DP11098 Enforcement Matters: The Effective Regulation of Labor

Author(s): Ravi Kanbur, Lucas Ronconi
Publication Date: February 2016
Keyword(s): effective regulation, enforcement, labor market outcomes, labor regulation, legal origin theory
JEL(s): J88, K42
Programme Areas: Labour Economics, Development Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11098

This paper provides, to our knowledge for the first time, cross-country measures of enforcement of labor law across almost every country in the world. The distinction between de jure and de facto regulation is well understood in theory, but almost never implemented in cross-country empirical work because of lack of data. As a result, influential papers like the one by Botero et. al. (2004) published in the Quarterly Journal of Economics, which have shaped the policy debate by finding strong negative consequences of labor regulation on labor market outcomes, are based entirely on measures of de jure stringency of regulations. We show that this neglect of regulation enforcement matters. There is, on average, a negative correlation between the stringency of labor regulation and the intensity of its enforcement. The strong results of Botero et. al. (2004) on the consequences of labor regulation, and the hypotheses of La Porta et. al (2008) on the legal origin theory of regulation stringency, no longer hold for effective labor regulation.