Political Regimes, Trade and Labor Policies
40 Pages Posted: 20 Apr 2016
Date Written: October 1995
Authoritarian systems that repress labor are more likely than democratic systems to adopt inefficient labor policies inimical to development. The more open the trade regime, the fewer distortions in the labor market. What, if any, is the link between labor market policies that benefit insiders - for example, regulations guaranteeing high minimum wages and strict job security - and political regimes?
Is it true that in a democracy outsiders vote and impose limits on what insiders can achieve, whereas in a dictatorship the government need worry only about insiders who have real power? Or are democratic governments more likely to succumb to trade union pressure and use labor policies to give them special privileges? To test these competing hypotheses, Banerji and Ghanem designed a two-sector political economy model that demonstrates that labor market distortions depend directly on the trade regime: The more open the trade regime, the fewer distortions in the labor market.
They use cross-country regressions to test the relationship between political and civil liberties and trade and labor policies. Using data for 90 developing countries, they apply existing indices of openness and political freedom and two different constructed measures of labor market distortion. Their conclusion, based on the regression results: Authoritarian systems that repress labor are more likely than democratic systems to adopt inefficient labor policies inimical to development.
This paper - a product of the Office of the Vice President, Development Economics - was prepared as a background paper for World Development Report 1995 on labor.
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