Labor Market Regulations in the Context of Structural Transformation

48 Pages Posted: 3 Jun 2018

See all articles by Priya Ranjan

Priya Ranjan

University of California, Irvine - Department of Economics

Rana Hasan

Asian Development Bank; University of Maryland - Department of Economics

Erik Jan Eleazar

Asian Development Bank

Date Written: April 2018

Abstract

This paper constructs a theoretical model to study labor market regulations in developing countries within the context of structural transformation. When workers are risk averse and the market for insurance against labor income risk is missing, regulations that provide insurance to workers (such as severance payments) are efficiency enhancing and promote structural transformation. However, regulations that simply create barriers to the dismissal of workers not only impede structural transformation, they also end up reducing the welfare of workers. The implications of some other issues like general regulatory burden, weak state capacity, and minimum wage regulations are analyzed as well. The paper provides some empirical evidence broadly consistent with the theoretical results using cross-country data. While dismissal regulations increase the share of informal employment, severance payments to workers do not.

Keywords: dismissal regulations, informal employment, minimum wage, severance payments, structural transformation

JEL Classification: J38, J46, O12, O17, O57

Suggested Citation

Ranjan, Priya and Hasan, Rana and Eleazar, Erik Jan, Labor Market Regulations in the Context of Structural Transformation (April 2018). Asian Development Bank Economics Working Paper Series No. 543. Available at SSRN: https://ssrn.com/abstract=3188619 or http://dx.doi.org/10.2139/ssrn.3188619

Priya Ranjan

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

Rana Hasan (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
808-944-7590 (Phone)
808-944-7399 (Fax)

Erik Jan Eleazar

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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