The unemployment effect of hiring and firing regulation in developing countries: survey evidence

Abstract

Using the results of surveys of senior company managers to measure the strictness of hiring and firing regulation, this article finds that stricter regulation moderately increased unemployment in developing countries over 1992 to 2008.

Keywords:

• dismissal protection
• employment protection
• hiring and firing regulation
• unemployment

JEL Classification:

• E24
• J63
• J64
• J68

Notes

¹ We already used it in a previous paper covering industrial countries, finding robust evidence for an adverse effect (Feldmann, 2009).

² ‘Collective bargaining’, ‘income and payroll taxes’ and the additional regulation variables are scaled to range from zero to one, with higher values indicating a higher degree of centralization in collective bargaining, higher top marginal income and payroll tax rates, and stricter regulation, respectively. While ‘minimum wage’ is in decimal fraction of the mean wage, ‘unemployment benefits’ is in decimal fraction of previous wage earnings. Sources: ‘collective bargaining’ and ‘income and payroll taxes’ – Gwartney and Lawson (2009; gaps filled by linear interpolation); ‘minimum wage’ and ‘unemployment benefits’ – Aleksynska and Schindler (2011); ‘financial sector regulation’ – Abiad et al. (2008); regulation of product markets, international trade and capital account transactions – constructed by the author of this article using Ostry et al. (2009) data. ‘Real interest rate’ and ‘inflation rate’ are in decimal fraction. ‘Openness’ is the ratio of exports and imports to GDP. ‘GDP per capita’ is in tens of thousands of constant dollars, PPP. The last four variables are from World Bank (2011). Using data from this source, ‘output gap’ (decimal fraction) was constructed by the author of this article. ‘War’ and ‘systemic banking crises’ are dummy variables, constructed using data from the Centre for the Study of Civil Wars (2009) and Laeven and Valencia (2008), respectively. While ‘private credit’ is the value of credit by deposit money banks and other financial institutions to the private sector, ‘stock market activity’ is the value of shares traded on domestic stock exchanges; both variables are in decimal fraction of GDP (Beck et al., 2012). The data for the unemployment rate (%) are based on labour force surveys and are harmonized to a large extent (ILO, 2010).

³ Developing countries are defined as low- and middle-income countries according to World Bank classification.