Labor Institutions and Development Under Globalization

38 Pages Posted: 9 Aug 2018

See all articles by Servaas Storm

Servaas Storm

Delft University of Technology - Department of Economics

Jeronim Capaldo

International Labour Office

Date Written: May 30, 2018


Labor market regulation is a controversial area of public policy in both developed and developing countries. Mainstream economic analysis traditionally portrays legal interventions providing for minimum wages, unemployment insurance and (often only a modicum of) employment protection as ‘luxuries’ developing countries cannot afford. After decades of de-regulatory advice, international financial institutions have recently come to a less extreme position. But any such concessions to labor regulation are based on concerns for social stability or for short-term support to aggregate demand, while regulation continues to be viewed as harmful to economic efficiency in the long run. In this paper we take a deeper look at the impact of labor institutions on economic development in two ways. First, we propose a macroeconomic model of a balance-of-payments constrained “small” developing country open to trade and foreign capital. This helps us clarify the importance of a dynamic view of economic efficiency, as opposed to the static view embedded in mainstream policy advice. Secondly, we discuss the political economy of labor regulation. We argue that labor institutions promote economic development through positive effects on aggregate demand, labor productivity and technology.

Keywords: Labor regulation, labor cost, balance-of-payments constrained growth, labor income share.

JEL Classification: F43, F63, F66, O4, J3, J8

Suggested Citation

Storm, Servaas and Capaldo, Jeronim, Labor Institutions and Development Under Globalization (May 30, 2018). Institute for New Economic Thinking Working Paper Series No. 76, Available at SSRN: or

Servaas Storm (Contact Author)

Delft University of Technology - Department of Economics ( email )

Jaffalaan 5
2628 EB Delft
31-15-2783548 (Phone)
31-15-2783480 (Fax)

Jeronim Capaldo

International Labour Office ( email )

CH-1211 Geneva 22

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