## sdnea2019004

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---

### Executive summary — scope and high-level findings
- Main purpose: Reviews theory and evidence on the design of labor market institutions in a developing economy context; focuses on (1) employment protection, (2) unemployment insurance and social assistance, (3) minimum wages and collective bargaining. Uses text mining of Article IV Reports for 30 emerging and frontier economies over 2005–16.
- High-level findings:
  - IMF advice broadly consistent with consensus on fostering flexibility while strengthening safety nets, with an increasing emphasis on inclusive growth.
  - Scope for better integration of efficiency and equity, accounting for interactions across policy areas, and more granular, context-specific recommendations.

### Unemployment insurance (UI) and social assistance — key insights and design lessons
- Rationale and constraints:
  - UI smooths consumption and can improve job-search quality and productivity; stronger moral hazard risks exist in emerging market and developing economies due to poorer monitoring and greater informality.
- Optimal generosity and duration:
  - Full insurance (100 percent replacement) is not implied to be optimal; keep benefit generosity lower and enhance gradually as administrative capacity improves and informality declines.
  - Short-duration UI can ease liquidity constraints and increase formal job search.
- Unemployment Individual Savings Accounts (UISAs):
  - Advantages: financed by individual contributions; workers internalize costs; contributions perceived as savings can reduce reservation wages.
  - Limitations: poor design can cause distortions (excessive turnover); example: a 15 percent contribution rate and 7 percent rate of return provides only about four months of benefits after two years of work if financed solely through individual contributions.
  - Practice: countries with UISAs (example: Chile) have maintained some state-provided risk pooling.
- Recommended two-tier approach:
  - Tier 1: Mandatory, nonredistributive UISAs funded by individual contributions.
  - Tier 2: Transparent, progressive subsidies financed through general taxation to enhance coverage of low-income workers and encourage informal workers to opt into the contributory system.
- Complementary policies:
  - Reduce informality and enhance administrative capacity; address regulatory causes of informality (EPL, minimum wages, labor taxation).
  - Consider shifting taxation away from labor toward consumption taxes (VAT) and broadening tax bases or cutting inefficient public spending.
  - Active labor market policies (ALMP) and strong enforcement of job-search requirements reduce adverse incentive effects and allow more generous UI.

### Employment protection legislation (EPL) — empirical effects and reform priorities
- Empirical effects:
  - EPL primarily reduces job turnover and reallocation; estimated productivity effects are generally small but can be larger in developing countries.
  - EPL contributes to labor market dualism and can increase unemployment duration.
- EPL components and policy implications:
  - Transfer component (severance payments) vs tax component (administrative procedures): the tax component is intrinsically distortive and should be minimized; transfer component is less distortive in theory but can be distortionary in practice due to wage rigidities.
  - Severance pay limitations: one-off payments do not insure unemployment duration and, without prefunding, raise nonpayment risk when firms become insolvent.
- Reform options:
  - Streamline administrative dismissal procedures to reduce uncertainty about cost and duration of firing.
  - Consider deferred compensation (severance savings) or pre-funded schemes as more efficient than large ex post severance.
  - Link EPL easing to UI buildup—scale back EPL as benefit systems are put in place.
- Trade-offs:
  - Reductions in severance payments often recommended to enhance reallocation and reduce informality; however, complementary expansion of social safety nets, retraining, and job-search assistance is frequently advised.

### Minimum wages and collective bargaining — trade-offs and design
- Minimum wages:
  - Objectives: alleviate in-work poverty and reduce income inequality.
  - Limitations: poor targeting (individuals vs households; employed workers only), worse targeting in economies with small formal sectors, low compliance, and possible adverse effects on formal employment if set too high.
  - Evidence: employment effects may be small at historically prevalent levels but risks rise when minimum wages are high; the average ratio of minimum wage to median wage is higher in emerging market and developing economies than in advanced economies (data referenced: 2010).
  - Design options:
    - Differentiation by groups, regions, or industries (for example, substandard rates for youth) can mitigate adverse employment effects but increases administrative complexity and enforcement challenges.
    - Use simple, limited differentiation and link future increases to productivity growth.
  - Complements: conditional/unconditional cash transfers, wage subsidies, and earned income tax credits where administrative capacity allows.
  - Examples:
    - Bolsa Familia benefit levels ranged between 2 percent to a maximum of about 15 percent of the average wage in 2015.
    - Chile: MINIMUM WAGE is 45 percent of the average wage compared to the OECD average of 40 percent (Chile 2010 extract).
    - South Africa: average sectoral MINIMUM WAGE in South Africa is 62 percent of the average formal wage compared to the 37 percent OECD average.
- Collective bargaining:
  - Potential benefits: improve productivity, deliver workplace public goods, reduce horizontal wage inequality.
  - Risks: lack of macro- and microflexibility can impede adjustment to shocks; administrative extensions can enlarge coverage but undermine firm-level flexibility and have been associated with adverse employment effects.
  - Design requirements for higher-level bargaining to work: high representativeness, coordination, and trust between bargaining parties—conditions often harder to meet in emerging market and developing economies.
  - Evidence: decentralization can improve firm-level flexibility; industry-level bargaining should allow for firm-level opening clauses or exemptions.

### Active labor market policies (ALMP) and social assistance
- ALMP evidence:
  - Mixed empirical returns; heterogeneous program impacts; important implementation issues include scalability and displacement effects.
  - Interventions targeting geographical and sectoral mobility show tentative promise; systematic evaluation and scaling only after passing cost-benefit tests recommended.
- Social assistance and cash transfers:
  - Cash transfers can be cost-effective when administrative capacity is weak; can be unconditional (example: Dibao in China) or conditional (example: Bolsa Familia in Brazil).
  - Risk of work disincentives likely small given typical program characteristics; cash transfers might improve formal labor force participation by easing liquidity constraints.
  - Design to minimize disincentives: avoid excessively high benefit levels, phase out benefits gradually with means-testing, consider conditionality linked to training.

### IMF recommendations (text-mining of Article IVs, 2005–16) — empirical findings on policy advice
- Method: Text mining of Article IV Reports (2005–16) for 30 emerging and frontier economies; analysts sifted advice from descriptions.
- Incidence of advice:
  - IMF advised about 20 percent of countries on UI at some point over 2005–16.
  - IMF advised 40 percent of countries on EPL over the same period.
  - Advice on the minimum wage was given in 70 percent of the country cases at least once over 2005–16.
  - Active labor market policies were recommended in about 25 percent of the countries.
  - Advice on collective bargaining was given in about 25 percent of the country cases, with incidence appearing to be growing.
- Typical IMF advice patterns:
  - UI: most common advice was to set up a system or to extend benefits; UI expansion advice was more common in higher-income emerging market economies (examples cited: Chile, China, Malaysia, Turkey).
  - EPL: most common advice was to lower generous severance payments and streamline dismissal procedures.
  - Minimum wage: often advised to lower the minimum wage relative to benchmarks or limit pace of increases to productivity growth or inflation (examples: Brazil 2013, Colombia 2011, Serbia 2013, Turkey 2016). Common recommendation: differentiate minimum wages across worker groups or regions.
  - Collective bargaining: recommendations tended to favor decentralization or reduction in the extent of centralization; in many cases the recommendation was to reduce centralization to enhance flexibility (examples: Greece, South Africa).
- Gaps in IMF advice identified:
  - Complementarity between UI and ALMPs and the need to consider UI and EPL design jointly received limited attention.
  - Pervasive informality often noted, but detailed guidance on designing UI, EPL, and minimum wages in presence of informality was limited.
  - Advice on collective bargaining should focus more on detailed features (representativeness, coordination, trust) that differentiate functioning from dysfunctional systems.

### Cross-cutting policy recommendations and way forward
- Overall strategic direction for emerging market and developing economies:
  - Gradually expand UI along the development path while converging toward less stringent, simpler, more predictable, and more homogenous EPL.
  - Favor moderate, simple, and predictable EPL that minimizes administrative “tax” components and considers deferred compensation mechanisms.
  - Design minimum wages to alleviate in-work poverty but complement them with targeted cash transfers, wage subsidies, or earned income tax credits where feasible.
  - Strengthen ALMPs, link UI expansion to activation requirements where capacity permits, and prioritize programs that pass cost-benefit evaluation.
  - Reduce labor market dualism by aligning protections across contract types, broaden access to training, and consider performance-based pay where appropriate.
  - When advocating lower minimum wages for efficiency, systematically propose alternatives to meet equity goals (e.g., cash transfers, income tax credits where administration allows).
  - In collective bargaining, focus advice on the specific institutional features needed for a chosen level of bargaining to deliver macro- and microflexibility (representativeness, coordination, trust); consider restricting administrative extension of agreements to cases meeting stringent criteria.

*Source: EXECUTIVE SUMMARY (sdnea2019004) — DESIGNING LABOR MARKET INSTITUTIONS IN EMERGING MARKET AND DEVELOPING ECONOMIES: EVIDENCE AND POLICY OPTIONS*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Main purpose and scope
- Reviews theory and evidence on the design of labor market institutions in a developing economy context.
- Focuses on three broad sets of institutions: (1) employment protection, (2) unemployment insurance and social assistance, (3) minimum wages and collective bargaining.
- Uses text mining to identify IMF recommendations in Article IV Reports for 30 emerging and frontier economies over 2005–16.
- Benchmarks IMF advice against lessons from the literature; recognizes IMF recommendations are shaped by political economy, technical capacity, and fiscal sustainability constraints.

### High-level findings
- Overall, advice has been broadly consistent with the available consensus on how to foster flexibility while strengthening safety nets; for example, in advocating reliance on worker rather than job protection.
- The advice has evolved along with the increasing emphasis on the need for more inclusive growth.
- Scope remains for better integrating efficiency and equity considerations, accounting for interactions between different policy areas, and considering more specific policies in each area.

### Unemployment insurance and social assistance
- Advice has focused primarily on strengthening social safety nets.
- Future emphasis could include:
  - Greater attention to the design features of unemployment insurance systems.
  - How UI systems could be scaled up over time.
  - The need to complement UI with well-designed tax systems, active labor market policies, and broader policies to curb informality.

### Employment protection legislation (EPL)
- Advice to ease legislation in many countries is broadly consistent with existing evidence, but the focus has often been on reducing severance pay.
- Reducing uncertainty about the cost and duration of firing procedures might be more important.
- Policy stance could be linked to UI buildup—as UI is put in place, employment protection could be scaled back.

### Minimum wages and collective bargaining
- Growing attention to reducing inequality has been a welcome development.
- When advocating scaling down minimum wages for efficiency reasons, governments and advisors could more systematically provide alternative options—such as cash transfers or income tax credits—to meet equity goals.
- Different (more or less centralized) collective bargaining systems can in principle achieve efficiency and equity; analysis should focus on detailed features needed for representativeness, coordination, and trust between bargaining parties.

---

### INTRODUCTION

### Overarching goal
- Labor market policies and institutions aim to deliver high and stable employment and productivity (efficiency) while providing adequate protection to workers (equity).

### Two-step analysis
- Step 1: Review theoretical and empirical literature to draw policy lessons on (re)design of labor market institutions in emerging market and developing economies, with attention to institution details, interactions, and development-stage adjustments.
- Step 2: Identify IMF recommendations to 30 emerging market and frontier economies on labor market policies over 2005–16 and benchmark them against the literature.

### Relation to existing framework
- Builds on Blanchard, Jaumotte, and Loungani (2013) framework for advanced economies distinguishing microflexibility (UI and EPL) and macroflexibility (minimum wages and collective bargaining).
- Notes that emerging and developing economies typically need more micro- and macroflexibility than advanced economies, and that minimum wages and collective bargaining can play a stronger role even in microflexibility.

---

### COMBINATION OF UI AND EPL: KEY INSIGHTS

### General considerations
- Need for labor market institutions that provide insurance against income loss is greater in emerging market and developing economies than in advanced economies.
- Risks of policy failure are greater owing to widespread informality and limited administrative capacity.
- As a result, emerging market and developing economies typically face a more restricted set of policy choices, often resulting in both more distortive and less protective policies.

### Policy implications and transition
- Insurance tends to rely relatively more on distortionary policies (such as overly stringent EPL, which protects only a fraction of formal, regular workers) than on broad-based UI.
- As countries develop and informality is reduced, policy can gradually rebalance away from EPL toward UI:
  - Expand UI while converging toward less stringent, simpler, more predictable, and more homogenous EPL.
- Gradual rebalancing requires well-designed UI systems and complementary policies to contain moral hazard.

### Design options to mitigate risks
- Individual UI savings accounts can play a role, supplemented by a redistributive component to achieve equity objectives.
- Complementary policies to reduce informality include labor market and tax policy reforms.
- While administrative capacity is being enhanced, well-designed cash transfers (which do not involve complex monitoring and enforcement of job search and work availability criteria) can be a cost-effective way of providing income support targeted to the poor.

---

### MINIMUM WAGES AND COLLECTIVE BARGAINING: KEY INSIGHTS

### Minimum wages
- Statutory minimum wages help alleviate in-work poverty and reduce income inequality.
- Poor targeting and possible adverse effects on formal (if not overall) employment if set too high suggest minimum wages should be complemented by better targeted tools.
- Alternative tools include cash transfer programs or, where possible, earned income tax credits.

### Collective bargaining
- Collective bargaining can complement wage-setting and working-condition policies, particularly at the firm level.
- For higher-level bargaining (industry or regional), stricter conditions are required to enhance equity without undermining efficiency, including:
  - A high degree of representativeness.
  - Coordination.
  - Trust between bargaining parties.
- These conditions are typically harder to meet in emerging market and developing economies than in advanced economies with deep social dialogue roots, making sector-level bargaining more difficult to make work.

---

### IMF RECOMMENDATIONS: SUMMARY OF FINDINGS (2005–16)

### Overall assessment
- IMF recommendations have been broadly consistent with consensus on fostering flexibility while strengthening safety nets.
- Recommendations have evolved with a greater emphasis on inclusive growth.
- Advice has included introducing or expanding UI systems in some cases and, more strongly and more often, easing EPL.

### Gaps and areas for improvement
- Complementarity of UI with active labor market policies and the need to consider UI and EPL design in tandem have not received much attention.
- The pervasiveness of informality is often mentioned, but how best to design UI, EPL, and minimum wage policies in the presence of informality has not been tackled in depth.
- Focusing on informality will enhance the granularity of future IMF labor market policy advice.
- Advice on collective bargaining has become more prominent; the focus should be on the detailed features that differentiate functioning from dysfunctional systems, especially for sector-level bargaining.

### Integration of efficiency and equity
- Efficiency and equity considerations are increasingly integrated into IMF labor market advice, consistent with emphasis on inclusive growth.
- For example, recommendations on lowering or restraining the growth of the minimum wage for efficiency considerations are more likely than in the past to include discussion of alternative ways of supporting workers.

---

### THEORY AND EVIDENCE: RATIONALE FOR PUBLIC LABOR MARKET INSTITUTIONS

### Market failures and policy rationale
- Information asymmetries: asymmetric information on job loss risk and job search effort creates moral hazard and adverse selection; private UI markets may fail or remain underdeveloped.
- Credit constraints: self-insurance is imperfect and provides no risk sharing; collective UI can smooth consumption.
- Externalities: laying off a worker imposes a financial cost on society that firms do not internalize, providing a rationale for layoff taxes.
- Transaction costs: the state can collect contributions and distribute benefits more cost-effectively due to existing administrative capacity (taxpayer and recipient records, collection, distribution vehicles).
- Monopsony and bargaining power imbalances: justify minimum wages and labor regulations.

### Weighing benefits against policy failure risks
- Policy interventions face risks of moral hazard and costly monitoring.
- Political economy can lead to suboptimal designs: e.g., EPL often takes form of administrative constraints rather than layoff taxes; collective bargaining systems may be skewed toward large firms; minimum wage setting can be politicized, resulting in excessively high or low levels.

---

*Source: EXECUTIVE SUMMARY (sdnea2019004) — DESIGNING LABOR MARKET INSTITUTIONS IN EMERGING MARKET AND DEVELOPING ECONOMIES: EVIDENCE AND POLICY OPTIONS*

### 11.      A defining feature of emerging market and developing economies is that both market

### 11.      A defining feature of emerging market and developing economies is that both market 

### Major constraints and trade-offs
- Emerging market and developing economies face larger market failures and policy failures than advanced economies, including:
  - Larger insurance and credit market imperfections and less personal wealth for consumption smoothing, implying greater potential welfare gains from UI (Chetty and Looney 2006).
  - Limited administrative capacity that impedes raising dedicated tax revenue, providing benefits, monitoring recipients, and enforcing the law.
  - Widespread informality that compounds administrative capacity issues (for example, monitoring job searches of UI recipients).
- Policy choice sets are more restricted than in advanced economies. Practical options often become:
  - Covering only formal workers;
  - Covering both formal and informal workers with high benefits and high distortions; or
  - Covering both formal and informal workers with low benefits and low distortions, often supplemented with tight, distortive, or poorly enforced EPL restricted to the formal sector.

### B. Unemployment Insurance and Social Assistance — UI: Key design challenges and lessons
- Rationale for UI:
  - UI smooths consumption for risk-averse workers in presence of credit and insurance market failures (Chetty 2008; Chetty and Looney 2006).
  - UI can improve job search quality and productivity (Marimon and Zilibotti 1999; Tatsiramos 2009).
  - UI can induce risk-taking that raises aggregate output (Acemoglu and Shimer 1999).
- Optimal generosity and duration considerations:
  - Full insurance (100 percent replacement) is not implied to be optimal; benefit levels must balance insurance versus job search incentives and wage effects (Blanchard and Tirole 2008).
  - Two complementary reasons imply stronger moral hazard risks in emerging market and developing economies:
    - Poorer monitoring and enforcement of eligibility and job search criteria.
    - Greater opportunities to take up informal work while collecting UI benefits (Alvarez-Parra and Sanchez 2009; Hopenhayn and Nicolini 1999).
  - Policy implication: Keep benefit generosity lower and enhance it gradually as administrative capacity improves and informality declines.
  - Short-duration UI benefits can increase formal job search by easing liquidity constraints for low-income, credit-constrained individuals (Bardey, Jaramillo, and Pena 2015).

### Coverage and international patterns
- UI systems are widespread in advanced economies but limited in emerging market economies and low-income countries (Figures referenced for 2014 and 2013 in the source).
- Benefit coverage (percentage of unemployed receiving benefits) is much greater in advanced economies than in emerging market and low-income countries.

### Unemployment Individual Savings Accounts (UISAs)
- UISAs can expand UI provision while reducing distortions because:
  - Benefits are financed through mandatory individual savings, so workers internalize the cost of benefit drawdowns (Brown, Orszag, and Snower 2008).
  - Contributions perceived as savings rather than taxes can reduce reservation wages and increase labor demand.
- UISAs limitations:
  - Poor design can create distortions (excessive turnover, running down accounts for other purposes), as observed in Brazil (Ribe, Robalino, and Walker 2010).
  - UISAs may provide insufficient insurance for some workers: example given—if financed solely through individual contributions, a 15 percent contribution rate on wages and a 7 percent rate of return on savings provides only about four months of benefits after two years of work.
  - Countries with UISAs (for example, Chile) have maintained some state-provided risk pooling.

### Recommended two-tier approach
- Move gradually toward a two-tier system:
  - Tier 1: Mandatory, nonredistributive first tier fully funded by individual contributions (UISAs).
  - Tier 2: Transparent and progressive subsidies, financed through general taxation, to enhance coverage of low-income workers and encourage informal workers to opt into the contributory system.
- Advantages:
  - Minimizes disincentive problems for formal workers.
  - Achieves inequality and poverty reduction objectives with better targeting and lower labor tax wedges than standard risk-pooling systems.
- Remaining costs:
  - Marginal tax rates from subsidy withdrawal as income rises can create effective marginal tax burdens; avoid threshold kinks to reduce these costs.

### Complementary policies to make UI systems work
- Implementation must address informality, activation of benefit recipients, and tax policy to limit distortions:
  - Reduce informality over time and enhance administrative capacity; address regulatory causes of informality (EPL, minimum wages, labor taxation, provision of social insurance).
  - Be aware of offsetting forces: UI can make formal work more attractive but financing UI through labor taxation can increase informality (Ribe and others 2010).
- Labor taxation and minimum wages:
  - High labor tax wedges can reduce formal employment; binding minimum wages amplify payroll tax pass-through onto labor costs.
  - Emerging market and developing economy average labor tax wedge estimated at about 35 percent in a 2010 World Bank study (Ribe and others 2010), close to OECD averages (OECD 2010).
  - Policy options include shifting taxation away from labor toward consumption taxes (VAT) and broadening tax bases or cutting inefficient public spending (for example, energy subsidies).
- Activation and active labor market policies:
  - Strong enforcement of job search requirements and well-designed active labor market policies reduce adverse incentive effects of UI and allow more generous systems.
  - Active labor market policies are especially important in emerging market and developing economies because:
    - Mandatory participation can partly substitute for weak job search monitoring and prevent informal work while on benefits.
    - Programs can strengthen insertion and attachment of vulnerable job seekers (youth, low-skill) and reduce locational, sectoral, and job mismatches.

*Source: DESIGNING LABOR MARKET INSTITUTIONS IN EMERGING MARKET AND DEVELOPING ECONOMIES: EVIDENCE AND POLICY OPTIONS (excerpt).*

### 25.      For an active labor market policy to pass a cost-benefit analysis test, it must explicitly target

### sdnea2019004 - 25.      For an active labor market policy to pass a cost-benefit analysis test, it must explicitly target

### Active labor market policies: evidence and evaluation
- For an active labor market policy to pass a cost-benefit analysis test, it must explicitly target well-identified labor market failures.
- Empirical literature on the impact of active labor market policies on employment and income has produced mixed results for both advanced economies and emerging market and developing economies.
- Returns on individual programs have been widely heterogeneous; important implementation issues include scalability and displacement effects.
- Tentative evidence suggests interventions targeting geographical and sectoral mobility may be more effective than others, but more research is needed.
- Policy recommendation: evaluate programs systematically, discard those that fail a cost-benefit test, and gradually scale up and reassess those that do.

### Social assistance and cash transfers
- Cash transfers can complement unemployment insurance (UI) but are often used as substitutes in many emerging market and developing economies where UI is in its infancy.
- Well-designed cash transfers can be cost-effective when administrative capacity is weak and can be unconditional (example: Dibao in China) or conditional (example: Bolsa Familia in Brazil).
- Sizable and well-designed cash transfer programs can reduce poverty and, if complemented by quality government programs, can enhance investment in education and health.
- Risk of work disincentives:
  - Conventional labor supply theory predicts adverse income and substitution effects on formal labor market participation from benefit receipt.
  - These effects are likely to be small because benefit levels are often fairly modest, target the poor whose leisure elasticity to income is small, are typically unconditional on labor market status, and are seldom carefully means-tested due to weak administrative capacity.
  - Cash transfers might improve formal labor force participation by easing liquidity constraints and enabling job search.
- Design considerations to minimize disincentives:
  - Avoid setting benefit levels too high.
  - Use gradual phasing out of benefits as means-testing is introduced.
  - Consider making some receipts conditional on participation in well-designed training programs.
- Numeric example preserved from source:
  - Benefit levels under the Bolsa Familia program in Brazil ranged between 2 percent to a maximum of about 15 percent of the average wage in 2015.

### Employment Protection Legislation (EPL): objectives and empirical effects
- Central objective: provide insurance to workers against risk of dismissal and income loss; importantly address noneconomic motives for dismissals (abuse, discrimination).
- Empirical findings on EPL effects include:
  - Reducing productivity (studies cited), though this effect might be less in developing countries with weak rule of law and weak EPL enforcement.
  - Primary documented negative impact: reduction in job turnover and reallocation of labor across firms and industries.
  - Overly stringent EPL can discourage venture capital and weaken innovation.
  - Estimated effects of EPL on productivity have generally been found to be small; two potential offsetting positive effects are:
    - Strict EPL induces firms to select more productive workers (with a cost of increased labor market dualism).
    - Increased expected tenure may increase on-the-job training.
  - Raising unemployment duration by lowering job turnover and possibly reducing employment; evidence suggests somewhat stronger adverse effects in developing countries than in advanced ones.
  - Increasing labor market dualism, especially the coexistence of a large informal sector alongside the formal sector in developing countries.
- EPL has two conceptually different components:
  - Transfer component: e.g., severance payments or notice of termination (a transfer of information with economic value).
  - Tax component: administrative procedures involved in dismissals that do not entail transfers to dismissed workers.

### Theory and policy implications for EPL design
- The tax component of EPL is intrinsically distortive; policymakers should try to keep it low.
- The transfer component (severance pay) is not necessarily distortive in theory if wage-setting fully adjusts, but wage rigidities and market frictions make distortive effects likely in practice.
- Key theoretical message: the transfer component is likely less distortive than the tax component.
- Policy question: Is there a case for a mandatory transfer component, and how does it interact with the presence and design of UI?

### EPL versus UI
- UI is conceptually superior to EPL for providing insurance against income loss.
- In presence of optimal UI, theory suggests EPL should take the form of a layoff tax to internalize social costs of layoffs; there would be no case for severance pay except to compensate for psychic costs of job loss.
- Limitations of severance pay relative to UI:
  - Being a one-off payment, it does not insure unemployment duration risk.
  - It offers no risk sharing across workers in different firms and, without prefunding, increases nonpayment risk because dismissals correlate negatively with firm solvency.
  - Practical issues: enforcement requires well-functioning administrative and judicial systems; litigation costs; exclusion of many workers due to short tenure or informality; lack of portability amid growing work fragmentation.
- Despite UI's conceptual superiority, emerging market and developing economies rely comparatively more on EPL and less on UI than advanced economies.
- Observations:
  - Average stringency of EPL differs only marginally between emerging market and developing economies and advanced economies (referenced Figure 3).
  - High mandated severance payments in emerging market and developing economies may reflect practical limitations of UI and mild substitutability between UI and EPL.
- Reform options:
  - Streamline administrative procedures and reduce the tax component of EPL.
  - Consider deferred compensation (severance savings) as it can avoid nonpayment and deliver better employment performance.

### Labor market dualism
- Poorly designed EPL can foster labor market dualism with adverse effects on efficiency and inequality.
- Historical pattern: deregulation of temporary contracts while keeping EPL for regular contracts can produce temporary jobs that are not converted to permanent ones, creating a two-tier system.
- Consequences include increased worker turnover, negative effects on aggregate unemployment, reduced on-the-job human capital accumulation, and lower productivity.
- Policy implications:
  - Reducing contract dualism (e.g., moving toward a single labor contract or making protections more homogenous) can help reduce labor market dualism.
  - Target mild, rather than stringent, protection levels for all workers to avoid fragmentation.
  - Overly stringent job protection for regular workers can foster fragmentation and informality (extreme form of dualism).

### Way forward: strategy for emerging market and developing economies
- Strong case for:
  - Gradually expanding UI along the economic development path.
  - Converging toward less stringent, simpler, more predictable, and more homogenous EPL.
- EPL design principles:
  - Moderate to minimize economic costs and adverse equity side effects.
  - Simple and predictable, favoring well-designed severance pay over burdensome administrative procedures with uncertain outcomes.
  - Homogenous across contract types rather than fragmented into multiple contract types with widely different protection levels.
- Deferred compensation mechanisms (severance savings) recommended as more efficient income insurance than lump-sum transfers at dismissal.

### Minimum wages and collective bargaining — Minimum wages
- Objectives of minimum wages:
  - Address market failures and promote economic efficiency (well suited when well calibrated, e.g., to counter monopsony power or improve worker effort under imperfect observability).
  - Reduce overall inequality (competes with other instruments such as tax-benefit systems).
- Limitations in reducing wage inequality and poverty:
  - Minimum wages are poorly targeted: they target individuals rather than households, and only employed workers rather than unemployed people.
  - In emerging market and developing economies, targeting is worse because minimum wages typically apply only to formal jobs.
  - Minimum wages may partly spill over to the informal sector via the lighthouse effect.
  - The effectiveness of minimum wages in reducing inequality declines when:
    - The share of formal workers in total employment is small.
    - Formal workers are less likely to live in poor households.
    - The starting level of the minimum wage is high (may bind for middle-income households too).
  - Low compliance among supposedly covered workers is a common issue in many emerging market and developing economies.
- Complementarities:
  - Minimum wages should be complemented by policies to address informality and enhance enforcement, including strengthening administrative capacity and legal systems.

*Source: IMF staff analysis from the chapter titled "Designing Labor Market Institutions in Emerging Market and Developing Economies: Evidence and Policy Options" (content unit sdnea2019004).*

### 40.      The impact of minimum wages on overall inequality also depends on their employment

### 40. The impact of minimum wages on overall inequality also depends on their employment effect, which is the main channel through which they affect economic efficiency

### Employment effects of minimum wages
- Employment effects remain hotly debated, though an emerging consensus suggests they may be small under the levels that have historically prevailed in most countries (see, for example, Kuddo, Robalino, and Weber 2015, or more recent studies discussed in Kugler, forthcoming).
- If set at too-high levels, minimum wages can have adverse effects on less productive population groups such as less educated youth (Abowd and others 2000; Kramarz and Philippon 2001; Neumark and Wascher 2008).
- In emerging market and developing economies, the distribution of productivity levels across firms is typically much wider than in advanced economies (Hsieh and Klenow 2009), increasing risks of adverse employment effects.
- The average ratio of the minimum wage to the median wage across countries that have a minimum wage is higher in emerging market and developing economies than in advanced economies (referenced as Figure 5; data year: 2010, simple average across available countries in each country income group).
- Additional considerations:
  - Minimum wages might also have a positive impact on productivity by encouraging worker effort and shifting activity away from lower-skilled toward higher-skilled firms and industries; the prevalence and magnitude of this effect are unclear. (Footnote text: Much more research is needed.)
  - Assessing overall employment effects is more difficult in emerging market and developing economies due to stronger labor mobility between formal and informal sectors and a smaller empirical literature (mostly focused on Latin America).
  - Meta-analysis evidence suggests nonlinearity: effects of minimum wages and other labor regulations on economic performance are stronger for higher degrees of stringency (Betcherman 2012, 2013).

### Differentiation and flexibility of minimum wage design
- Differentiation can mitigate adverse employment effects when productivity varies across groups, regions, or industries:
  - Options include differentiation by population groups (for example, youth), regions, or industries, or outright exemptions for certain categories of workers (youth, agricultural workers).
  - Differentiation can enable a higher standard minimum wage than would otherwise be feasible without hurting job opportunities for disadvantaged workers.
- Trade-offs and constraints:
  - Excessive differentiation increases administrative complexity and enforcement challenges, particularly in emerging market and developing economies with low-resourced labor administration and high informality.
  - Differentiation can weaken poverty and inequality reduction objectives of minimum wages.
  - When differentiating across regions, price levels must be taken into account because the relevant yardstick is purchasing power rather than nominal minimum wages.
- Flexibility mechanisms:
  - Debate over discretionary adjustments versus automatic formula adjustments:
    - Automatic formulas avoid lengthy political negotiations but can impede or delay wage adjustment to adverse macroeconomic shocks, with adverse implications for low-skilled employment.
    - A compromise: regular reviews informed by recommendations of an independent specialized body. Outcome range of such bodies can vary from advisory to legally setting minimum wages; globally, such bodies legally set minimum wages in 11 percent of cases in 2012 (see Table 9 in ILO 2013).

### Collective bargaining: coverage, design, and effects
- Collective bargaining coverage and union density:
  - Union density and collective bargaining coverage rates are far lower on average across emerging market and developing economies than across advanced economies (referenced Figures 6 and 7; data year: 2013 or latest available year for union density; early 2010s/late 2000s for collective bargaining coverage).
  - Bargaining coverage depends on union density, the predominant negotiation level (firm, industry, national), and government policies (including administrative extensions).
  - Effective coverage also depends on informality when considering the whole workforce.
- Potential benefits of collective bargaining:
  - Can improve productivity by strengthening internal labor markets, delivering workplace public goods (for example, workplace safety), and addressing market failures (for example, appropriability problems in general training).
  - Can reduce horizontal wage inequality (for example, gender gaps) and overall wage and income inequality; unions can complement tax and public spending policies.
- Need for macro- and microflexibility:
  - Collective bargaining systems must deliver both macro- and microflexibility. Lack of flexibility can cause inefficient resource allocation across firms and industries and impede adjustments to shocks, undermining productivity and employment stability.
- Level of bargaining and evidence:
  - Cross-country heterogeneity exists in primary bargaining levels, with an overall trend toward decentralization; Latin America shows notable decentralization although some countries retained centralized bargaining (Argentina, Uruguay).
  - The Calmfors and Driffill “hump-shaped hypothesis” argued for the superiority of either highly centralized or highly decentralized systems over sector-level bargaining; empirical evidence has been mixed.
  - Experiences in advanced economies diverge: some sector-level systems (Germany, Japan, Netherlands, Scandinavian countries) achieved greater coordination or higher firm-level flexibility (for example, via opening clauses) than others (Portugal, Spain).
  - In emerging markets, evidence from Argentina and Uruguay’s policy-driven decentralization in the early 1990s points to a positive impact of firm-level bargaining on productivity (Cassoni, Labadie, and Fachola 2005; Lamarche 2013).
  - Emerging evidence suggests industry-level bargaining systems need to provide for some firm-level flexibility at minimum.
- Administrative extensions of collective agreements:
  - Extensions enlarge coverage beyond negotiating parties to all workers in a sector and can reduce transaction costs and avoid a “race to the bottom.”
  - Extensions undermine firm-level flexibility by imposing similar working conditions across firms.
  - Mounting empirical evidence of adverse employment effects from administrative extensions exists in both advanced and emerging market and developing economies (Diez-Catalan and Villanueva 2015; Hijzen and Martins 2016; Magruder, 2012; Martins 2014).
  - Mitigants:
    - Extend only agreements that meet stringent union and employer association representativeness criteria.
    - Retain discretionary power on extension decisions to be used when rapid macroeconomic adjustment is needed.
  - More research needed on detailed design features, and on the role of trust between social partners for macro- and microflexibility (Blanchard and others 2013; IMF 2016).

### Way forward — policy recommendations and complementarities
- Core conclusions:
  - Statutory minimum wages are helpful to alleviate in-work poverty and to reduce income inequality.
  - Poor targeting and possible adverse effects on formal employment if set too high suggest minimum wages might not be the most effective sole policy tool and should be complemented by better targeted measures.
- Recommended design features and complements:
  - Simple, limited differentiation by regions or population groups (for example, substandard rates for youth) can ease the tension between equity and employment and enable higher standard rates without hurting disadvantaged workers’ job opportunities.
  - Complement minimum wages with targeted tools:
    - Conditional or unconditional cash transfer programs.
    - Wage subsidies.
    - Earned income tax credits where possible.
  - Evidence and examples:
    - Barros and others (2010) argue that for a given resource transfer, the Bolsa Familia program in Brazil was more effective than minimum wage increases in reducing poverty and income inequality.
    - Earned income tax credits have been used extensively in advanced economies as complements to minimum wages and could be deployed more widely in more advanced emerging market and developing economies where administrative capacity is sufficient.
- Collective bargaining role:
  - Collective bargaining can complement minimum wages in setting wages and working conditions, especially when bargaining takes place at the firm level.
  - For higher-level bargaining (industry or regional) to enhance equity without undermining efficiency, strict conditions must be met: high degree of representativeness, coordination, and trust between bargaining parties—conditions more likely met in advanced economies with longstanding social dialogue traditions (for example, northern European countries).

### IMF engagement and context (brief)
- IMF institutional efforts:
  - In 2011, IMF management set up a Jobs and Growth group to enhance work on labor market topics and inclusive growth concerns.
  - The IMF has conducted research into adverse effects of excessive inequality and lack of gender equality on the macroeconomy and has begun to incorporate findings into country-level advice.
- Scope of review in the source:
  - The study catalogs IMF advice across a sample of countries using MSCI definitions: 20 emerging and 10 frontier markets are covered; the sample excludes countries with very low per capita incomes.

*Source: sdnea2019004 - 40. The impact of minimum wages on overall inequality also depends on their employment effect (excerpt).*

### 56.      Text mining techniques were used to extract references to labor market institutions in Article

### sdnea2019004 - 56.      Text mining techniques were used to extract references to labor market institutions in Article

### Methodology and scope
- Text mining techniques were used to extract references to labor market institutions in Article IV Reports from 2005 through 2016.
- Extracts were reviewed and IMF policy advice was sifted out from routine descriptions of labor market developments.
- A team of research analysts did the initial sifting of advice from descriptions; the authors read the sifted advice and consulted the relevant Article IV Reports when necessary. In a few cases, the advice was contained in program documents rather than in Article IV Reports.
- The appendix provides a condensed version of the extracts, and five tables describing IMF advice on (1) unemployment insurance, (2) employment protection legislation, (3) active labor market policies, (4) minimum wage, and (5) collective bargaining.
- The benchmarking of IMF advice covered 30 emerging market and frontier economies.

### Findings — Unemployment Insurance (UI) and Employment Protection Legislation (EPL)
- IMF advised about 20 percent of the countries on UI at some point over the period 2005–16.
- IMF advised 40 percent of countries on EPL over the same period (see Appendix Tables A1 and A2).
- Most common UI advice: to set up a system or to extend benefits.
- Most common EPL advice: to lower generous severance payments.
- The trade-off between UI and EPL was mentioned in only a couple of cases.
- Active labor market policies were recommended in about 25 percent of the countries; there was no mention that the extension of UI should be accompanied by such policies.
- UI expansion advice was more common in higher-income emerging market economies (examples: Chile (2010, 2015), China (2015–16), Malaysia (2013, 2016), Turkey (2007)).
- UI was often viewed as part of the necessary social safety net rather than as a facilitator of microflexibility; discussions were often bundled with advice on expanding social assistance (recommended in about half the countries) and with broader tax and benefit system reforms.
- In some cases advice emphasized better targeting rather than expansion (examples: Hungary, 2011; Mexico, 2015) or replacing fuel or other subsidies with cash transfers (examples: Indonesia, 2012; Jordan, 2012).
- Two commonly given motivations for reducing severance payments under EPL advice:
  - Enhance productivity through better reallocation of workers (examples: Chile, 2009–15; Malaysia, 2012; Peru, 2006; Turkey, 2007).
  - Reduce informality and dualism in labor markets, contributing to more inclusive growth (examples: Chile, 2009–15; Indonesia, 2013; Morocco, 2011; Peru, 2006; Turkey, 2007).

### Findings — Minimum wage
- Advice on the minimum wage was given in 70 percent of the country cases at least once over the period 2005–16.
- Observations motivating advice:
  - Minimum wages (relative to median wages) tend to be higher in these economies than in advanced economies, raising risks of adverse employment effects.
  - IMF advice often: lower the minimum wage relative to some benchmark or limit the pace of increases to productivity growth or inflation targets.
  - Examples of countries where such advice was given: Brazil (2013), Colombia (2011), Serbia (2013), Turkey (2016).
- Recent discussions increased on using the minimum wage as a tool for equity and on efficiency–equity trade-offs (examples: the Philippines, 2016; South Africa, 2016).
- Claims about aggregate employment effects were modest and consistent with empirical evidence; recommendations were motivated more by likely effects on specific groups.
- Common recommendation: differentiate minimum wages across types of workers or regions (examples: lower minimum wages for youth and low-skilled workers in Colombia (2015) and Hungary (2014); lower minimum wages in some regions of Malaysia (2013) and Poland (2005–06)).
- One noted exception: Bangladesh (2013), where an increase in the minimum wage in the garment industry, instituted along with other protections after a major industrial accident, was welcomed by staff.

### Findings — Collective bargaining
- Advice on collective bargaining was given in about 25 percent of the country cases, with incidence appearing to be growing.
- Countries with fairly intensive advice on collective bargaining: Greece (2006, 2007, and 2013) and South Africa (2005–06, 2010–14, 2016).
- Other cases with advice on collective bargaining: Argentina (2016), Chile (2015), the Philippines (2014), Poland (2007), Romania (2012), Serbia (2014).
- In all these cases the recommendation was to reduce the extent of centralization of collective bargaining.
- Context and examples:
  - In some euro area countries, macroflexibility was needed to correct a large competitiveness problem at a fixed nominal exchange rate; absent exchange rate adjustment, IMF recommended achieving wage reductions through national agreements among social partners (Blanchard and others 2013). Such agreements were often difficult or did not take place, reflecting lack of trust between social partners (example: Greece).
  - South Africa: 2005–06 advice to relax the extension principle to allow small firms to negotiate agreements reflecting their circumstances. In 2010 staff judged the wage bargaining framework insufficiently flexible during recession; over 2011–16 staff repeatedly advised changing the sector-wide wage bargaining system to exempt small and medium-sized enterprises from wage increases agreed by large firms. IMF also called for a tripartite social accord including wage restraint in return for hiring commitments.

### Conclusions and forward-looking policy considerations
- Importance:
  - Getting labor market policy right can play an important role in delivering inclusive growth, especially in emerging market and developing economies where there is scope to scale up and improve labor market institutions amid slowing productivity growth and high or increasing inequality.
- Assessment of IMF advice:
  - Advice is sound and consistent with the broad consensus in the literature, recognizing that IMF recommendations are shaped by efficiency and equity objectives as well as political economy, technical capacity, and fiscal sustainability constraints.
  - The purpose and content of advice have evolved over time with growing recognition of the need for labor market and other institutions to promote more inclusive growth.
- Issues worth exploring in greater depth and policy suggestions highlighted:
  - Unemployment insurance: move beyond generic advice tied only to strengthening social safety nets; discuss design features of UI systems and how systems can be scaled up over time.
  - Employment protection legislation: while focus has often been on reducing severance payments, reducing uncertainty about the cost and duration of firing procedures might be more important than the level of payments. Consider linking EPL stringency to the buildup of the benefit system—scale back EPL as benefit systems are put in place.
  - Minimum wages: continue attention to equity–efficiency trade-offs. Where minimum wages are scaled down for efficiency, accompany the process systematically with alternatives to meet equity goals (examples: cash transfers or, where administrative capacity exists, income tax credits).
  - Collective bargaining: develop a consistent view that acknowledges different bargaining systems can achieve efficiency and equity, and focus on the detailed features needed for a given system to deliver in practice. Continue to keep advice aligned with evolving academic and policy knowledge.

*Source: https://www.imf.org/-/media/files/publications/sdn/2019/sdnea2019004.pdf*

### 2014. https://www.imf.org/external/np/pp/eng/2014/102514a.pdf.

### DESIGNING LABOR MARKET INSTITUTIONS IN EMERGING MARKET AND DEVELOPING ECONOMIES: EVIDENCE AND POLICY OPTIONS

### Appendix: scope and method
- The appendix lists advice extracted through text mining techniques for each of the countries and policy areas covered in the note.
- Capitalized words correspond to key word searches. Text in the “Article IV Extract” column corresponds to extracts (direct quotes) from Article IVs.

### Unemployment benefits — extracted policy advice (Article IV extracts)
- Chile 2009 (page 27): "Staff also noted scope to improve the balance between security and flexibility in the labor market. The authorities and staff agreed that future efforts could focus on further promoting formal employment, by introducing reforms to the UNEMPLOYMENT INSURANCE system that help lower SEVERANCE PAYMENTS, as well as by easing some restrictions on contracts."
- Chile 2010 (page 13): "Staff agreed with the authorities that replacing the current high SEVERANCE PAYMENT system with a more comprehensive UNEMPLOYMENT INSURANCE scheme could help increase labor market mobility and encourage greater investment in education and on-the-job training."
- Chile 2015 (page 21): "Staff welcomed recent changes in UNEMPLOYMENT INSURANCE (which have increased the amount and duration of the benefits from a relatively low base, and linked them to mandatory training), and the efforts to improve skill training programs for youth and women outside of the labor force."
- China 2016 (page 30): "Increasing on-budget support for consumption should include raising pensions, SOCIAL ASSISTANCE, education and health spending, UNEMPLOYMENT BENEFITS and providing restructuring funds, while cutting minimum social security contributions and raising SOE dividend payments. Increases in social benefits should be targeted to ensure progressivity."
- Korea 2015 (page 25): "Reducing labor market rigidities: This entails addressing gaps in legal protection for regular and non-regular workers, moving to performance- rather than seniority-based wages, reducing incentives for forcing early retirement, and improving UNEMPLOYMENT INSURANCE."
- Korea 2016 (page 20): "Fiscal support, including UNEMPLOYMENT INSURANCE benefits, retraining opportunities, and job-search facilities, could assist workers affected by corporate restructuring or labor market reforms -- this would allow more equitable outcomes and increase the likelihood of developing consensus for structural reforms."
- Malaysia 2011 (page 20): "Consideration could also be given to introducing an UNEMPLOYMENT INSURANCE scheme that could be mainly funded by employers and employees to avoid burdening the public purse."
- Malaysia 2012 (page 16): "The authorities could consider other measures to strengthen inclusiveness, such as introducing an UNEMPLOYMENT INSURANCE scheme funded by employers and employees; improving the targeting of CASH TRANSFER programs; and making them conditional on access to education and health care."
- Malaysia 2013 (page 25): "Staff recommended the introduction of UNEMPLOYMENT INSURANCE, which the authorities are studying, and which would further strengthen the safety net and reduce precautionary savings."
- Malaysia 2016 (page 90): "It would be useful to continue to improve social protection and social insurance institutions, including the introduction of an UNEMPLOYMENT INSURANCE system, increase private investment, including in physical infrastructure; and address labor-force skill mismatches and rigidities in the labor market. Consistent with the authorities' intentions, stronger SOCIAL SAFETY NETS and efforts to further boost private investment would help to further moderate the current account surplus."
- Turkey 2007 (page 34): "Staff suggestions to increase labor market flexibility and boost productivity include lower SEVERANCE PAYMENTS, while loosening eligibility requirements for UNEMPLOYMENT INSURANCE."

Key policy implications from the unemployment-benefits extracts:
- Replacing high severance-payment regimes with comprehensive unemployment insurance is recommended to increase labor mobility and encourage investment in education and training.
- Introducing or expanding unemployment insurance funded by employers and employees is a recurring recommendation to strengthen safety nets without overburdening public finances.
- Linking unemployment benefits to retraining and job-search facilities is advised to improve re-employment prospects and build consensus for structural reforms.
- Targeting increases in social benefits is emphasized to ensure progressivity.

### Employment protection legislation (EPL) — extracted policy advice (Article IV extracts)
- Chile 2005 (page 23): "In the labor area, several studies have shown that Chile exhibits significant labor market inflexibility, in part as a result of still widespread practices of inflation-indexed wage contracts, binding MINIMUM WAGEs for low-skilled workers, high SEVERANCE PAYMENTS, and cumbersome rules for worker dismissal. However, the authorities were not considering any new specific initiatives in this area in the near future."
- Chile 2009 (page 27): "The authorities and staff agreed that future efforts could focus on further promoting formal employment, by introducing reforms to the UNEMPLOYMENT INSURANCE system that help lower SEVERANCE PAYMENTS, as well as by easing some restrictions on contracts."
- Chile 2010 (page 14): "Replacing the current high SEVERANCE PAYMENT system with a more comprehensive UNEMPLOYMENT INSURANCE scheme, for example, would increase labor mobility and encourage greater investment in education and on-the-job training."
- Chile 2012 (page 15): "In line with OECD recommendations, staff suggested that labor market efficiency could be enhanced by moving away from the system of high SEVERANCE PAYMENTS for workers, increasing the flexibility of working hours, and improving the efficiency of training programs."
- Chile 2013 (page 24): "In line with OECD recommendations, a reconsideration of the relatively high SEVERANCE PAYMENTS and the rigid working hours, and strengthened training programs could help ensure efficient labor allocation."
- Chile 2014 (page 39): "Structural Reforms: i) Establishing a reform agenda for boosting productivity growth; ii) Improving labor market efficiency and flexibility, including by streamlining the high MINIMUM WAGE and SEVERANCE PAYMENTS, increasing the flexibility of working hours, raising (female and youth)labor participation, and improving the efficiency of training programs;"
- Czech Republic 2006 (page 3): "A high tax wedge and generous entitlements discourage job search, and strict EMPLOYMENT PROTECTION hampers job creation."
- Greece 2005 (page 15): "There is clearly scope to improve the Greek business climate, particularly by streamlining business establishment procedures and lowering hiring and firing costs, notably strong EMPLOYMENT PROTECTION arrangements."
- Greece 2006 (page 20): "Further initiatives in the labor market, which has seen less reform, include relaxation of strong EMPLOYMENT PROTECTION legislation and decentralization of the bargaining system."
- Greece 2007 (page 21): "The Greek labor market remains relatively rigid by international comparison. Reform should focus on enhancing the flexibility of the wage setting system and easing the restrictiveness of EMPLOYMENT PROTECTION legislation."
- Greece 2009 (page 32): "Greece can also facilitate more part-time work to boost participation of youths and women in the labor force, and ease EMPLOYMENT PROTECTION legislation."
- Indonesia 2007 (page 34): "The authorities should now focus on, modifications in labor regulations to alleviate the burden of SEVERANCE PAYMENTS on employment generation and facilitating public private partnerships in infrastructure (in addition to more budgetary spending) while ensuring that they are adequately prepared and assessed."
- Indonesia 2013 (page 25): "Reducing the rigidity of Indonesia's labor regulations, particularly with respect to SEVERANCE PAY, would improve Indonesia's competitiveness and generate jobs to absorb a large pool of underemployed workers (notably in the agricultural sector), supported by higher social spending."
- Korea 2009 (page 27): "Past staff advice to reduce EMPLOYMENT PROTECTION for regular workers and expand social protection of non-regular workers is still appropriate. More LABOR MARKET FLEXIBILITY would facilitate a reallocation of labor from the tradables to the nontradables sector, while better social protection would strengthen domestic demand by reducing precautionary savings. Moreover, increasing labor market participation of women, the old, and the young would help offset the projected fall in total factor productivity associated with a shift of economic activity to the less productive nontradables sector."
- Korea 2010 (page 22): "As previously recommended, there is scope to reduce the high level of EMPLOYMENT PROTECTION for regular workers to raise LABOR MARKET FLEXIBILITY and employment growth. However, any easing of EMPLOYMENT PROTECTION should be accompanied by an expansion in the SOCIAL SAFETY NET for both regular and nonregular workers to provide some income protection in case of layoffs."
- Korea 2012 (page 24): "Reducing labor market duality would entail relaxing EMPLOYMENT PROTECTION for regular workers, to reduce the incentives for firms to hire non-regular workers."
- Korea 2013 (page 17): "Efforts to reduce labor market duality should be stepped up. Broadening the access to training opportunities and improving social coverage for non-regular workers would raise productivity and reduce precautionary saving. To preserve overall employment, some changes in regular workers' contracts may be needed, including moving to performance rather than seniority based wage, reducing the relatively high degree of EMPLOYMENT PROTECTION, and accelerating the shift from mandatory retirement allowance to corporate pension schemes with defined contributions or defined benefits."
- Mexico 2012 (page 16): "The labor reform bill would overhaul labor laws dating back to" (extract truncated in source).

Key policy implications from the EPL extracts:
- High SEVERANCE PAYMENTS and strict EMPLOYMENT PROTECTION are repeatedly identified as sources of labor-market inflexibility and barriers to job creation.
- Recommendations emphasize streamlining severance regimes, increasing working-hours flexibility, decentralizing bargaining, and facilitating part-time work to boost labor participation of women and youth.
- Where EPL is eased, parallel expansion or strengthening of SOCIAL SAFETY NETS (including UNEMPLOYMENT INSURANCE, retraining, and social coverage for non-regular workers) is frequently advised to mitigate social risks and support reallocation.
- Addressing labor market duality (differences in protection between regular and non-regular workers) is highlighted as central to reducing incentives for firms to rely on non-regular contracts and to raise productivity.

### Cross-cutting themes and recurring recommendations
- Replace or complement high SEVERANCE PAYMENTS with comprehensive UNEMPLOYMENT INSURANCE schemes to improve labor mobility and incentives for human capital investment.
- Design unemployment benefits and social spending increases to be targeted to ensure progressivity.
- Pair labor market liberalization (reducing EMPLOYMENT PROTECTION and increasing flexibility) with stronger SOCIAL SAFETY NETS, retraining, and job-search assistance to preserve equitable outcomes and facilitate consensus for reforms.
- Reduce labor market duality by aligning protection and social coverage across contract types, broaden access to training, and move toward performance-based wage structures where appropriate.
- Improve the efficiency of training programs and increase female and youth labor force participation as complementary measures to reforms in EPL and unemployment protection.

*International Monetary Fund. DESIGNING LABOR MARKET INSTITUTIONS IN EMERGING MARKET AND DEVELOPING ECONOMIES: EVIDENCE AND POLICY OPTIONS (Appendix extracts).*

### 1970. Provisions to streamline the settlement of labor lawsuits and

### 1970. Provisions to streamline the settlement of labor lawsuits and to limit compensation for unjustified dismissals to one year of salary

### Streamlining dispute resolution and SEVERANCE PAY rules
- Proposal: Simplify the current lengthy dispute resolution process (which can hold up SEVERANCE PAY for several years) and provide more legal certainty by limiting compensation for unjustified dismissals to one year of salary.
- Rationale: Current processes are lengthy and can delay SEVERANCE PAY for several years; streamlining would reduce delays and increase legal certainty.
- Country examples and related reform notes:
  - Peru 2006 34: With three fourths of workers employed in the informal sector, reducing informality is imperative. Comprehensive reform should aim at lowering high SEVERANCE PAYMENTS, better aligning non-wage benefits with job tenure, and removing legal restrictions that prevent dismissals for economic, technological, and structural reasons.
  - Philippines 2004 14: Awarding generous SEVERANCE PAYMENTS to those near retirement would reduce possible gains to the budget.
  - Philippines 2009 23: Strengthen LABOR MARKET FLEXIBILITY: Liberalize fixed-term contracts, gradually reduce or phase out MINIMUM WAGEs while strengthening SOCIAL SAFETY NETs, and reduce redundancy notice periods and SEVERANCE PAY.
  - Poland 2007 21: Panel econometric thought experiment—if Poland moved instantaneously to Ireland’s position on several key institutional variables (including EMPLOYMENT PROTECTION legislation), private sector employment rate would climb by 9½ percentage points over three years, erasing 60 percent of the difference between the two countries in this variable.
  - Serbia 2013 13: Staff urged delinking SEVERANCE PAYMENTS from lifetime employment and relaxing restrictions on the separation process to improve hiring incentives.
  - Serbia 2014 21: Reform limits SEVERANCE PAYMENTS by linking them to service with the current employer rather than life-time employment and clarifies and simplifies separation rules; staff welcomed these changes.
  - Turkey 2007 34: Suggestions to increase labor market flexibility include lower SEVERANCE PAYMENTS while loosening eligibility requirements for UNEMPLOYMENT INSURANCE.
  - Turkey 2010 8: Turkey's SEVERANCE PAY scheme is among the most generous in the OECD (one month per year of tenure); regulations on short-term contracts are the most restrictive, squeezing jobs from the formal to the informal sector or discouraging job creation.
  - Turkey 2011 30: To encourage new employment and job mobility within the formal sector, urged lowering restrictions on temporary and part-time work, and replacing current ex post SEVERANCE PAY with a pre-funded, lower-cost insurance scheme.
  - Turkey 2016 20: Reforms aimed at increasing funding in the private pension and SEVERANCE PAY systems, while maintaining a tight fiscal stance, should be implemented swiftly; these reforms could raise the private saving rate (IMF 2016b), especially as the current pay-as-you-go PENSION SYSTEM remains generous by international standards.

### ACTIVE LABOR MARKET POLICIES (ALMP)
- Key policy direction: Strengthen ACTIVE LABOR MARKET POLICIES to improve labor mobility, reduce skills mismatches, and increase labor participation.
- Country examples and recommendations:
  - China 2016 30: Key reforms include expanding social security and improving portability of benefits, liberalizing residency restrictions, and improving ACTIVE LABOR MARKET POLICIES.
  - Czech Republic 2007 23 and 2013 14: Better targeted ACTIVE LABOR MARKET POLICIES, less rigid hiring/dismissal regulations, and improved tax-benefit design could raise participation and lower structural unemployment.
  - Greece 2007 18: Review EMPLOYMENT PROTECTION legislation, especially on temporary employment, and strengthen ACTIVE LABOR MARKET POLICIES to increase labor mobility.
  - Hungary 2010 12; 2014 19; 2015 11; 2016 20: Narrow scope of ALMP to disadvantaged groups; strengthen training components and job-matching services; consider differentiating MINIMUM WAGE across groups and link increases to productivity growth; adopt targeted, conditional transfers linked to revamped ALMP focusing on individualized skills-training and job-search assistance.
  - Jordan 2012 21; 2014 22: Adopt ACTIVE LABOR MARKET POLICIES—vocational training, job matching services, support for youth start-ups—and address barriers for female labor participation (employers' perceptions, access to job information, lack of targeted ALMP for females, lack of private-sector maternity benefits, absence of affordable childcare).
  - Poland 2011 17; 2016 37: With limited resources, review efficiency and targeting of existing ALMP; improve job-search efficiency across regions and reduce skill mismatches by aligning education/training with employer needs.
  - Russia 2016 27: Improve education quality and vocational training, increase coordination between employers and training institutes, and strengthen ALMP to increase labor productivity.
  - South Africa 2012 31: Short-run support via ALMP measures—temporary youth wage subsidies, transport subsidies for job seekers, schemes for work experience and on-the-job training—designed to prevent abuse and ensure net employment, with tightly controlled spending given fiscal cost.

### MINIMUM WAGE considerations and interactions with labor costs
- Central observations: High MINIMUM WAGE levels, indexation practices, and high non-wage labor costs can increase youth unemployment, contribute to informality, and hinder competitiveness.
- Key findings and country notes:
  - Bangladesh 2013 24: Imminent revision in garment sector MINIMUM WAGES is welcome.
  - Brazil 2013 36; 2014 24; 2016 27: Revising MINIMUM WAGE indexation mechanism and severing automatic links between benefit payments and the MINIMUM WAGE is advisable; limit increases to cost of living adjustments.
  - Chile 2005 23; 2006 26; 2010 13; 2012 17; 2014 39: Widespread practices—inflation-indexed wage contracts, binding MINIMUM WAGEs for low-skilled workers, high SEVERANCE PAYMENTS, and cumbersome dismissal rules—contribute to labor market inflexibility; Chile’s MINIMUM WAGE is 45 percent of the average wage compared to the OECD average of 40 percent (Chile 2010 13); MINIMUM WAGE increases should be consistent with productivity growth.
  - Colombia 2005 10; 2008 17; 2011 30; 2012 49; 2014 37; 2015 25: High MINIMUM WAGE and non-wage labor costs are main contributors to high structural unemployment and informality; in mid-2013, the MINIMUM WAGE for a 19-year old worker or an apprentice stood at $310 per month, representing about 30 percent of value-added; non-wage costs constitute about 40 percent of total labor costs for the average worker; tax reform of 2012 lowered non-wage compulsory payments by eliminating health, training, and child care contributions and may have contributed to reduced informality since mid-2013.
  - Czech Republic 2014 59: Recommendation to increase the MINIMUM WAGE annually to raise it over time to 40 percent of the average wage.
  - Greece 2005 20; 2013 16: Relax EMPLOYMENT PROTECTION legislation and allow greater opt-out of centrally agreed MINIMUM WAGEs in stressed sectors; high national MINIMUM WAGE relative to competitors contributes to firing costs and inflexibility.
  - Hungary 2005 31: Contain further increases in the MINIMUM WAGE after sizable increases in 2001-02 undermined employment goals.

*Source: sdnea2019004 - 1970. Provisions to streamline the settlement of labor lawsuits and to limit compensation for unjustified dismissals to one year of salary (excerpt).*

### 2011. The MINIMUM WAGE has been increased on a one-off

### 2011. The MINIMUM WAGE has been increased on a one-off

### One-off increase and compensatory scheme
- The MINIMUM WAGE has been increased on a one-off basis to compensate for the tax hike for low-income earners.
- To preserve employment, enterprises are compensated for the labor cost increase resulting from the increased MINIMUM WAGE.
- The MINIMUM WAGE hike, coupled with the compensatory scheme, should also reduce prevalent tax evasion consisting of only declaring the MINIMUM WAGE income.

### Cross-country findings and concerns about MINIMUM WAGE design and effects
- Hungary 2014: Consideration should be given to boosting labor demand by differentiating the MINIMUM WAGE across different groups and linking future increases to productivity growth.
- Hungary 2016: Consider introducing differentiated MINIMUM WAGEs and broadening the definition of eligible skilled workers.
- India 2010: The cost of expanding NREGA to levels of most implemented states would be around 0.8 percent of GDP; tying wage rates to MINIMUM WAGEs could also raise costs.
- Indonesia 2005: Regional tripartite councils set the MINIMUM WAGE; encouraged use of this framework to resolve labor issues like SEVERANCE PAY and outsourcing.
- Indonesia 2013: Reducing rigidity (notably SEVERANCE PAY) would improve competitiveness and generate jobs; align wage increases with productivity and redefine MINIMUM WAGE as a safety net rather than a COLLECTIVE BARGAINING tool; growth in labor costs has outpaced productivity due to high MINIMUM WAGE levels relative to average wages, frequent adjustments, and indexation of wage contracts.
- Indonesia 2014: Moving away from annual negotiations of MINIMUM WAGEs would reduce uncertainty for employers and possibly spur hiring.
- Jordan 2012: Ensure revisions to public sector compensation or MINIMUM WAGE structure do not distort private sector employment incentives.
- Morocco 2011: Further reforms to reduce MINIMUM WAGEs and hiring costs are critical to reduce youth unemployment.
- Mexico 2014: An eventual increase in the MINIMUM WAGE could affect wages more broadly, putting upward pressure on prices.
- Malaysia 2011: The role of the MINIMUM WAGE in supporting low-skilled wages must be balanced against potential dis-employment effects; porous borders and migration to informal sector complicate implementation.
- Malaysia 2012: A MINIMUM WAGE introduced from January 2013 aimed at boosting low-skilled wages; preliminary analyses suggest limited impact on inflation and unemployment; consider phased adjustment for highly affected firms and regional dispersion.
- Peru 2016: Recent 13 percent increase in the national MINIMUM WAGE could pressure inflation; pass-through to consumer prices is uncertain.
- Philippines 2009: Recommend liberalizing fixed-term contracts, gradually reducing or phasing out MINIMUM WAGEs while strengthening SOCIAL SAFETY NETs, and reducing redundancy notice periods and SEVERANCE PAY.
- Philippines 2016: Exemption for MINIMUM WAGE earners effectively exempts a large share of the labor force and creates vertical inequity; the 13th month salary exemption is highly regressive.
- Poland 2005: Freeze the MINIMUM WAGE to make it less binding for low-skill workers, differentiate regionally and for young workers, and eliminate impediments to job creation.
- Poland 2006: Better targeting out-of-work benefits and differentiating MINIMUM WAGEs regionally would increase work incentives.
- Romania 2016: Pace of future MINIMUM WAGE increases should be moderate and balance social considerations with competitiveness, productivity growth, and employment prospects.
- Serbia 2013: Cautioned against MINIMUM WAGE increases that outpace productivity growth; youth unemployment already at 51 percent.
- Thailand 2012: Rebalancing income distribution through higher MINIMUM WAGEs needs to be accompanied by higher labor productivity; gradual implementation is appropriate.
- Thailand 2013: Nationwide MINIMUM WAGE hikes could induce enhancement of labor productivity and firms’ production processes.
- Thailand 2015: Incentives to hire newcomers may be enhanced by temporary tax breaks or MINIMUM WAGE waivers.
- Turkey 2007: Ease or differentiate regionally the real minimum wage which exceeds 150 percent of regional per capita income in poorer provinces.
- Turkey 2010: Better align productivity-adjusted employment costs with regional peers by lowering the MINIMUM WAGE (especially in low-income regions), scaling back severance benefits, and allowing more flexible work practices.
- Turkey 2011: Bring MINIMUM WAGEs in formal sector into line with peers, relax restrictions on flexible work arrangements, and introduce an unemployment cushion scheme.
- Turkey 2016: In January 2016, the government raised the net MINIMUM WAGE by 30 percent; the increase poses challenges for labor markets, competitiveness, and the fiscal balance. Authorities should pursue a prudent MINIMUM WAGE policy and help integrate refugees; contain increases at or below programmed inflation.
- South Africa 2006–2016 (multiple entries): Repeated recommendations to consider employment effects when setting MINIMUM WAGEs; national MINIMUM WAGE proposals could increase unemployment depending on level and formulation; average sectoral MINIMUM WAGE in South Africa is 62 percent of the average formal wage compared to the 37 percent OECD average; proposed national MINIMUM WAGE could help reduce inequality but risks causing job losses among less-skilled, young, and SME workers; recommended simultaneous labor market reforms to increase wage flexibility, exempt SMEs from COLLECTIVE BARGAINING outcomes, reduce firing costs, and introduce benefit-accumulating contracts.
- Vietnam 2007: The indexation of public wages and pensions to the common MINIMUM WAGE should be discontinued.

### Collective bargaining and wage-setting dynamics
- Argentina 2016: Core inflation continued to decline and reached 1½ percent (m/m) in September; collective WAGE BARGAINING injects backward-looking elements into nominal wage determination.
- Chile 2015: Maintain COLLECTIVE BARGAINING at firm level and introduce more flexible work arrangements within the process; balance strike rights with defining minimum services.
- Greece 2006–2013: Centralized COLLECTIVE BARGAINING delivered higher unit labor cost growth and somewhat high MINIMUM WAGEs relative to productivity; argued decentralization and easing EMPLOYMENT PROTECTION legislation to encourage hiring.
- Philippines 2014: Inflation rose to 4 percent late in the year and reached 4½ percent in May; supply-side pressures and regionally centralized WAGE BARGAINING framework contributed.
- Poland 2007: If Poland instantaneously matched Ireland on institutional variables, private sector employment rate would climb by 9½ percentage points over three years.
- Romania 2006–2012: Urged labor market legislation amendments to increase employers’ representation and ensure consistency with core ILO conventions.
- Serbia 2014: Reform extends maximum temporary contract length from one year to two years and tightens extension rules for COLLECTIVE AGREEMENTS; staff welcomed changes.
- South Africa (multiple years): Centralized COLLECTIVE BARGAINING and the "extension principle" prevent smaller firms from negotiating reflective agreements; suggested moderating economy-wide wage growth, limiting real wage increases to 1 to 2 percent for several years through social accords, and increasing voice of unemployed outsiders in WAGE BARGAINING.
- South Africa 2013: Real wage growth has outpaced productivity growth; mandatory extension of COLLECTIVE BARGAINING agreements makes it difficult for smaller firms; recommend limiting extension practice and increasing wage flexibility for SMEs and new businesses.
- South Africa 2014: Simultaneous reforms—outsider influence in wage setting, exempting SMEs from extension, reducing firing costs—could be part of a social bargain including wage restraint, industry hiring commitments, and government provision of education, training, and targeted transport subsidies.
- South Africa 2016: Research shows reforms that increase wage flexibility are particularly important in bad times; the introduction of the proposed national MINIMUM WAGE should be accompanied by reforms that increase wage flexibility, exempt SMEs from COLLECTIVE BARGAINING outcomes, and introduce benefit-accumulating contracts.

### Policy implications and recommendations (aggregate)
- Differentiate MINIMUM WAGEs across regions, age groups, and worker categories to reflect productivity and labor market conditions.
- Link future MINIMUM WAGE increases to productivity growth.
- Consider compensatory schemes for firms to preserve employment when MINIMUM WAGE hikes are implemented.
- Phase adjustments for highly affected firms and allow regional dispersion or delayed implementation where appropriate.
- Avoid MINIMUM WAGE increases that outpace productivity growth to prevent competitiveness losses, informality, and higher unemployment.
- Complement MINIMUM WAGE policies with:
  - reforms to SEVERANCE PAY and EMPLOYMENT PROTECTION legislation to increase flexibility,
  - targeted social safety nets rather than wage-only income support,
  - measures to enhance labor productivity (training, investment),
  - exemptions or special arrangements for SMEs and newcomers to the labor market,
  - careful monitoring of inflation pass-through from MINIMUM WAGE increases.
- Ensure COLLECTIVE BARGAINING frameworks allow firm-level flexibility and representation for outsiders and smaller firms; consider limiting the extension of sectoral agreements to non-participating firms.

*Source: sdnea2019004 - 2011. The MINIMUM WAGE has been increased on a one-off*

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_Source: https://www.imf.org/-/media/files/publications/sdn/2019/sdnea2019004.pdf_