Labor Institutions and Development Under Globalization

Abstract

Labor market regulation is a controversial area of public policy in both developed and developing countries. After decades of de-regulatory advice, international financial institutions have recently come to a less extreme position. But any 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 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 with balance-of-payments constraint for a "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 though positive effects on aggregate demand, labor productivity and technology. * An earlier version of this article has appeared in Nissanke and Ocampo (2019). The authors would like to thank Alex Izurieta for helpful comments and suggestions.

Labor Laws and Manufacturing Performance in India: How Priors Trump Evidence and Progress Gets Stalled

“…"… laws created to help workers often hurt them," is how the World Bank (2008, p. 8) sums it up. This particular 'perversity trope' has been invoked numerous times in the Indian debate on the impacts of labor market regulation on registered manufacturing performance that has been raging for decades (Bhattacharjea 2006;Schrank 2014;Srivastava 2016;Storm and Capaldo 2018;Karak and Basu 2019). To justify policies of labor market deregulation, successive Indian governments, of varying political colors, have claimed that India's 'archaic' and 'restrictive' labor regulation in registered manufacturing hurt industrial performance-the recent anti-labor reforms by the BJP-led government of Narendra Modi are only the latest manifestation of what has been standard policy since at least the mid-1980s.…”

“…As the example of Besley and Burgess (2004) illustrates, the social and economic damage caused by wrong-headed policy advice can be substantial. I know of no credible evidence that suggests that pro-worker labor regulation systematically ends up hurting workers and that could possibly justify the waves of labor market deregulation around the globe (Freeman 2010;Storm and Capaldo 2018). If anything, labor regulation is a strong force for the social good and for economic progress, because it acts as 'beneficial social or regulatory constraints' (see Streeck 2004), which force capitalists (in Schumpeterian fashion)…”

“…to innovate so as to benefit from these constraints and thereby improve the economy's dynamic efficiency (Storm and Capaldo 2018). The evidentiary base in support of the 'technology-forcing' impacts of labor rules is building up in an unrelenting manner-and it will eventually force established theory to recognize that laws created to help workers do not hinder economic performance-not in India nor elsewhere.…”