DP7097 | Employment Laws in Developing Countries

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We survey the research on the effect of employment laws in developing countries, using papers published since 2004. The survey is further supported by cross-country correlation analyses. Both exercises show that developing countries with rigid employment laws tend to have larger informal sectors and higher unemployment, especially among young workers. A number of countries, especially in Eastern Europe and West Africa, have recently undergone significant reforms to make employment laws more flexible. Conversely, several countries in Latin America have made employment laws more rigid. These reforms are larger in magnitude than any reforms in developed countries and their study can produce new insights on the benefits of labor regulation.