Revisiting the labour market effects of employment protection legislation in Latin America

ADRIANA MARSHALL (GOLDSCHVARTZ)

Ginebra

Congreso; Research Conference on Decent Work, Social Policy and Development; 2006

International Institute for Labour Studies

The debate on the labour market effects of labour regulations in Latin America has been ongoing for at least two decades, starting during the 1980s, gaining momentum in the 1990s in the context of the widespread implementation of economic liberalisation policies, and continuing, perhaps less passionately, in the first half of the 2000s. When the controversy on the labour market impacts of labour laws, originally focussed in European and North American countries, was extended to Latin America it incorporated additional aspects, in particular the relationship between legislation and compliance. In this paper I succinctly review the long period evolution of employment protection legislation and some of its labour market outcomes in Latin America, before, during, and after the 1990s, the decade of "labour reforms". From this review it is apparent that employment protection legislation does influence labour market behaviour, but its effects as well as its importance in relation to international competitiveness seem to have in general been overstressed, neglecting the concurrent impacts of other factors. As it could be expected, employment protection legislation contributes to shape recruitment and dismissal strategies. According to results from comparisons, both across and within Latin American countries, in the latter case prior and after law reforms, selected labour market outcomes, such as shares of temporary employment, structures of job tenure and employment-output elasticities, tend to behave in agreement with what is to be anticipated on the basis of the comparative characteristics of employment protection legislation. However, there is no conclusive evidence supporting the notion that relaxation of constraints on contracts and dismissals is an either necessary or sufficient condition for improving the longer term performance of employment and unemployment. Employment protection legislation appears to influence also the magnitude of non-compliance, but this might be the result of a plausible association between the degree of employment protection and costs to employers of all the mandated social benefits. The explanatory model of the extent of non-compliance with labour legislation should include employment regulations and total labour costs, legal loopholes to circumvent them, level of the labour surplus, intensity of enforcement and cost of penalization of transgressions, and this research is pending. In any case, after international trade was liberalised, allegedly strengthening the incentive to evade regulations, non-compliance continued to be localised mainly in the smallest firms, and not in those sectors producing tradeables, competing in the domestic or external markets. This suggests that non-compliance is more a mechanism for the economic survival of the smallest firms (that, in addition, are less controlled by governments) than a mechanism for increasing international competitiveness.