Labour law and inclusive development: the effects of

industrial relations laws in low- and middle-income countries

Simon DeakinUniversity of Cambridge

26th Annual Labour Law Conference, Johannesburg, July-August 2013

Synopsis

• Research question: what are the effects of collective labour laws on inequality, poverty and employment in developed and developing countries?

• Methods: ‘leximetric’ coding of legal data makes it possible to identify correlations of legal and economic variables, and isolate causal effects

• Results: laws protecting worker voice (collective bargaining and employee representation laws) are correlated with greater equality in both developed and developing countries; effects on poverty and employment are more difficult to discern

Policy perspectives

• ILO standards on freedom of association and collective bargaining have been at the foundation of international labour code, from the Declaration of Philadelphia (1944) to the ILO Declaration of Fundamental Principle and Rights at Work (1998) and the Decent Work agenda

• By contrast, the IMF and World Bank have been sceptical of the economic effects of labour laws : ‘Laws created to protect workers often hurt them’ (World Bank, Doing Business report, 2008)

From the Declaration of Philadelphia… to ‘Doing Business’

Limits of the Doing Business methodology

• ‘It is important to remember that the report is intended to be a pure knowledge project. As such, its role is to inform policy, not to prescribe it or outline a normative position, which the rankings to some extent do’ (Manuel Commission, June 2013)

Theoretical perspectives

• Neoliberal critique: labour laws ‘distort’ the labour market (Posner, Epstein)

• Capability approach: labour laws provide the basis for substantive freedom of choice on the part of individuals (Sen)

• ‘New institutional’ approach (Douglass North): stresses the importance of the legal framework in underpinning economic activity in markets, including the labour market

Labour law in developing countries

• While some labour law rules may not be well matched to emerging markets, the argument that labour laws in general hinder economic growth is not well grounded: labour laws can play a developmental role by, among other things, providing insurance against labour market risks, assisting market access, and overcoming information asymmetries and collective action problems

World Bank’s recent position

• ‘The World Bank’s views on the objectives of economic growth and development, and the best way to attain these objectives, are continuously evolving. For example, in its World Development Report 2013, the Bank puts forward a nuanced view on labour regulations, suggesting that governments should strive for a balanced combination of labour regulation and management practice that is unique to their country’s stage of development. This message differs markedly from the perspective associated with the report in its earlier years’ (Manuel Commission, June 2013)

Evaluating labour law reforms

Generic criteria• Incentive compatibility• Systemic fit• Context dependence• Inclusive governance• Institutional capacity

Source: Shelley Marshall, Simon Deakin et al., Promoting Decent Work: the Role of Labour Law, Report to ILO, 2010

Specific criteria• Economic coordination• Risk distribution• Demand management• Democratisation• Empowerment

Empirical evidence

• Collective bargaining is correlated with reduced dispersion of earnings (Freeman, 2005)

• Cooperative industrial relations are correlated with higher productivity and profitability for firms (Feldmann, 2009)

• A gap in knowledge: what is the impact of collective labour laws (laws on worker representation and the right to strike) on wage determination, productivity and employment?

The case of India• Besley and Burgess (2004), using an index of state-level

labour laws, found pro-worker labour laws to be associated with a reduction of both investment and employment in firms in the organised manufacturing sector, and with a growth in the size of the informal sector

• ‘Labor regulation will typically create adjustment costs in hiring and firing labor and in making adjustments in the organization of production… by increasing the bargaining power of workers, labor regulation can increase the importance of holdup problems in investment’ (Besley and Burgess, 2004)

Enforcement matters• Fagernäs (2010) collated data on court efficiency

and pro-worker legal rulings in different Indian states, and coded them alongside the changes in state-level laws which Besley and Burgess (2004) focus on

• Her analysis found no correlation between the resulting, composite de jure and de facto measures of the pro-worker orientation of state laws, and the extent of formal employment in either manufacturing or services, across the states concerned

Leximetrics

• Constructing indices of the strength and weakness of labour law systems and the degree of change over time

• Mostly only measures formal law, but can take into account collective agreements and other non-legal sources of law

• Can be used in conjunction with data on enforcement and respect for legality (‘rule of law’) to control for mismatch between ‘law in the books’ and ‘law in reality’

Cambridge Labour Regulation Index

• In total: 40 indicators, covering flexible working, working time, dismissal protection, worker representation, right to strike

• Worker representation index: right to unionise, right to collective bargaining, duty to bargain, extension of collective agreements, closed shop, codetermination (board membership), codetermination (worker information and consultation)

• Strike laws index: unofficial industrial action, political industrial action, secondary industrial action, lockouts, constitutional right, waiting period, peace obligation, compulsory arbitration, replacement of striking workers

Coding algorithms36. Right to industrial action Measures the protection of the right to industrial

action (i.e. strike, go-slow or work-to-rule) in the country's constitution or equivalent Equals 1 if a right to industrial action is expressly granted by the constitution Equals 0.67 if strikes are described as a matter of public policy or public interest. Equals 0.33 if strikes are otherwise mentioned in the constitution. Equals zero otherwise. Scope for further gradations between 0 and 1 to reflect changes in the strength of the law.

Data

• South Africa, LRI (employee representation and strike laws), 1970-2013…

Variable/Year 1970 1971 1972 1973 1974 1975 1976

v25 0 0 0 0 0 0 0v26 0 0 0 0 0 0 0v27 0.75 0.75 0.75 0.75 0.75 0.75 0.75v28 1 1 1 1 1 1 1v29 0.5 0.5 0.5 0.5 0.5 0.5 0.5v30 0 0 0 0 0 0 0v31 0 0 0 0 0 0 0v32 1 1 1 1 1 1 1v33 0 0 0 0 0 0 0v34 1 1 1 1 1 1 1v35 0 0 0 0 0 0 0v36 0 0 0 0 0 0 0v37 0.25 0.25 0.25 0.25 0.25 0.25 0.25v38 0 0 0 0 0 0 0v39 0.25 0.25 0.25 0.25 0.25 0.25 0.25v40 0 0 0 0 0 0

Employee representation laws

Developed countries Developing countries

Strike laws

Developed countries Developing countries

Comparing cross-country trends

Employee representation Right to strike

Econometric analysis• Panel data analysis: pooled cross-country data analysed

making different assumptions concerning homogeneity of countries in sample and time effects (fixed effects and random effects models; dynamic effects models)

• Estimate the impact of a change in the LRI on economic indicators and vice versa, after controlling for level of GDP growth and World Bank Rule of Law index

• Economic indicators include employment, unemployment, labour share, Gini coefficient, poverty rate

(Joint research with Colin Fenwick, ILO, and Prabirjit Sarkar, Jadavpur University)

Results (1)

• In the developed country context, laws on worker representation are correlated with greater equality as measured by labour’s share in national income

• In the developing country context, worker representation laws are correlated with greater equality as measured by the Gini coefficient, and with well being as measured by the Human Development Index; also weak evidence that they are correlated with lower unemployment

Results (2)

• There is no effect of strike laws on equality or employment in developed countries

• There is weak evidence of negative impacts of strike laws on equality, HDI and unemployment in developing countries (robustness tests indicate no clear effects for strike law if one country at a time is removed from the regression)

Table 4. Labour market effects of industrial action laws

Dependent variables

Inequality Human development

Unemployment

FE model RE model FE model RE model FE model RE model Independent variables

GDP growth -0.0573 -0.2348 0.0001 0.0008 0.2442 0.1283 Rule of law -3.6032 2.9543 0.0110 -0.04864 16.4779 8.4732 Industrial action laws

56.4779*** 24.7123 -0.5145** -0.7874*** 84.0592 72.1090*

R2 0.0641 0.4322 0.5583 0.7401 0.1905 0.1916 Chosen model FE FE RE Sources: see Table 3. Significant at the 1% level (***), 5% level (**), 10% level (*).

Table 3. Labour market effects of employee representation laws Dependent variables

Inequality Human development

Unemployment

FE model RE model FE model RE model FE model RE model Independent variables

GDP growth -0.08098 -0.2311 0.0003 -0.0006 0.0065 -0.2978* Rule of law -3.7494 1.2973 -0.0092 -0.1651 12.2152 4.5874 Worker representation laws

-37.9085** 11.6790 0.4470** 0.1850*** -27.1831** 13.3212

R2 0.4489 0.4375 0.1962 0.7837 0.0107 0.4756 Chosen model FE FE RE Sources: World Bank (Gini Coefficient and Rule of Law Index), UNDP (Human Development Index), ILO (unemployment). Significant at the 1% level (***), 5% level (**), 10% level (*)

Conclusions (1)• With better data, we are getting a more nuanced

picture of the economic and social effects of labour laws

• A qualified case can be made for labour laws as instruments of economic development and social inclusion

• Developed countries tend to have more worker-protective labour laws, and developing countries are catching up with them (at the same time as some developed countries are cutting back on levels of worker protection)

Conclusions (2)

• Industrial relations laws, in particular those protecting collective bargaining and worker voice at the level of the enterprise, are generally associated with positive outcomes in terms of greater equality and higher scores on human developmental indices, and with some efficiency effects, in terms of employment growth and reduction of unemployment

• This finding holds for both developed and developing countries

• The results for strike laws are less clear: in general they neither reduce inequality, nor cause unemployment

Conclusions (3)

• The empirical case for linking collective labour laws with negative employment and human development outcomes is weak for both developing and developed countries

• Labour laws are consistently found to reduce inequality

• There is no clear evidence of a trade off between equality and unemployment

Further research

• Extend leximetric data to cover wider range of countries

• Carry out firm-level analysis to supplement country-level data

• Case studies to complement analysis of ‘big data’

• Identify ‘intermediate variables’ or ‘channels’ between legal regulation and economic outcomes