FIGURE 4.2
FIGURE 4.3
and markets, firms tend to stay small and Rigid labor regulations are associated create fewer jobs.1 Workers in the inforwith a larger informal sector mal sector receive no benefits or social Informal sector share of GDP security, lack formal protection from arHigh bitrary or discriminatory treatment and may receive lower wages.2 According to a recent OECD study, 1.8 billion people are employed in the informal economy worldwide—far more than the 1.2 billion Low in the formal economy.3 Least Most Finding that burdensome regulation rigid rigid Economies ranked by makes it difficult for workers to move difficulty of hiring index, quintiles between firms and industries, another Note: Relationships are significant at the 5% level and remain study concludes that this probably leads significant when controlling for income per capita. Source: Doing Business database; Schneider (2007). to higher job losses due to external economic shocks.4 Stringent employment prevent more people from slipping into regulation also reduces a firm’s ability to FIGURE 4.4 Both are critical for an econopoverty. respond adequately to demand or proEconomies with unemployment protection schemes Share of region my’s competitiveness. ductivity shocks, according to a study of In OECD response to the crisis, many weekly laborNumber choices in an international of economies— 27 100% high income economies reformed unemployment fast food chain covering 2,500 outlets in Eastern Europe 23 85% rigid re& Central Asiaschemes in recent months by protection 43 economies.5 And excessively Middle East expanding benefits or lowering6eligibilstrictions on hiring and redundancy tend 32% & North Africa ity thresholds. Brazil, Canada and the to raise labor costs, reducing opportuniEast Asia 7 29% United& Pacific States extended the period over ties for firms to spend on innovation and Latin America which unemployment benefits adapt to new technologies.6 7 22%are paid. & Caribbean Italy expanded coverage to those who Labor reform is challenging. Most South Asia 1 13% previously did not qualify. Korea pro- major developments in labor law have Sub-Saharan 3 7% vided aid to vulnerable workers put on taken place in the context of big political Africa temporary unpaid or economic shifts. In Western econoSource: Doing Business database.leave. Chile, China, Germany, Japan, Mexico, the Philippines, mies the industrial revolutions of the Thailand and Vietnam similarly extended 19th century brought about regulation to unemployment benefits. protect workers against abuses incidental FIGUREIn dropped economies that cannot afford ex- to new forms of large-scale mining and Reforms in laborsecurity regulation bring greater pensive social systems, sever-flexibility manufacturing. Fundamental labor laws Rigidity of employment index (0–100) ance pay can serve as a substitute for were adopted in Latin America follow50 unemployment benefits. This year Doing ing the Mexican Revolution ending in Business has introduced changes to the 1917 and in Russia following the October 40 employing workers indicators to take Revolution the same year. account of the existence of safety nets— In more recent times the collapse 30 whether in the form of unemployment of the Soviet–26 Union and the EU acces–10both per- –15 benefits or severance pay—for sion movement triggered –31 a new wave 20 manent and temporary workers in cases of reforms. Since Doing Business started 2008 of10redundancy for economic reasons (see tracking reforms in 2004, close to two2009 –3 Data notes for details). thirds of Eastern European and Central Asian economies and half of OECD 0 In many developing economies emKyrgyz Montenegro Rwanda Macedonia, FYR ployers andBelarus employees continue to face high-income economies have made labor Republic overly rigid regulations. Faced with exregulation more flexible. Estonia, HunNote: Higher values indicate more rigid regulation. Source: Doingrestrictions, Business database. many firms simply cessive gary and Slovenia introduced new labor choose to opt out of the regulated formal laws following the end of the cold war. sector and operate or hire workers in the The prospect of EU accession led several FIGURE 4.1 informal sector (figurehave 4.3).less There, withlaboreconomies Low-income economies flexible regulations to introduce EU labor stanless access to formal finance, institutions dards in domestic law, including Latvia, 70 40 35
Low income
40
40
35
35
Low income
Low income
60
Employing workers
23
Employing workers: rules on hiring,
FYR Poland, and the Slovak workMacedonia, schedules and redundancy 7 based on 4 subindicators Rankings are Republic. Nonstandard work schedules, Fixed-term contracts, developing In contrast, economies paid vacation days minimum wage have made few reforms in aspects of regulations 25% 25% labor regulation covered by Doing BusiRigidity ness. Take Difficulty the 2 regions with the most of hiring of hours index index regulation: rigid employment in SubSaharan Africa25% only 25% 6 of 46 economies Difficulty of Redundancy made labor regulations more flexible in redundancy cost the past 5 years index(Burkina Faso, Mauritius, Mozambique, Namibia, Rwanda As weeks of salary; Mandatory legal includes notice period requirements on dismissals and Uganda); in Latin America only 3 and severance payments for economic reasons did (Argentina, Colombia and Peru). In Note: SeeAsia Data notes for details. South only Bhutan and Pakistan increased flexibility. In East Asia and the Pacific, Vietnam was the only developing economy to do so. Some of the econoFIGURE with 4.5 mies the most rigid regulation in Where the cost of redundancy highest? the firstisplace made it even more rigid— Average cost to terminate redundant workers including Cape Verde, Djibouti, Fiji, The (weeks of salary) Gambia, Honduras, Maldives, Moldova, 446 Zimbabwe Togo and Zimbabwe. Sri Lanka Reform is challenging, but getting the 200 level of employment regulation right Sierraeffort. Leone And it matters for is worth the Ghana, Zambia the impact of other reforms. Following reforms to reduce barriers to entry in 150 India, a recent study found that states with more flexible employment regulation saw a 25% larger reduction in the 100 number of informal firms.8 The most vulnerableSouth groups, women and youth, Asia Sub-Saharan Africa from reforms. could benefit the most Middle East & North Africa, While employment protection Latin America & Caribbeanlaws may 50 East Asia & Pacific that employed increase the likelihood Eastern Europe & Central Asia workers will stay their job, for those OECD high in income without a job they reduce the chances Denmark New Zealand of0finding employment or reentering the Puerto Rico 9 This United Statesparticularly affects labor market. women, who tendBolivariana to exitde from Note: Bolivia and República Venezuelaand are reexcluded the because redundancy for economic reasons enter labor market more frequently is not possible. during their career. database. Source: Doing Business
Who reformed in 2008/09? Eleven economies reformed their labor laws in 2008/09 (table 4.2). Seven increased flexibility in employing workers; 4 reduced it. Eastern Europe and Central Asia had the most reforms, with 4 economies introducing more flexible regulation, followed by Sub-Saharan Africa. Rwanda was the top reformer.