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Labor market institutions and industrial performance: an evolutionary study

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Abstract

This study investigates the impact of labor market institutions on industrial performance from a Schumpeterian perspective. We suggest that labor market institutions play a very important role in the process of creative destruction, because they may create an environment that encourages and enforces innovation, and help to reallocate resources, most importantly labor, through swift elimination of weak performers. We specifically look at the effects of the quantity of labor market regulations and inter-industry wage differentials on labor productivity for a panel of 44 countries for the period 1965–1999. Our findings suggest that those countries that introduce more regulations on conditions of employment and wages achieve higher levels of productivity. Moreover, wage compression raises productivity by reallocating resources to productive activities.

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Notes

  1. However, their study is likely to suffer from very low variation in the labor regulation variable (no change over time in six out of 16 states).

  2. Delmas (2002), in her study on seven European countries, claims that “labor regulations … can sometimes discourage innovation”, but did not include in the estimated model any variable measuring the extent of labor regulations.

  3. See Natlex homepage, http://natlex.ilo.org.

  4. See the LMRI website for more information: http://www.metu.edu.tr/~etaymaz/lmri.

  5. A country is classified as HIC (LIC) if its GNI per-capita was greater (less) than $9205 in 1999 (for the GNI per-capita data, see World Bank 2002).

  6. We do not present separately the figures for other labor market regulation indices because the patterns are rather similar.

  7. Since all variables used in the model are persistent, and change gradually over time, we use the average values of the variables for 5-year intervals. This method also mitigates the effects of measurement errors and annual fluctuations.

  8. The capital stock is calculated by perpetual inventory method from the UNIDO database (UNIDO 2002). The depreciation rate is assumed to be 7.5 percent.

  9. Note that the exchange rate does not have any effect on regression results because all country specific effects are accounted for by fixed effects, α i s, in the model.

  10. Specialized-supplier and science-based industries include Office and Computing Machinery (ISIC-3822), Machinery and Equipment, nec. (ISIC-382X), Radio, TV and Communication Equipment (ISIC-3832), Electrical Machinery, nec. (ISIC 383X), and Professional Goods (ISIC 385).

  11. We do not include variables on other possible sources of growth (human capital, R&D, and so on.) since those are beyond the scope of this study. We experimented with human capital proxied by primary and secondary school enrolment, and youth and adult illiteracy rates in our estimations, but we decided to exclude these variables basically for two reasons. First, the human capital data are not available for 1960s for most of the countries. Second, the coefficients of these variables were insignificant in many cases.

  12. Of course, this does not mean that any increase in the number of labor market regulations leads to productivity improvement. The results imply that LMRs included in the Natlex Database from 1960 to 1999 seem to have a positive impact on productivity for our sample of countries.

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Acknowledgements

We would like to thank two anonymous referees and Ali Cevat Taşıran of Göteborg University for their extremely helpful comments and suggestions.

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Authors and Affiliations

  1. Department of Economics, Anadolu University, 26470, Eskişehir, Turkey

    Yılmaz Kılıçaslan

  2. Department of Economics, Middle East Technical University, 06531, Ankara, Turkey

    Erol Taymaz

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  1. Yılmaz Kılıçaslan
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Correspondence to Erol Taymaz.

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Kılıçaslan, Y., Taymaz, E. Labor market institutions and industrial performance: an evolutionary study. J Evol Econ 18, 477–492 (2008). https://doi.org/10.1007/s00191-008-0098-4

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