especially for youth. In addition, the episodes of unemployment are increasing in length, with a significant share unemployed for over a year.


A baker in her shop
A baker in her Albanian shop. Photo: ©World Bank


At the recent South-South Learning Forum in Hyderabad, India, I spoke with members of the ministries of labor in Latvia, Albania, and Romania about how their countries have coped with the recent financial crisis and the lessons they've learned about how to tackle stubborn unemployment. The consensus was that the top policy priority must be expanding job creation—although the countries varied in the steps they were taking to do this—and must be coupled with adequate, and efficiently provided, social assistance.

Worries about a jobless recovery

For the three Europe and Central Asian (ECA) countries the impact of the crisis in 2008 in terms of growth in GDP per capita was sharp, but the extent of declines varied. Latvia was hit the hardest, followed by Romania, while Albania didn't even experience a recession (Figure 1). On the employment side, not surprisingly, Latvia also experienced the sharpest rise in unemployment overall, especially for youth unemployment (Figure 2). Albania, while not experiencing as much of a slowdown in growth, did see youth unemployment rise. Romania managed to avoid a wild a swing in unemployment.

Figure 1: Latvia took a big GDP hit from the financial crisis...

Source: World Development Indicators

Figure 2:...with unemployment surging, particularly among youth

Source: World Development Indicators; data for Albania is not available for all years.



Creating new jobs and better targeting social assistance

So what are these ECA countries doing to improve the labor picture?

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In Latvia, beyond expanding social assistance programs, there has been a debate as to whether it would be appropriate to protect jobs and not just workers. With such large job losses, there could be a rational for trying to stem them and avoid excess destruction. However, Ilke Zvidrina, the Deputy Director of the Labor Market Policy Department in the Ministry of Welfare, is largely skeptical of such plans. Certainly in some sectors, such as construction, pre-crisis employment isn't sustainable, and intervening in other sectors to protect jobs is also seen as ineffective. Instead, the government's priority is to reallocate resources to help people move to new jobs. Could foreign direct investment (FDI) be attracted to help create these new jobs? She believes it could help, but the scale of the challenge is too large for it to offer a complete solution.
 



In Albania, Kastriot Sulka, Deputy Minister of Labor, Ministry of Labor, Social Affairs and Equal Opportunities, also examines ways the government is trying to create more jobs. He points to two areas where government spending could help create jobs. The first is higher infrastructure investment, because it both directly provides jobs in the building of the infrastructure itself and indirectly boosts the access to markets of those communities connected to the new infrastructure. Thus expanding the road network has been seen as a way to expand opportunities in rural areas where unemployment has been particularly high. The second is greater promotion of Albania's tourism industry. There are also synergies between the two approaches, with improved infrastructure facilitating the ability to move around the country. At the same time, he says, Albania is focusing on social assistance programs, such as the minimum wage and pensions. Plus he notes that the Ministry of Labor is coordinating the broader activities on the part of many ministries, assessing the impact on vacancies and new jobs.



In Romania, Lacramioara Corches, the General Director of the Directorate of Social Assistance in the Ministry of Labor, Family and Social Assistance, underscores the need for active labor measures to help lower youth unemployment and possible later retirement ages for older workers who would like to keep working. As for the beneficiaries of social assistance, some of them should be encouraged to re-enter the labor market while others require better targeted help. She stresses that information technology could play an important role in streamlining social assistance programs, improving targeting and payment systems, and reducing fraud.

The private sector and IT

Overall, the relative emphasis put on the need to create more jobs matched the rise in unemployment across the countries. It dominated Zvidrina's (Latvia) comments, and was a prominent theme for Sulka (Albania), while Corches (Romania) focused more on the issue of better social assistance programs. Although each country offers a range of active labor market policies, these speakers agreed that to be sustainable, private sector growth was needed, with Zvidrina making this point most forcefully. They also agreed that improving the targeting of social assistance was important not only for budgetary reasons but also for the incentives it provides for people to actively seek employment. However, it was new advances in IT that most animated the exchange between them and other colleagues.
Claudia Sepulveda is a Lead Economist, Office of the Chief Economist at the World Bank
 
Nearly two years after the "Great Recession" officially ended in the United States according to the NBER, the labor markets in many countries remain stagnant. At the recent Latin American Economic Association Meetings (LACEA) in Peru (Nov. 1-3), several presentations attempted to shed light on the impact of shocks originating in credit markets on the labor market. Today’s blog highlights three working papers – all still works in progress – that suggest that all recessions are not created equal and that much more research is needed to understand better how labor markets function.
 

Pablo Ottonello, 2012
 
 
Financial crises bad for the labor market
Let's start with whether what triggers a recession matters for future jobless levels, a question being studied by Guillermo Calvo (Columbia University and NBER), Fabrizio Coricelli (Paris School of Economics-Université Paris 1 and CEPR), and Pablo Ottonello (Columbia University). In an interview with the JKP team and Vox LACEA, Ottonello tells us that their study shows that the nature of the trigger matters greatly. In advanced and emerging economies, recessions associated with shocks originating in credit markets tend to be followed by more sluggish adjustment in labor markets than during "normal" recessions (productivity-led). In advanced economies, financial crises are followed by jobless recoveries, whereas in emerging markets whether the recovery from financial crises is of a jobless or a wageless nature depends on the pattern of inflation during the recession episodes. This means that policy makers will need to either relax credit constraints or accept a trade-off between wages and inflation.
 
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Less-educated workers hardest hit
Which segments of the work force are most vulnerable to being fired when a financial crisis hits? Jose Ignacio Lopez (HEC Paris) describes the main findings of his paper co-written with Virginial Olivella (Banque de France), which explores how a disruption to credit access can change both the firm's incentives to hire labor and the optimal mix between skilled and unskilled workers, a question that has so far been little studied. They do this by introducing a financial shock in a model that exhibits capital-skill complementarity. In this environment, a disruption to financial markets not only affects total overall hours worked but also the optimal mix between skilled and unskilled workers. In particular, the interaction between financial frictions and capital-skill complementarity enables the model to reproduce a fairly volatile and counter-cyclical ratio of skilled to unskilled hours worked. That is, the less educated workers are the first to go when credit is tight, meaning that they would benefit from greater protection by keeping trade flowing to the private sector and keeping financial conditions at the optimal level.
 
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Getter a better fix on how jobs are filled
Finally, economists have long used matching theory to describe how jobs take form when there are unemployed workers and vacancies at firms. But in recent years, questions have been raised about the quantitative accuracy of the standard-calibrated, stochastic, search and matching model. While unemployment shows big fluctuations over the business cycle, this model — so far, focusing on the United States – predicts much smaller fluctuations in unemployment. To shed more light on this issue, Pedro Amaral (Federal Reserve Bank of Cleveland) investigated the accuracy of this model for a wide range of OECD countries. His paper establishes that for OECD countries, the model cannot deliver the volatility in unemployment and vacancies that is present in the data — that is, in the real world, unemployment and vacancies vary a lot more than the model suggest. In addition, his study shows that any adaptation of the model will need to take into account the fact that labor markets in countries like Portugal and Spain are quite different from others, such as those in the United States, and thus require different policy solutions.
 
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By Klaus F. Zimmermann, Director of the Institute for the Study of Labor (IZA, Bonn)

"The biggest economy in the euro area, Germany's, is in a bad way. And its ills are a main cause of the euro's own weakness. [...] Thus the biggest economic problem for Europe today is how to revive the German economy."


This excerpt from The Economist in June 1999 illustrates that not so long ago, the "sick man in Europe" was Germany. The phenomenon of successive, recession-related waves of unemployment that ended up accumulating was considered to be a European problem, and Germany served as the prime example for the pattern of high and rising unemployment. The country faced severe problems in its labor market, which have often been linked to the high level of employment protection, high labor costs, and the strictly regulated labor market. During the 1990s, a number of policy measures addressed these problems, but the outcome was far from satisfactory — the adjustments merely addressed the symptoms.

Jump to the present, and the picture is dramatically different. Although Germany has been hit relatively hard by the Great Recession in terms of its impact on GDP, the crisis has, unlike in other countries — like the United States, the United Kingdom, and Japan — never translated into an employment decline (see figure). Quite to the contrary, the size of the German working population held at a record level of more than 40 million people through both 2008 and 2009 and even went on to exceed 41 million.

U.S. jobs hardest hit by Great Recession even though GDP wasn't


Why did Germany's labor market buck the trend and respond only mildly to the Great Recession? A recent article in the new IZA Journal of Labor Policy (Ulf Rinne and Klaus F. Zimmermann, 2012) argues that the underlying factors are related to major labor market reforms — some of which may be replicated by other countries.

Germany's labor market reforms

Starting in 2003, structural labor market reforms making low-skilled labor productive helped put the economy into a relatively strong position when the crisis arrived in Germany. While the long-term unemployment rate could be substantially reduced, skilled labor in the best-managed and successful companies, typically in the export sector, became increasingly scarce. This is important to recognize as the crisis in Germany mainly affected export-oriented companies, in particular manufacturing, and not the consumption sector. Firms affected by the Great Recession had a strong interest in retaining their qualified workforce against the background of population ageing and the expected future shortages of skilled labor.

The behaviors of social partners (trade unions exercising wage restraint and, more important, using the collective bargaining process to arrive at much more flexible labor arrangements) and automatic stabilizers also helped cushion the crisis' labor market impact. Firms affected by the crisis reacted mainly at the intensive margin to retain their workers. Next to the reduction of overtime hours and other instruments of working time flexibility if available at the firm level (for example, working time accounts), short-time work was the instrument through which this could be managed at reasonable costs.

The labor market reforms are therefore a key factor in explaining Germany's remarkable resilience to the Great Recession. They resulted in a better functioning of the labor market with an increased effectiveness of labor market instruments, improved incentives for the unemployed to take up jobs, and greater labor force participation rates.

Replicating Germany's success

Is the German model transferable to other developed countries? Some aspects of this model are certainly transferable. A substantial part of the country's success story during the Great Recession is its recent reform efforts that have helped putting Europe's "sick man" back on track. These long-term labor market reforms can definitely serve as a role model for other countries. But some aspects are likely to be less transferable. With regards to short-time work, it presumably helped that firms already had experience with using it. In addition, the crisis appeared in Germany as a sector-specific and transitory external demand shock.

However, two other countries — Austria and the Netherlands — also had similar experiences to Germany, and the combination of several features seems to be related to successfully navigating the crisis. They all experienced a transitory shock in external demand; they all expected to face long-term shortages of skilled workers; and they all had short-time work schemes available during the crisis.

One general conclusion that can be drawn from cross-country comparisons of labor market responses to the economic crisis is that countries with existing policy measures to quickly adjust fare relatively well. And previous reform efforts pay off, also and maybe in particular during a crisis. In that light, each country must develop its own strategy for labor market reforms. But it is certainly not a bad idea to take the German model as a reference.

For further information, see: Rinne, Ulf and Klaus F. Zimmermann (2012): “Another Economic Miracle? The German Labor Market and the Great Recession,” IZA Journal of Labor Policy 1, Article 3, 121. [OPEN ACCESS]
By Gladys Lopez-Acevedo, Senior Economist, Poverty Reduction and Economic Management, the World Bank

Traditionally, policy makers have focused on creating jobs to reduce poverty, but jobs alone may not be sufficient. Job quality also matters, although creating "good" jobs is a huge challenge given the advent of global supply chains, which link thousands of firms extending across cultural and political boundaries. One area where there is a large and growing debate about globalization and labor standards is working conditions in apparel factories. At one extreme are those who argue that globalization erodes working conditions and reduces labor compliance in export-oriented sectors. At the other extreme are those who insist that free trade does not interfere with labor compliance. As it turns out, we are learning that good human resource policies may tip the scales.

Made in Cambodia
"Made in Cambodia" by @ndres1, 2010.

The value of human resource policies

In response to growing public concern about "sweatshops" - which are typically associated with low wages, long hours, high temperatures, excessive noise, poor air quality, unsanitary conditions, and abuse (both verbal and physical) - several organizations have pressured governments and employers to improve working conditions. Public exposure, such as anti-sweatshop demonstrations in the 1990s, seems to have paid off in some developing countries. For example, in Indonesia, a study on the impact of these campaigns shows that they led to large real wage increases, although there were some costs in terms of reduced investment, falling profits, and increased probability of closure for smaller plants, but little significant effects on employment (Harrison and Scorse, 2010).

How about other aspects of employment besides wages, such as decent and healthy working conditions, and rights of association? A recent Massachusetts Institute of Technology study explored this question by comparing two pretty similar factories supplying Nike (both are in Mexico, produce more or less the same products for Nike and other brands, and are subject to the same code of conduct). On the surface, these factories appear to have similar employment practices, and they receive comparable scores when audited by Nike’s compliance staff. But the study shows that their actual labor conditions differ significantly. Beyond the code of conduct and various monitoring efforts aimed at enforcing it, workplace conditions and labor standards are shaped by very different patterns of work organization and human resource management policies (Locke et al., 2010). The promotion of these alternative work/human resource management practices can complement traditional monitoring efforts in ways that promote better labor standards.

While the term "human resource management practices" may inspire thoughts of administration and bureaucracy, in developing countries these policies shape and define job quality. Ichniowski et al. (1997) argue that adopting new human resource practices - such as work teams, flexible job assignments, employment security, training in multiple jobs, and extensive reliance on incentive pay - might be viewed as an aspect of production technology akin to shop-floor production technologies. As such, these practices may improve productivity, factory performance, and survival. Subsequent studies support the idea that better work practices can help survival (Brown et al. (2011, 2012).

The Better Work program

In 2001, the Better Factories Cambodia (BFC) program was created by the International Labor Organization (ILO) to monitor and help factories improve working conditions. It grew out of the 1999 U.S.-Cambodia bilateral trade agreement, which created an incentive for factories to improve working conditions by linking such improvements to greater access to the U.S. market. A number of recent studies document sustained increases in working conditions in Cambodia (Miller et al., 2009; Shea et al., 2010; Adler and Woolcock, 2010). Other studies show that the presence of a reputation-sensitive buyer and the policy of public disclosure of noncompliance increased the likelihood of compliance (Oka, 2010a and 2010b). In addition, overall, working conditions didn’t fall as the environment became more competitive (Beresford, 2009). One study even finds that ending the program of public disclosure reduced the rate of compliance, especially between the first and second visit (Ang et al., 2011).

Currently, targeted policies to improve human resource practices are widespread. The Better Work program (www.betterwork.org), which grew out of Better Factories Cambodia, has been one of the most significant programs. Run by the ILO and the International Finance Corporation (IFC), in close collaboration with local and international stakeholders, including unions and buyers, it has been growing over the past decade - with established operations in countries such as Bangladesh, Cambodia, Haiti, Indonesia, Nicaragua, Lesotho, Jordan, and Vietnam. It promotes and enforces labor standards and technical assistance to firms in apparel and textiles to increase their competitiveness in international markets. It also collects periodic data on workers, managers, and firm performance at the factory level as part of their monitoring and evaluation plan. The event that spawned both holidays occurred in Chicago on May 4, 1886, but different political dynamics reflect how they have come to be commemorated in different ways. What became known as the Haymarket Affair (or Haymarket Massacre) started as a peaceful rally in Haymarket Square to support workers that were striking for an 8-hour work day. It turned deadly when a bomb was thrown (the culprit is still unknown), followed by a shoot-out that killed several police officers and civilians. The trial was widely publicized, with eight anarchists sentenced to death on conspiracy charges.

Better Work has a significant presence in the apparel sector - for instance, all export apparel firms participate in Better Work Cambodia. It is also exploring extending its operations to other sectors, such as electronics and tourism.
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