The effects of labor market institutions on economic performance, most importantly on unemployment, have been at the core of the economic policy debates at least since the early 1970s. Although the labor market constitutes the single largest market in any market economy, and the functioning of labor market institutions has a significant impact on economic growth and performance, there are not many empirical studies on the effects of labor market institutions on economic growth and productivity. For example, in his review article, Sala-I-Martin (Sala-I-Martin, X.X. (1996), I Just Ran Four Million Regressions, NBER Working Paper No. 6252, Cambridge, MA: NBER.1996) identified 62 variables that had been used in the empirical literature explaining long-run growth across countries, but none of these variables referred to labor market institutions.
Empirical studies on the effects of labor market institutions at the macro-level suffer from the lack of data. There have been some attempts by both researchers and international institutions to construct proxy variables that reflect various aspects of labor markets institutions or labor market flexibility. The World Bank’s Rigidity of Employment Index, the OECD’s Employment Protection Legislation index, and the Labour Market Institutions Database by Nickell and Nunziata are some of the existing databases on labor market institutions. The main shortcoming of these databases is the fact that they cover either a small group of countries or short time periods so that they do not allow a panel data analysis of developed and developing countries together. Rama and Artecona prepared a panel database for a large number of countries. Their database is based on the ratification of International Labour Organisation (ILO) conventions on various subjects along with some other measures like minimum wages, the number of trade union membership, etc.
That is why we attempted to construct a new index as a proxy for the degree of labor market regulation. The proposed index, derived from ILO Natlex Database, is not a direct index but an approximation and based on the number of laws and regulations on 100 different subjects adopted by governments. It includes the annual data for 44 countries from 1960 to 2000.
In constructing the database, we first collected the number of laws and regulations on different subjects related to labor markets from 1960 to 2000 for each country in the database. We included the laws issued/adopted before 1960 in the year 1960. We summed the number of laws on each subject over 5 year periods for 13 main subject categories defined by the ILO. We, then, assumed that each law is effective for 15 years, and cumulated the (log) number of regulations for three periods with the exception of the second period (1965-1969) that is composed of the first two periods (1960-1964 and 1965-1969).
Since some of the subject categories were correlated with each other, we carried out a factor analysis for two sub-periods, the pre- and post-1980 periods, to reduce the dimensionality of the labor market regulation subjects. On the basis of factor analysis, we grouped 13 subjects into four main categories defined as follows:
The first index, labeled as “Employment conditions and wages”, includes regulations governing contracts of employment, wages and wage payment system (minimum wage and protection of wages), personnel management, termination of employment and dismissals, labor administration and inspection, tripartite consultation, labor statistics and training. This index is closely related to the issues discussed in the literature on the effects of labor market institutions on economic growth/productivity. This is our preferred index that is used in empirical analysis.
The second index, “Work organization and social policy”, includes regulations concerning work organization (working time, night work, rest and leave, quality of working life) as well as issues on economic and social policy including cooperatives, unemployment, employment services, etc.
The third index, “Social and economic rights”, includes mostly regulations on broad social and economic rights, including freedom of association, non-discrimination, equal remuneration, industrial relations (collective bargaining and agreements, workers participation, labor disputes), occupational safety and health, social security including unemployment benefit, and special provisions by category of persons (children and young persons, women, indigenous and tribal peoples, etc.). These provisions are likely to have non-discriminating effect on all firms and sectors.
The final index basically covers laws and regulations specific to certain activities/sectors. Most of the provisions in the database under this category are about public servants.
Limitations, deficiencies, and measurement errors are inherited in any database. Our index on labor market regulation also comes with its own problems:
First, it is a very strong assumption that the number of labor market regulations reflects the degree of regulation in the labor market, because some laws and regulations may indeed deregulate the market. In other words, the content of regulations could be more important than their quantity. However, it is not practical to quantify the degree and type of all regulations cited in the Natlex database. Second, we assumed that a regulation remains in force for about 15 years. There is certainly a great diversity concerning the time span of laws and regulations. Moreover, some of the regulations may amend or replace existing regulations so that a simple count of regulations adopted is likely to generate an overestimation of the number of regulations in force. Third, although we count all regulations equal, there are substantial differences in the scope of laws and regulations. For example, a single labor code in a country may regulate various aspects of labor markets and industrial relations whereas in another country, there could be many specific laws and regulations for the same issues. Finally, the adoption of the law does not necessarily mean that it is enforced.
You can download the dataset in comma-separated values (csv) format for non-profit research.
Labor Market Regulations Index Dataset
Please cite the database as follows:
Kilicaslian, Y. and Taymaz, E. (2008), Labor Market Regulations Index, www.metu.edu.tr/~etaymaz/lmri
The variables in the dataset are as follows:
countryname : Name of the country
countrycode : UN Country code
incomegroup : Income group, 1 low income, 2 high income country
lmri1 : LMR Index 1, Employment conditions and wages
lmri2 : LMR Index 2, Work organization and social policy
lmri3 : LMR Index 3, Social and economic rights
lmri4 : LMR Index 4, Special provisions
period : Time period, from 1960-64 to 1995-99
Natlex subject categories covered in labor market regulation indices are as follows:
Labor Market Regulation Index 1: Conditions of employment and wages
Labor Market Regulation Index 2: Work organization and social policy
Labor Market Regulation Index 3: Social and economic rights
Labor Market Regulation Index 4: Special provisions
General provisions
Constitutional law, general labor and employment acts, civil, commercial and family law, etc.
For more information, see:
Kilicaslan, Y. and Taymaz, E. (2008), “Labor Market Institutions and Industrial Performance: An Evolutionary Study”, Journal of Evolutionary Economics (18): 477-492.