Designing Labor Market Institutions in Emerging Market and Developing Economies: A Review of Evidence and IMF Policy Adv
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Designing Labor Market Institutions in Emerging Market and Developing Economies: A Review of Evidence and IMF Policy Advice Romain Duval1 · Prakash Loungani1
© Association for Comparative Economic Studies 2020
Abstract This paper reviews the state of theory and evidence on the design of labor market institutions in emerging markets and developing economies. Compared with advanced economies, these economies tend to have larger market failures, which creates a strong case for government intervention. But they also face larger risks of policy failures due to informality and limited administrative capacity. We draw specific implications from this tension for the design unemployment insurance, job protection legislation, minimum wages and wage bargaining systems. We then use text mining techniques to identify and review a decade of IMF recommendations in these areas for 30 emerging market and developing economies. Keywords Labor market institutions · Employment protection · Unemployment benefits · Social assistance · Cash transfers · Minimum wage · Collective bargaining JEL Classification J08 · J21 · J38 · J58 · J65 · J68
Introduction Employment and productivity growth objectives still loom large in emerging market and developing economies as they try to close the income gap with advanced economies. At the same time, workers in these economies, particularly lower-income workers, often lack basic protections. This raises the issue of how to provide such protections, including through labor market institutions, in the most efficient possible way. In the last 2 decades, substantial theoretical progress has been achieved * Romain Duval [email protected] Prakash Loungani [email protected] 1
International Monetary Fund, Washington, DC, USA Vol.:(0123456789)
R. Duval, P. Loungani
regarding the optimal design of labor market institutions in advanced economies, and a voluminous body of empirical evidence has documented the impact of these institutions on economic outcomes. As regards emerging market and developing economies, however, theory and evidence remain more scant, scattered and recent. One goal of this paper is to sum up the state of that knowledge, and to draw preliminary normative implications regarding how best to design labor market institutions in a developing economy context. In that regard, perhaps the closest predecessor to our paper is Betcherman (2012, 2015), who provides a comprehensive review of the empirical literature. Relative to his work, our paper does not aim for comprehensiveness but instead brings together insights from both theory and evidence, and it focuses more squarely on drawing normative lessons. The other objective of this paper is to explore whether these normative lessons are consistent with the labor market policy advice given by the International Monetary Fund (IMF)—an influential player in emerging market and developing economies through its surveillance (Article IVs, in particular) and lending activities (with conditionality in IMF programs including labor market reforms in a
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