In Defence of Labour Market Institutions

In Defence of Labour Market Institutions

The International Labour Organization The International Labour Organization was founded in 1919 to promote social justice and, thereby, to contribute to universal and lasting peace. Its tripartite structure is unique among agencies affiliated to the United Nations; the ILO s Governing Body includes representatives of government, and of employers and workers organizations. These three constituencies are active participants in regional and other meetings sponsored by the ILO, as well as in the International Labour Conference a world forum which meets annually to discuss social and labour questions. Over the years the ILO has issued for adoption by member States a widely respected code of international labour Conventions and Recommendations on freedom of association, employment, social policy, conditions of work, social security, industrial relations and labour administration, among others. The ILO provides expert advice and technical assistance to member States through a network of offices and multidisciplinary teams in over 40 countries. This assistance takes the form of labour rights and industrial relations counselling, employment promotion, training in small business development, project management, advice on social security, workplace safety and working conditions, the compiling and dissemination of labour statistics, and workers education.

In Defence of Labour Market Institutions Cultivating Justice in the Developing World Edited by Janine Berg and David Kucera

International Labour Organization 2008 First published in 2008 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world. ISBN 978-1-349-35963-9 DOI 10.1057/9780230584204 ISBN 978-0-230-58420-4 (ebook) And International Labour Office CH-1211 Geneva 22, Switzerland ISBN-13: 978 92 2 119319 7 hardback Softcover reprint of the hardcover 1st edition 2008 978-0-230-53805-4 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. Publications of the International Labour Office enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights of reproduction or translation, application should be made to ILO Publications (Rights and Permissions), International Labour Office, CH-1211 Geneva 22, Switzerland, or by email: pubdroit@ilo.org. The International Labour Office welcomes such applications. The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data In defence of labour market institutions : cultivating justice in the developing world / edited by Janine Berg and David Kucera. p. cm. Includes index. 1. Labor market Developing countries. I. Berg, Janine. II. Kucera, David, 1960- HD5852.I5 2007 331.1209172 4 dc22 10 9 8 7 6 5 4 3 2 1 17 16 15 14 13 12 11 10 09 08 2007050218

If you wish for peace, cultivate justice ILO motto

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Contents List of Tables and Figures Acknowledgements Notes on Contributors xi xiii xv 1 Introduction 1 Janine Berg and David Kucera 1.1 The labour market flexibility debate 1 1.2 Overview of the chapters 3 2 Labour Institutions in the Developing World: Historical and Theoretical Perspectives 9 Janine Berg and David Kucera 2.1 Introduction 9 2.2 What are labour institutions? 11 2.3 History of labour standards and the ILO 15 2.4 International labour standards: Are they relevant? 19 2.5 The debate on labour market flexibility 22 2.6 Conclusion 27 3 Measuring Labour Market Institutions: Conceptual and Methodological Questions on Working Hours Rigidity 32 Sangheon Lee and Deirdre McCann 3.1 Introduction 32 3.2 A review of the indicators 34 3.3 Methodological and conceptual questions on measuring working time rigidity 37 3.4 Legal texts and actual hours: de jure and de facto regulation 45 3.5 Concluding remarks 58 4 Institutions and the Finance of General Skills Training: Evidence from Africa 64 Irmgard Nübler 4.1 Introduction 64 4.2 Strategic decision of firm and worker: a trust game 65 4.3 Evidence from Africa 70 4.4 Conclusions 75 vii

viii Contents 5 The Origins of Unemployment Insurance: Lessons for Developing Countries 80 Janine Berg and Matthew Salerno 5.1 Introduction 80 5.2 The different ways of compensating unemployment 81 5.3 The origins of unemployment insurance 83 5.4 Is unemployment insurance suitable for developing countries? 91 5.5 Is unemployment insurance the right approach? 95 5.6 Conclusions 97 6 The Revival of Minimum Wage Setting Institutions 100 François Eyraud and Catherine Saget 6.1 Introduction 100 6.2 Minimum wage setting institutions 101 6.3 The minimum wage and collective bargaining 102 6.4 The minimum wage and poverty 106 6.5 Workers with no form of wage protection 108 6.6 The minimum wage and wage inequality 111 6.7 The minimum wage and employment 112 6.8 Conclusion 116 7 What Can the Labour Demand Function Tell Us About Wages and Employment? The Case of the Philippines 119 Jesus Felipe and J.S.L. McCombie 7.1 Introduction 119 7.2 Derivation of the elasticity of demand for labour 123 7.3 A more parsimonious interpretation 125 7.4 Do minimum wages cause unemployment in the Philippines? 128 7.5 The Philippine labour demand function 134 7.6 Do increases in the minimum wage rate induce increases in the average wage rate in the Philippines? 137 7.7 Conclusions 138 8 The Impact of Trade Unions: What Do Economists Say? 150 Zafiris Tzannatos 8.1 Introduction 150 8.2 You need three to tango: workers, employers and governments 151

Contents ix 8.3 Empirical evidence: microeconomic 159 8.4 Empirical evidence: macroeconomic 171 8.5 Summary and conclusions 179 9 Labour Standards and Informal Employment in Latin America 192 Rossana Galli and David Kucera 9.1 Introduction 192 9.2 Prior empirical evidence for Latin America 196 9.3 Employment data definitions, sources and overview 198 9.4 Labour standards and formal and informal employment 200 9.5 Concluding remarks 212 10 Legal Determinants of Labour Informality 218 José Luis Daza Pérez 10.1 Introduction 218 10.2 Concepts and definitions on informality at work 219 10.3 The legal framework of labour: the reality of the scope of labour law regarding inclusions, exclusions and exemptions 223 10.4 Attitude of states towards informality 228 10.5 Conclusion: policies to incorporate workers and informal activities into the formal economy 231 11 New Trends in Latin American Labour Reforms: The Law, its Reform and its Impact in Practical Terms 233 María Luz Vega Ruíz 11.1 Introduction 233 11.2 Main amendments to labour relations 239 11.3 Main amendments to collective labour relations 251 11.4 Conclusions 256 Bibliography 264 Index 283

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List of Tables and Figures Tables 3.1 Rigidity of Hours Index, ILO standards and national laws 41 3.2 International standards on working time and the World Bank Rigidity of Hours Index 44 3.3a Statutory hours, observance and working-hour regulation index 50 3.3b Statutory hours, observance and working-hour regulation index 52 3.4 Working hours by formal and informal employment 57 4.1 Apprenticeship fees in Togo 72 5.1 Dates of legislative enactment of unemployment compensation 89 5.2 Characteristics of original unemployment insurance systems 90 6.1 Minimum wage-fixing procedures 103 6.2 Categories of workers excluded from the principal legislation on the minimum wage 109 6.3 Impact of a 10 per cent minimum wage increase on employment amongst young people in the United States, 1954 1979 (percentages) 113 6.4 Effect of the minimum wage on employment in certain developing countries 114 7.1 Marginal revenue product of labour function, the minimum wage rate and the accounting identity, the Philippines, 1980 2003 131 7.2 The labour demand function and the accounting identity, the Philippines, 1980 2003 134 7.3 Impact of increases in the minimum wage rate on the average wage rate, the Philippines, 1980 2003 138 8.1 Selected indicators of economic performance in studies assessing the effects of trade unions 151 8.2 Aspects of bargaining coordination 155 8.3 Externalities associated with decentralized wage setting 157 8.4 Country rankings based on alternative valuations of bargaining coordination 172 9.1 Types of labour standards 193 9.2 Non-agricultural employment shares and labour market and development indicators for 14 Latin American countries, 1990 97 201 xi

xii List of Tables and Figures 9.3 Correlation coefficients (Pearson) for non-agricultural employment shares and labour market and development indicators for 14 Latin American countries, 1990 97 period averages 203 9.4 Trend regressions of employment shares on civil liberties indices and GDP per capita for 13 Latin American countries, 1990 97 206 9.5 Regressions of employment shares on lagged civil liberties indices and GDP per capita for 13 Latin American countries, 1990 1997 208 9.6 Trend regressions of employment shares on wage share and GDP per capita for 13 Latin American countries, 1990 97 210 9.7 Difference regressions of employment shares on wage share and GDP for 13 Latin American countries, 1990 97 211 Boxes 2.1 Labour institutions 12 Figures 2.1 Determining labour institutions 13 3.1 Proportion of workers working more than 48 hours per week 35 3.2 Statutory normal hours by national income (total 138 countries) 48 3.3 Observance rate and income by statutory working hour standards 53 3.4 Working hour regulation index and national income 54 4.1 Trust game in training 67 4.2 Hostage training game 69 5.1 Percentage of labour force employed in agriculture at year of enactment, select countries and territories 92 5.2 GDP per capita when unemployment insurance was enacted, 2001 (US$) 94 5.3 GDP per capita in 2001 of selected countries without unemployment insurance 95 7.1 Labour share, the Philippines 1980 2003 132 7.2 Real average and minimum wage rates. Philippines 1980 2003 133 7.3 Ratio minimum to average wage rates. Philippines 1980 2003 133 7.4 User cost of capital and profit rate. Philippines 1980 2003 136 9.1 Non-agricultural employment shares for 14 Latin American countries, 1990 97 199

Acknowledgements In November 2005, the ILO s Policy Integration Department and Economic and Labour Market Analysis Department held a two-day technical staff seminar on Labour Market Institutions and Employment in Developing Countries at ILO headquarters in Geneva. The objective of the seminar was bring together ILO staff working on the employment effects of labour market institutions in developing countries in order to improve our work in this area as well as reflect on the ongoing debate on labour market rigidities. We are grateful to the participants of the seminar, from ILO headquarters and the field, as well as the outside experts, for a very engaging and lively discussion of the issues. We would also like to thank those participants whose contributions appear as chapters in this volume. We are extremely grateful to Peter Peek for initiating the seminar and for his ongoing support of our work in putting together this volume. We would also like to thank Peter Auer for his support, including his participation in the seminar and for his valuable comments on our draft chapters. The seminar and volume were financed by funds from the Follow-Up to the World Commission on the Social Dimensions of Globalization and by the Economic and Labour Market Analysis Department of the ILO. We are grateful to Duncan Campbell, Riswanul Islam, Peter Peek and Peter Auer for help with arranging financing. The completed manuscript benefited from a detailed and extremely helpful review of the text by Professor Chris Tilly of the University of Massachussetts- Lowell. We would also like to thank Sukti Dasgupta and Gyorgy Sziraczki, for valuable comments and suggestions on improving the draft. We hope we have done justice to their comments. Finally, we would like to thank Charlotte Beauchamp, the ILO s Editor, for her continuous support of this volume. Besides being a pleasure to work with, Charlotte read over the text numerous times and provided valuable advice and suggestions for its improvement. Along with her colleagues, Alison Irvine and Lauren Elsaesser, to whom we are also thankful, she also worked closely with our co-publisher, Palgrave Macmillan. Janine Berg David Kucera

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Notes on Contributors Janine Berg is Senior Labour Economist in the Economic and Labour Market Analysis Department of the International Labour Office, Geneva, Switzerland. She received her PhD in Economics from the New School for Social Research. José Luis Daza Pérez is Director of the Subregional Office for the Andean countries, International Labour Office, Lima, Peru. He received his Masters in Law from the Universidad de Salamanca. François Eyraud is Director of the ILO Training Centre in Turin, Italy, and is former Director of the ILO Conditions of Work and Employment Programme. He received his Doctorat d Etat en Sciences Économique from the Université d Aix, Marseille. Jesus Felipe is Principal Economist with the Central and West Asia Department of the Asian Development Bank, Manila, Philippines and Research Associate at the Centre for Applied Macroeconomic Analysis, Australian National University and at the Cambridge Centre for Economic and Public Policy, University of Cambridge. He received his PhD in Regional Science from the University of Pennsylvania. Rosanna Galli is Professor of Macroeconomics at the Università Svizzera Italiana in Lugano, Switzerland. She received her PhD in Economics at Birkbeck College, University of London. David Kucera is Senior Research Economist in the Policy Integration Department, International Labour Office, Geneva, Switzerland. He received his PhD in Economics from the New School for Social Research. Sangheon Lee is Senior Research Officer with the Conditions of Work and Employment Programme, International Labour Office, Geneva, Switzerland. He received his PhD in Economics from Cambridge University. Deirdre McCann is Research Officer with the Conditions of Work and Employment Programme, International Labour Office, Geneva, Switzerland. She received her DPhil in Labour Law from the University of Oxford. J.S.L. McCombie is Reader in Applied Economics and Director of the Cambridge Centre of Economic and Public Policy, Department of Land Economy, xv

xvi Notes on Contributors University of Cambridge and Fellow in Economics, Downing College, Cambridge. He received his PhD in Economics from the University of Cambridge. Irmgard Nübler is Senior Skills and Training Policy Specialist, Skills and Employability Department, International Labour Office, Geneva, Switzerland. She received her PhD in Economics from the Free University of Berlin. Catherine Saget is Senior Research Officer with the Conditions of Work and Employment Programme, International Labour Office, Geneva, Switzerland. She received her PhD in Economics from the European University Institute. Matthew Salerno is a graduate of the School of Industrial Relations, Cornell University and a former intern at the International Labour Office, Geneva, Switzerland. Zafiris Tzannatos is currently Advisor at the World Bank Institute, World Bank. He previously served as Advisor to the World Bank s Managing Director for Human Development, Manager for social protection in the MENA region, and Leader for the child labour programme. He received his PhD in Economics from the University of London. María Luz Vega Ruíz is Senior Specialist in Labour Administration and Industrial Relations, Department of Social Dialogue, Labour Law and Labour Administration, International Labour Office, Geneva, Switzerland. She received her MPhil in Labour Law from the Université de Genève.