Impact of Labor Market Institutions on Unemployment: Results from a Global Panel

Abstract

Policies and programs designed to protect workers may, paradoxically, have a negative impact on labor as a whole by increasing unemployment. A key question is which policies have this effect. Using a 3-year panel of 90 countries, the study finds that the unemployment rate is affected by the existence, duration, and replacement rate of unemployment insurance. Hiring and retrenchment regulations and the nature of collective bargaining, however, are not significantly correlated with unemployment. These results are broadly in line with the extensive literature on countries of the Organisation for Economic Co-operation and Development but are at odds with the few cross-country studies that have considered a wider sample. These findings question again whether the deregulation of labor markets in developing countries will improve labor market outcomes.

Keywords: labor market, unemployment, regulation, institutions

JEL Classification: J64, J65, J68