Martin Rama

Securing our future in a global economy

In the 1990s Latin America and the Caribbean (LAC) began to resurface from the lost decade of the 1980s after a sustained reform effort by the countries to enhance the role of market forces and increase the regions real and financial integration into the global economy. In spite of this, perceptions of economic insecurity run high in the region. This report assesses the extent, causes, and effects of economic insecurity in LAC and identifies policies and institutions that can help reduce the degree of insecurity faced by workers and households in the region, while allowing them to take advantage of the enhanced economic opportunities brought about by the recent reforms. After stating the facts concerning economic insecurity in Chapter 2, the report then sets out a general analytical framework to help organize the various options available to individuals and governments for dealing with economic insecurity (Chapter 3). With this framework, the remaining chapters focus on measures to deal with risks. First, they suggest the causes of macroeconomic or aggregate volatility and some remedies (Chapter 4). Then this report examines how these risks affect individuals and households, and their responses to economic shocks (Chapter 5). Next the report discusses the risk of becoming unemployed, and the public responses to help workers deal with this risk (Chapter 6). Appropriate social insurance and social protection is considered in the final chapter.

The Consequences of Doubling the Minimum Wage: The Case of Indonesia

Indonesian minimum wages were tripled in nominal terms, and doubled in real terms, in the first half of the 1990s. The author analyzes data from the 1993 labor force survey to evaluate the effects of this hike on wage earnings and wage employment. The results suggest that the minimum wage hike had a modest impact on Indonesian labor market outcomes, increasing average wages by 5–15% and decreasing urban wage employment by 0–5%. The employment effects, however, varied substantially by firm size: small firms apparently experienced substantial decreases in employment, whereas some large firms actually saw their employment increase. Workers in those large firms, the author concludes, are the evident winners from the minimum wage hike.

Globalization and Workers in Developing Countries

Stories on the positive and negative effects of globalization on workers in developing countries abound. But a comprehensive picture is missing and many of the stories are ideologically charged. This paper reviews the academic literature on the subject, including several studies currently under way, and derives the implications for public policy. First, it deals with the effects of openness to trade, foreign direct investment, and financial crises on average wages. Second, it discusses the impact of exposure to world markets on the dispersion of wages by occupation, skill, and gender. Third, it describes the pattern of job destruction and job creation associated with globalization. Because these two processes are not synchronized, the fourth issue addressed is the impact on unemployment rates. Fifth, the paper reviews the labor market policies that can be used to offset the adverse effects of globalization on employment and labor earnings. Finally, it discusses how the international community could encourage developing countries to adopt sound labor market policies in the context of globalization.

Lobbying by capital and labor over trade and labor market policies

This paper uses the common agency approach to analyze the joint determination of product and labor market distortions in a small open economy. Capital owners and union members lobby the government on both tariffs and minimum wages, while other factors of production are not organized. The paper shows that product and labor market distortions move in the same direction in response to changes in economic and political parameters and that their level is not modified by social pacts between capital and labor. It also shows that labor market distortions are second best. Hence, conditionality by foreign organizations should target distortions in product markets but not in labor markets.

Labor Market ‘Rigidity’ and the Success of Economic Reforms Across More Than 100 Countries

Abstract This paper shows that labor market policies and institutions have an impact on the effectiveness of economic reform programs. Countries with relatively ‘rigid’ labor markets experienced deeper recessions before adjustment and slower recoveries afterwards. Minimum wages and mandatory benefits are not detrimental to growth, but the relative size of organized labor, in government and overall, appear to be crucial. Labor market rigidity thus seems to be relevant for political reasons, more than for economic reasons. These findings suggest that insufficient attention has been paid to vocal groups who stand to lose from economic reforms.

Determinants of Hourly Earnings in Ecuador: The Role of Labor Market Regulations

Ecuadorian labor costs are said to be high because of the existence of many mandated benefits. Using the 1994 Living Standards Measurement Survey, we show that the effect of these benefits is actually mitigated by a reduction of base earnings, that is, of the foundation on which they are paid. The reduction is larger in the private than in the public sector and is negligible for unionized workers. We also show that, in spite of mandated benefits, interindustry wage differentials are comparable to those of Bolivia, a country characterized by “flexible” labor markets but otherwise similar to Ecuador.

Rent seeking and economic growth: A theoretical model and some empirical evidence

Abstract This paper introduces distributional activities in one of the simplest endogenous growth models. Firms engage in investment and lobbying, with the extent of the latter determining the number of restrictive regulations in force. As a result, the growth rate increases with the private cost of passing a regulation, while dynamics include rise and decline, as in Olsons theory. The empirical evidence is from Uruguay, a relatively wealthy country that has dramatically lagged behind. It shows that restrictive regulations have a positive impact on sectoral output, but a negative impact at the aggregate level, which is consistent with the model.

Efficient public sector downsizing

Most downsizing operations show high financial returns, but their economic returns depend crucially on their design. After comparing public sector employment across countries, the author analyzes the optimal design of downsizing operations from a microeconomic perspective. The author discusses how to identify redundant workers when individual productivity is observable, as is often the case in state enterprises. Comparisons of productivity and labor costs are misleading because overstaffing is only one among several distortions. The author proposes using a shadow cost of labor, much the same as in standard investment projects. The author then discusses how to identify redundancies when individual productivity cannot be observed, as in government administration. Voluntary separations in exchange for severance pay create an adverse selection problem, whereby the best workers leave the public sector and the worst workers stay. The author discusses other self-selection methods more likely to create an incentive for the best workers to stay rather than quit. Most offers of severance pay tend to overcompensate workers. The author analyzes how labor data can be used to predict the loss replaced workers will experience and to tailor compensation to their individual characteristics. Finally, the author discusses the appropriate sequence of downsizing and privatization, the consequences of early retirement programs, and the usefulness of training programs and other active labor policies.

State Ownership and Labor Redundancy: Estimates Based on Enterprise-Level Data from Vietnam

Privatizing, or restructuring state-owned enterprises, may lead to massive layoffs, but the number of redundant workers is usually unknown beforehand. The authors estimate labor redundancy by comparing employment levels across enterprises with different degrees of state ownership. In their model, state enterprises are a hybrid between labor-managed enterprises, and profit-maximizing enterprises, with the profit motive becoming less prominent as the state of capital increases. This model leads to an employment equation, that is estimated using an enterprise database from Vietnam. In this database, constructed especially for this paper, roughly a third of the enterprises are fully state-owned, a third are fully private, and a third are joint ventures between the state, and the private sector. The employment equations control for sector activity, region, and the enterprises age, among other variables. The results suggest that if the state share of capital were brought down to zero, roughly half of the workers in the corresponding enterprises would be redundant. This is more than ten times the estimate by the current enterprise directors. The results also show a wide dispersion of redundancy across sectors of activity. There is only a weak correlation between estimated labor redundancy, and twelve ad hoc indicators of profitability, productivity, and labor cost. But the correlation between most ad hoc indicators also is weak, suggesting that these indicators are not reliable tools for identifying the most overstaffed enterprises.

Job Opportunities Along the Rural-Urban Gradation and Female Labor Force Participation in India

The recent decline in India’s rural female labor force participation is generally attributed to higher rural incomes in a patriarchal society. Together with the growing share of the urban population, where female participation rates are lower, this alleged income effect does not bode well for the empowerment of women as India develops. This paper argues that a traditional supply-side interpretation is insufficient to account for the decline in female participation rates, and the transformation of the demand for labor at local levels needs to be taken into account as well. A salient trait of this period is the collapse in the number of farming jobs without a parallel emergence of other employment opportunities considered suitable for women. The paper develops a novel approach to capture the structure of employment at the village or town level, and allow for differences along six ranks in the rural-urban gradation. It also considers the possible misclassification of urban areas as rural, as a result of household surveys lagging behind India’s rapid urbanization process. The results show that the place of residence along the rural-urban gradation loses relevance as an explanation of female labor force participation once local job opportunities are taken into account. Robustness checks confirm that the main findings hold even when taking into account the possibility of spurious correlation and endogeneity. They also hold under alternative definitions of labor force participation and when sub-samples of women are considered. Simulations suggest that for India to reverse the decline in female labor force participation rates it needs to boost job creation.