Vol. 14 No.12 (December 2004), pp.950-952

LAW AND EMPLOYMENT: LESSONS FROM LATIN AMERICA AND THE CARIBBEAN, by James J. Heckman and Carmen Pagés (eds). Chicago: University of Chicago Press, 2004. 475pp. Cloth $95.00. ISBN: 0-226-32282-3.

Reviewed by Matthew M. Taylor, Department of Government, Georgetown University. Email: taylormm@georgetown.edu

The implications of labor laws for employment have driven a large body of research in the past decade. Labor regulations, ranging from mandatory social security contributions to job security guarantees, influence overall labor market performance through their effects on the hiring decisions of employers and the participatory strategies of potential or actual employees. In Latin America, labor laws have been notoriously rigid since the creation of substantial labor protections in the 1930s, and these countries are only now seeing the effects of labor reforms undertaken during the late 1980s and 1990s.

LAW AND EMPLOYMENT: LESSONS FROM LATIN AMERICA AND THE CARIBBEAN, an edited collection on the effect of Latin America’s labor regulations on labor markets, provides a timely and comprehensive analysis of the multiple effects of labor laws and labor reforms in Argentina, Brazil, Chile, Colombia, Peru, Uruguay, and the Caribbean at large. As one might expect from a volume edited by a Nobel Prize winner in economics, James J. Heckman, and a senior economist at the Inter-American Development Bank, Carmen Pagés, the approach here is fundamentally rooted in the discipline of economics, with essays by a range of economists throughout the region, and targeted to an audience of economists.

The introduction by Heckman and Pagés sets the tone, arguing that the methodological focus of past research on aggregate statistics tends to mask diversity and can be insensitive to significant differences across countries. Substantively, the key lesson of Heckman and Pagés’ introduction – which serves not only as a launching pad for the other essays in the volume, but also as an empirical test of cross-regional patterns – is that labor regulation not only affects the distribution of labor incomes and overall efficiency, but more specifically, that “mandated benefits reduce employment and that job security regulations have a substantial impact on the distribution of employment and on turnover rates” (p.3). Their research is exhaustive, analyzing the effect of regulations governing social security and job security provisions in both Latin America and OECD countries. In so doing, they provide a valuable service by meticulously quantifying the costs of various job security and social security provisions in both regions, with the interesting finding that “labor laws impose a much larger cost in OECD countries” (p.31), although job security provisions are more significant in Latin America. [*951]

The country-based chapters in this collection are equally meticulous, built largely on “micro” data from household surveys, firm and sector level data, and employment surveys, rather than large panels of aggregate cross-national data. This permits the authors to depict more accurately the national effects of regulation and reform, with a good deal of interesting conflict between the national results. The contributions also cover a broad range of issues, including the effects of the minimum wage on the labor market as a whole in Colombia (Maloney and Mendez), the impact of a job security-enhancing new constitution in Brazil (Pães de Barros and Corseuil), the effects of three decades of employment regulations in Chile (Montenegro and Pagés), and the influence of three distinct collective bargaining regimes on wages and labor demand in Uruguay (Cassoni, Allen and Labadie).

This compendium will be of great interest to anyone with a significant interest in the employment effects of labor regulations in the region. This is both its great draw and its potential downfall, especially for members of the Law and Courts Section. For although the essays here are exacting tests of various economic propositions regarding the influence of labor regulations on employment, the larger implications either for policy or for the relationship between law and politics are less evident.

Politics is largely non-existent in this volume. While it is unfair to criticize the editors for the book they did not write, rather than the book at hand, I believe this oversight limits the interest the book will hold for readers of the LAW AND POLITICS BOOK REVIEW. The country chapters frequently provide rich detail on the reforms to local labor markets, but the how and why of labor market reform is treated only tangentially, if at all. Meanwhile, although the title suggests that the law is a subject of equal weight, it is only addressed as an independent variable impinging on employment, before and after reform. The actual performance of legal systems and the courts is barely touched upon, and there is little discussion of how the functioning of court systems influences the regulation of labor markets. Although it is acknowledged (i.e., p.34), there is little discussion of the de facto, as opposed to de jure, cost of regulations – a seemingly important lapse in a region reputedly marked by informality. The social costs of informality (or indeed, the size of the informality problem) are secondary to the authors’ emphasis on the effect of labor regulations on formal labor markets. And while the editors, by virtue of their research design, shy away from costs that are difficult to measure (p.24), one wonders how the expected costs or effectiveness of legal action in the courts, as opposed to the costs of complying with government regulation, might also have an influence on hiring and firing decisions.        

Given the editors’ likely target audience, a fairer criticism is the absence of a synopsis of the overarching and region-wide policy implications of labor regulations. The collection has no concluding chapter (although the last chapter, by Hamermesh, provides an overview of previous work in the field), and the introduction is honest in highlighting the contradictions between the various chapters. But in the absence [*952] of such a conclusion, the reader is forced to dig deep for the larger policy implications or developmental significance of the sum of the parts, which seems to be implicitly assumed, but seldom brought to the forefront. Despite exhaustively researched and impeccably argued essays, this is a major weakness of the book’s appeal for policymakers with an interest in labor markets, but especially for those outside the discipline of economics.

For policymakers with responsibilities for labor markets, one wonders what the implications are from the finding in Kugler’s essay that declining job security guarantees in Colombia tend to reduce the duration of both employment and unemployment. Similarly, what is the policy implication of Mondino’s and Montoya’s finding that job security guarantees in Argentina have a negative effect on job security, or of Maloney’s and Mendez’ conclusion from the Colombian case that the tradeoff between the poverty- reducing effects and the rigidity-increasing effects of the minimum wage is more severe in Latin America than in the United States? How does one square the low levels of labor market distortion found by Downes, Mamingi and Antoine in the Caribbean with higher distortions found under similar regimes elsewhere in Latin America? I suspect that the editors would have a ready answer to these and other questions, and the contributors frequently point to some of them, but nowhere are the broader lessons more explicitly addressed and summarized for policymakers. Perhaps this is a weakness of the country-specific methodological approach, but in light of the significant gains such an approach promises, and especially in light of the very clear country by country conclusions by each of the contributors, the absence of a greater reconciliation of the various country findings is disappointing.

Despite this criticism, however, the editors are to be commended for the methodological rigor of all the component essays, and the important findings the volume brings to light, both in individual countries and in the region as a whole. The key cross-national conclusion is that “labor market regulations are an inequality-increasing mechanism, because some workers benefit while many others are hurt,” and “regulation acts unevenly across different groups in society” (p.85). As Heckman and Pagés note, young, uneducated, and rural workers are generally the losers from regulation, a troubling conclusion in a region that is facing serious political and social challenges from pathologies such as crime and violence that are also associated with youth and education, as well as continuing rural unrest. This collection will provide a substantial empirical foundation for those interested in the concrete effects of Latin America’s legal structure on the labor market, and provides an important subsidy to research on the effects of legal structure on policy choice and economic performance in the region.

************************************************************

© Copyright 2004 by the author, Matthew M. Taylor.