This paper systematically reviews available research on the impact of labour market regulation on employment in low-income countries (LIC). Studies for inclusion were selected based on the relevance of the study method and context, as well as study quality. Given the small number of studies identified from LICs, it also draws lessons from the experience of countries that were LICs until recently. The authors use a framework synthesis to evaluate the evidence, and also conducted a meta-regression analysis (MRA) of the few comparable minimum wage studies in the formal sector.
The review identified four studies from LICs, 11 studies from recent LICs, and two cross-country studies that met the inclusion criteria. The studies cover a variety of labour regulations, including minimum wages, employment protection, firing rigidities, unemployment insurance, unionization, dispute resolution, and aggregate measures of labour regulation. Most studies focus on employment outcomes in the formal sector, but several studies consider informal, self-employment, or overall employment outcomes. Four studies from recent LICs examine differences in employment outcomes by gender.
The four studies from current LICs examine the effects of minimum wages, the right to unionize, and the impacts of firing rigidities on employment. All of these studies find that labour regulations are associated with lower formal employment levels and formal employment shares. One of these studies also considers the impact of labour regulations on the informal sector, and finds that higher minimum wages are not associated with the share of informal employment, but are associated with an increase in the share of self-employment.
It is concluded that the evidence for LICs (and recent LICs) points to there being a negative effect of regulations on formal employment, and a compensating positive effect on informal employment. The effect on overall employment rates, and on unemployment, is ambiguous. The effect of labour regulations by gender is also ambiguous.
Shanthi Nataraj; Perez-Arce, F.; Srinivasan, S.; Kumar, K.B. What is the impact of labour market regulation on employment in LICs? How does it vary by gender? RAND Corporation, Santa Monica, CA, USA (2012) 79 pp. [RAND Working Paper]