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Tito Boeri (Bocconi University, IGIER and CEPR) Brooke Helppie (University of Michigan) Mario Macis (University of Michigan and IZA)

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Presentation on theme: "Tito Boeri (Bocconi University, IGIER and CEPR) Brooke Helppie (University of Michigan) Mario Macis (University of Michigan and IZA)"— Presentation transcript:

1 Tito Boeri (Bocconi University, IGIER and CEPR) Brooke Helppie (University of Michigan) Mario Macis (University of Michigan and IZA)

2  The process of economic growth (& globalization) generates risks (employment risk, income risk)  The market alone often cannot provide protection from such risks  Also, some institutions might be pre- requisite ◦ e.g., unemployment insurance and efficient matching (Acemoglu and Shimer 1999)

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4  Employment risk ◦ Employment protection (EPL) ◦ Unemployment benefits (UB)  Earnings risk ◦ Minimum wages (MW) ◦ Mandated benefits (MB)  Keeping in mind… ◦ Peculiarities of developing countries contexts ◦ Interactions between institutions

5  Middle-Low income countries have crucial peculiarities: ◦ Weak law enforcement ◦ Large informal sectors ◦ Underdeveloped capital markets ◦ Extensive informal credit and insurance networks   “standard” theoretical predictions might fail to hold; extra care is needed when interpreting findings

6  Ambiguous predictions ◦ Competitive labor markets:  employment,  wage and welfare of those who remain employed,  welfare of those who lose their job; deadweight loss ◦ Imperfect labor markets: redistributive effects, unclear whether employment effects  Predictions also depend on institutional context ◦ Compliance, enforcement, existence of uncovered sector(s), other regulations

7  It depends on country, source of variation, methods, population of interest. Hard to identify general patterns.  Effects on wages: ◦ Largest on workers earning close to the MW ◦ Evidence of “spillover effects” throughout the distribution and in uncovered sectors  Effects on employment: ◦ employment of workers most likely to be directly affected  younger workers, females (Fajnzylber 2001, Montenegro-Pages 2004); blue collars (Suryahadi et al. 2003); employees of small firms (Rama 2001, Alatas-Cameron 2003) ◦ employment of workers who become relatively cheaper  males ages (Feliciano 2008); white collars (Suryahadi et al. 2003) ◦ self-employment (Maloney and Nunez-Mendez 2004); mixed evidence of effects on informality

8  No research on long-run effects of MW in developing countries ◦ Evidence from the US suggests important long-run consequences (e.g., Neumark-Nizalova 2007)  Limited, mixed evidence on effect of MW on poverty ◦ Morley 1995:  in cross-section of LAC countries; Lustig-McLeod 1997:  in panel of countries; Neumark-Cunningham-Siga 2006 : no effect; Gindling-Terrell 2007: small effects  Limited or no research on effects of MW on other margins ◦ E.g., hours, training, non-cash compensation (preliminary evidence from Thailand presented by Kilenthong-Macis 2010 suggests complex interactions)  Limited or no research on the political economy of MW setting ◦ Neumark-Wascher 2004; Boeri 2009

9  MB: unambiguously  $ pay, but employment might  or  depending on how much workers value the benefits. Net welfare effects might be positive.  However: ◦ If benefits only given to a subset of workers, these might be discriminated against  E.g., might see  use of part-time, temporary work; smaller firm size; males ◦ If a MW exists, negative employment effects might be severe even when benefits are highly valued Source: Helppie and Macis (2009)

10  Very few studies in developing Country contexts  Could (carefully) look at studies from developed countries: ◦ Gruber 1994 (US): mandated health insurance coverage of childbearing costs  wages &  hours worked by women of prime childbearing age ◦ Baker-Milligan 2005 (Canada): maternity leave  labor force participation of women before childbirth and  the rate of return to the same or similar job  The limited evidence from developing countries suggests similar effects ◦ MacIsaac-Rama 1997 (Ecuador): evidence of wage shifting due to 13 th -16 th salaries+other mandated benefits ◦ Zveglich-van der Meulen Rodgers 2003 (Taiwan): no evidence of wage shifting;  hours and  employment but only after the laws began to be enforced

11  Evidence from developing countries is essentially non-existent ◦ Not just on mandated benefits, but also on in-kind compensation and its interaction with cash compensation  Benefits are heterogeneous in nature, beneficiaries, implementation, and enforcement: difficult to draw overarching conclusions  Unlikely that research will soon establish whether benefits are efficient or distortionary, good or bad for the economy ◦ Research should aim at analyzing the effects of individual policies in individual countries or contexts, looking at efficiency, distributional, and informalizing effects

12  EPL is multi-dimensional institution ◦ Severance payments, advance notice, procedural requirements, etc…  Conceptually, two components: Transfer & Tax  Dynamic search and matching models (e.g., Blanchard-Portugal 1998) predict reduced ability of employers to adjust labor to the desired level in response to shocks ◦ job turnover ◦ employment,  unemployment duration ◦ Insider-Outsider dualism  However, in the presence of relationship-specific investments, MacLeod-Nakavachara 2007 predict: ◦ turnover,  productivity and possibly  employment

13  Early cross-country studies: ◦ weak or no effects of EPL on employment  Heckman-Pages 2000 and 2004 ◦ careful panel studies of LAC;  impact of EPL on formal employment, and  on informal sector  Micco and Pages 2006 ◦ diff-in-diffs methodology,  job flows,  value added and  employment (driven by  firm entry)  Lafontaine and Sivadasan (2009): ◦ SAME firm (so same product, same technology) in a large sample of countries; finding: stricter EPL severely limits the ability of the firm to adjust labor in response to demand or productivity shocks

14  Latest developments: Focus on longitudinal, individual-level data, single countries, developing countries, attention to enforcement issues ◦ Autor-Kerr-Kugler 2007 (USA):  turnover,  capital intensity,  unskilled empl,  skilled empl. ◦ Kugler 1999 (Colombia) : reduction in firing costs  unemployment duration ◦ Montenegro-Pages 2003 (Chile):  employment probability of women & younger workers relative to prime-age men ◦ Garibaldi et al. 2004, Schivardi-Torrini 2005 (Italy):  effect on firm growth, esp. around the 15-employee threshold ◦ Almeida-Carneiro 2008 (Brazil): focus on enforcement and find that stricter enforcement  firm size,  output and  capital stock

15  Interactions with other institutions have been recognized only very recently ◦ EPL and capital markets  Bertola 2004: if financial markets are imperfect, EP can be beneficial  Bertola-Koeninger 2007: EPL reform easier if accompanied by increased access to capital markets ◦ EPL and product market regulation  Koeninger-Prat 2007: PMR (sunk entry cost) increases the size of firms and has positive effect on job turnover  Fiori et al. 2007: employment gains from product market reforms in OECD countries were larger in countries with stricter EPL

16  Contingent payments made to workers who lose their job  Traditional focus: consumption-smoothing gains vs. reduced job-search incentives  Issues that gained attention more recently: ◦ UB increase unemployment duration by relaxing liquidity constraints (Chetty 2008) ◦ UB might influence the extent and quality of job reallocation (Acemoglu-Shimer 1999,2000)

17  UBs are very uncommon in developing countries ◦ E.g., ij Africa, only four Countries offer UB (Algeria, Egypt, South Africa and Tunisia)  Evidence from developed economies suggests that: ◦ UBs help smooth consumption during episodes of job loss (Gruber 1997), especially for households who are liquidity- constrained (Browning-Crossley 2001) ◦ UBs increase unemployment duration (long list of citations), but Chetty 2008 suggests that it does so through liquidity effects rather than moral hazard effects  Many middle-income countries introduced UB for the first time in the past years ◦ Boeri-Macis 2009: UB associated with increased job turnover & shift from agriculture to services

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19  Growth & Globalization create risks for workers  Markets alone are unlikely to provide full protection for these risks  Challenge: Provide protection while at the same time minimizing distortions  Theoretical prediction often ambiguous, dependent on the underlying model.  Predicted effects depend on context (institutional, cultural, etc).  empirical analyses necessary

20  In some cases, the balance of theory & evidence gives relatively clear prescriptions: ◦ To provide protection against employment risk, UB seem to work better than EPL b/c not detrimental to job turnover & reallocation  In other cases, “the jury is still out” ◦ More research is needed to assess the complex effects of MW and MB


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