Labor Market Policies, Development and Growth

Transcription

1 Labor Market Policies, Development and Growth William T. Dickens and Vania Stavrakeva Discussion by Jan Svejnar Washington DC October 2007

2 Overall Assessment Nice, polished study Important issue New approach to a long-term problem Innovative analysis Plausible results/recommendations Also Questions stemming from the analysis

3 Motivation and Findings Large literature analyzing the effects of labor market policies in developing countries Fundamental problem Literature considers mostly static policy effects Yet, labor market policies crucial in determining profitability of investment and hence ability to attract capital in developing economies Also affect incentives for investment in education These and other policy channels influence transfer of population from traditional to modern economy Studies have considered these links but only rarely in a dynamic policy setting

4 Key Ideas Develop a dynamic model of a transition from a traditional to modern economy => analyze effects of labor market policies on growth Rural (traditional) v. urban (modern) sector Importance of dualism Marginal product of labor lower in the traditional sector than modern sector => labor transfer = engine of growth Elastic supply of labor to the modern sector=> capital accumulation and savings play an important role in economic growth Impact of labor market policies on growth depends on the reason for marginal product differences and the elasticity of supply to the modern sector

5 Key Ideas (2) Lucas paradox failure of developing countries to attract capital despite very low wages Answer: Shortages of skilled labor and IRS two-sector growth model with skilled and unskilled labor Infinitely elastic supply of capital to the modern sector Infinitely elastic supply of unskilled labor to the modern sector Modern sector wages determined by a bargain between capital and skilled workers => capital/labor ratio Given the capital/labor ratio, the number of skilled workers determines the number of firms and output in the modern sector Growth of the economy determined by accumulation of skilled workers -- potentially affected by conditions in the labor market

6 Conceptual Considerations Labor rights laws and policies affecting workers ability to form unions and bargain These laws affect bargaining power and wages of unionized and non-unionized workers Overly high wages reduce return on capital below its supply price => reduce growth Wage increases up to that point likely increase the rate of growth and speed transition -- despite short run allocational inefficiency Strength of worker bargaining power a country can afford increases with growth if IRS important Increasing productivity from IRS can explain rising wages in the modern sector

7 Conceptual Considerations (2) Labor standards -- regulations of conditions of private employment not covered by labor rights Some reason to believe that labor standards may raise the attractiveness of skilled work in the modern sector => positive growth effects However, many labor standards costly and demand for them probably has a positive income elasticity Thus introducing such standards too early in the development process can be inefficient

8 Conceptual Considerations (3) Government often one of the largest employers of modern sector workers Government -- also often one of the highest wage employers => may produce problems and negatively affect growth These problems can be avoided if governments adopt a hiring policy favoring workers with private sector work experience

9 Dualism Dualism -- sectors with differing marginal products of labor Moving resources from the sector with low marginal products to the sector with high marginal products will increase total factor productivity => if dualism important, it should help to explain some of the differences between countries in GDP per capita and total factor productivity

10 Dualism -- Evidence Not all the evidence is of the highest quality Suggests there are large differences in marginal products across sectors these differences and the sectoral allocation of factors are important in explaining differences across countries in the level and growth rates of GDP per capita and TFP factors determining the sectoral allocation of labor important for the growth process -- incorporating them into an analysis of growth in developing countries is essential

11 Theoretical Model Sensible, simple approach worth developing and presenting more fully multi-generational extended family Adults choose their children s level of education to maximize family income during their lifetime Lifetime includes old age during which adults are not producing and rely on children and grandchildren for income Family is like a coop with overlapping generations Unable to characterize conditions under which policies increase or decrease the speed of transition => simulation -- increasing benefits or decreasing costs of education speeds transition

12 Analysis Issues Education for modern sector v. brain drain Extended family optimization over how to allocate people across the two sectors, including job search Single representative family Bargaining over wages but not employment; yet firm selects employment before wages are set Unskilled wages = fraction of skilled wages (bargaining v. competition) => how related to rent dissipation income of skilled urban workers providing funds for investment in education

13 Analysis Issues (2) International capital supplied infinitely elastically at a rate of return above an internationally fixed hurdle rate and not at all below? Minimum wages sometime found to have effects further up in the wage distribution Elaborate more in the context of the model on Effect of different government hiring policies Labor rights v. labor standards

14 Overall Assessment Nice paper Important topic Careful combination of institutional and theoretical work New, plausible interpretations of observed outcomes