Ebook Labor Market Regulation and Productivity
Since the Asian and the Russian crisis, Latin America has struggled to recover its long term productivity growth. Recent evidence suggests that Asian emerging economies have been more successful in recovering from the crisis (Calderon and Fuentes, 2006). Only in the last few years, mainly due to the high terms of trade, Latin American economies have been growing at a faster pace.
Chile has not escaped to this trend. After being a successful example of growth over 1986-1997 (TFP grew at 3%), the aggregate productivity growth rate has dramatically declined over the last 10 years (TFP grew at 0.4%) (Figure 1.1). The profession has not come out with an undisputable answer to explain this decline. Most of studies regarding total factor productivity have emphasized the macroeconomic environment and economic reforms to explain aggregate productivity growth. Chile has been an example of good macroeconomic management today and in the recent past (Fuentes and Mies, 2005). However, casual evidence suggests that there are some micro issues where the country is showing deficiencies (World Economic Forum, 2008). Then, the answer to this puzzle should be searched on the micro side.
One of the challenges to conduct an empirical study on the effect of micro policies on productivity of individual plants across sectors is that most of the policies in Chile are neutral. In contrast to some other countries, there is not regional variation in regulations as those that have been useful to identify their effects in countries like the U.S. and India.
In Chile, there are very few policies to target specific sectors or specific regions. Although there are some targeted specific programs for small firms, the lack of consistent data for beneficiaries of these programs limits the possibility of studying the effects of micro policy at the level of firms. There are several studies that look at the effect of trade orientation on productivity of the Chilean manufacturing industry. But as far as we know none of them study the effects of other type of microeconomic regulations. Bergoeing et al (2006) uses the identification strategy of Rajan and Zingales (1998) to analyze how financial development affects the productivity of plants operating in industries that differ in external financing needs. A similar strategy has been used by Álvarez and Görg (2007) to identify different responses in domestic and multinational plants during the last economic crisis in Chile. We think that broader questions need to be addressed to explain productivity slow down shown in figure 1.1.
Despite the neutrality of Chilean policies in general, it is possible to observe changes in policies over time (labor’s law, minimum wages, and import tariff cuts due to free trade agreements) that would have different effects on the performance of individual plants and sectors. For instance, it can be argued that changes in the labor’s law or minimum wage and adjustment costs of adjustment for labor will differently affect plants depending on the capital and labor intensity used in each one, or the ratioof unskilled workers to skilled workers they have. It should be expected that for those plants that the minimum wage is a relevant parameter, movements in this variable will certainly affect the demand for labor. Moreover, we may also observe firing processes. If, however, there are relevant firing cost, such as high severance payments, firms may be unable to adjust employment because is too costly. They may forced by regulation to keep undesired less skilled workers affecting plant’s productivity. Then, several interesting questions arise from these micro policy changes. How more rigid labor markets may affect resource allocation across plants and even sectors? What is the implicit productivity cost of not using the “right” capital/labor ratio?
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