## _wp04205

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---

### I. INTRODUCTION — Overview and research focus
- Investigates consequences of wage compression and restrictions on worker redeployment for low-skill workers in Mauritius.
- Key finding: "even relatively minor wage compression and restrictions on the redeployment of workers can have a dramatic impact on the fragility of jobs, the length of unemployment spells, as well as the extent of unemployment and labor market churning."
- Scope:
  - Empirical analysis of the EPZ (export processing zone / textiles) sector (Section II).
  - Stylized calibrated model of job creation and destruction to assess potential benefits of labor market reform (Section III).
- Comparative relevance: Similar wage compression and labor market restrictions documented in western Europe and transitional economies.

### A. Mauritius’s Unemployment Problem — Observations and implications
- Unemployment trends and composition:
  - "Mauritian unemployment has increased in every year since 1991, with the unemployment rate reaching 10.2 percent in 2003."
  - The 2000 Census reported that "90 percent of the unemployed have not completed the high school certificate."
- Policy responses and limits:
  - Government implementing "far-reaching educational reforms" to address skills mismatch.
  - Conclusion: "educational reform can only be a partial solution to the unemployment problem."
- Mismatch measure:
  - Variance of relative unemployment rates declined "from 17 percent to 12 percent" between the 1990 and 2000 censuses.
- Structural challenges and timing:
  - Loss of preferential arrangements for sugar and textile exports; textile quota under the Agreement on Textiles and Clothing "is set to lapse by end-2004."
  - Sugar Sector Strategy has "reduced employment by around a quarter."
  - Delaying labor market reform "will exacerbate the pain involved in this adjustment, especially for those with few skills."
- Policy implication:
  - "Employment opportunities for these workers can be enhanced over the medium term by simply liberalizing the regulations that govern the labor market."

### B. Mauritius’s Labor Market Institutions — Structure and effects
- Institutional features:
  - Wages and conditions determined centrally via industry-specific Remuneration Orders (RO).
  - ROs "specify the exact duties of every type of worker in the firm in great detail."
  - ROs "are aggressively enforced by the Ministry of Labor," making worker redeployment "extremely difficult."
  - Termination procedures require approvals from the Termination of Contracts Services Board; "often leading to delays on the order of four months."
- Wage-setting mechanics:
  - Annual tripartite wage setting produces a "new wage for all categories," typically indexed to inflation, with "lower wages rising by more than higher ones."
  - Every five years the Pay Research Bureau establishes a catch-up wage increase for the public sector, which "typically puts some additional pressure on private sector wages."
- Labor market consequences:
  - Centralized wage determination "tends to compress the wage distribution."
  - With "wages being compressed and workers unable to be redeployed as circumstances change, jobs become substantially more fragile."
  - Incentives to create new jobs "can also be reduced significantly," potentially constraining low-skill workforce access to emerging sectors such as ICT.
- Scope note:
  - ROs "do not cover the EPZ sector, and are not expected to cover new information, communications, and technology (ICT) activity."

### II. EVOLUTION OF EMPLOYMENT IN THE EPZ (TEXTILES) SECTOR — Dynamics and evidence
- Role of textiles:
  - "Textile production, especially in the EPZ sector, has contributed significantly to the Mauritian 'growth miracle.'"
  - Textiles account for "almost 90 percent of EPZ sector employment"; textiles and EPZ used interchangeably in analysis.
- Job flows and reallocation:
  - Decomposition of EPZ employment growth into job creation and job destruction since 1983 shows "remarkable transformation in the early 1980s," then stabilization around longer-term values.
  - Job creation and destruction are "a persistent and continual process of renewal," with "sizable job destruction occurring even during periods of high employment growth."
  - Job reallocation rate defined as "the sum of job creation and destruction rates"; excess job reallocation rate is "job reallocation in excess of absolute employment growth"—a measure of "churning."
  - "The exceptional job reallocation seen initially... subsequently declined as the industry matured."
- Data and measurement:
  - Job creation, destruction, and employment growth rates are calculated "by dividing the change in employment between two periods by the average employment in those periods"—consistent with Davis, Haltiwanger and Schuh (1997).
- Recent trends and shocks:
  - Rapid growth in EPZ employment in the mid-1980s, followed by moderation throughout the 1990s.
  - First three quarters of 2003:
    - Substantial decline in the rate of job creation (to its lowest level ever).
    - Rapid increase in the rate of job destruction.
  - Average size of firms closing down increased markedly in the last two years.
  - Interpretation: dramatic increase in job destruction and decline in job creation consistent with rapid structural decline in Mauritian textiles; industry unlikely to disappear but could become much smaller.

### Labor market characteristics in Mauritius (empirical measures)
- High unemployment with long unemployment spells:
  - Average (median) unemployment duration: 20 (9) months.
- Low rates of job flows relative to the United States:
  - EPZ and Portuguese markets show much smaller quarterly job flows than the U.S., suggesting less dynamic labor markets and less frequent flows into and out of unemployment.
- Quarterly job flow rates (Table 1 excerpts):
  - United States, 1972(2)-1993(4), Manufacturing: Job Creation 5.07, Job Destruction 5.47.
  - United States, Apparel and Textiles: Job Creation 4.58, Job Destruction 5.40.
  - Portugal, 1991(1)-1995(4), Manufacturing: Job Creation 3.20, Job Destruction 3.90.
  - Portugal/U.S. 1/: Job Creation 0.63, Job Destruction 0.71.
  - Mauritius, 1989(1)-2003(1), EPZ: Job Creation 3.96, Job Destruction 4.02.
  - Mauritius/U.S. 2/: Job Creation 0.86, Job Destruction 0.74.

### Model framework (equilibrium labor market model)
- Model type: standard frictional matching model similar to Pissarides (2000) and Mortensen and Pissarides (1994); captures job creation and destruction with bargaining or exogenous wage settings.
- Entrepreneurs post vacancies at cost k and discount factor set to β (0,1)∈.
- Key equations and constructs preserved exactly as in source:
  - Zero profit condition for vacancy posting: (1) ()()0=⋅+−εβJqk, whenever v>0.
  - Bellman equation for match value (entrepreneur): (2) ()  ()()()()(){}0,'max1εβγεγβεεJEJwfJ+−+−=,.
  - Worker Bellman equation: ()()()()(){}0,'max1εβγεγβεε eee VEVwV+−+=,.
  - Unemployed value: ()()()() [] ueu VpVpV⋅−+⋅=1εβ.
  - Matching function with constant returns-to-scale: jobs formed m(v,u) with finding rates p(.) and q(.); steady state unemployment *u = *δ /(δ*+p).
- Two wage regimes analyzed:
  - Decentralized Nash bargaining: wage function linear in productivity: ()εε 10 www+=; bargaining power θ; reservation productivity dε and labor market tightness u/v characterize equilibrium via (3) and (4).
  - Exogenous (compressed) wage schedule: wage ~ ()εw~, modifies entrepreneur value (5) and leads to creation and destruction rules (6) and (7); with exogenous wage the JD curve becomes vertical (reservation productivity independent of tightness).

### Comparative statics and intuition (from the model)
- Wage compression effects:
  - Raises average wages for low-skill workers (cross-market) and flattens wage slope (within-market), parametrized by g and φ respectively.
  - Raising average wages for low-skill workers makes marginal jobs unprofitable, increasing reservation productivity dε and moving JD curve right (more destruction).
  - New-job creation may rise slightly since new matches begin at high productivity (JC curve moves right), but aggregate effect is typically more destruction and fewer jobs.
- Redeployment restrictions:
  - Modeled as lower average per period output from the worker (reduced expected productivity).
  - Reducing redeployment raises job fragility and increases destruction (JD moves right); can indirectly raise creation of new jobs but overall worsens unemployment outcomes.
- Interaction:
  - Wage compression intensifies the adverse effects of redeployment restrictions and negative output shocks.

### Calibration (to Mauritian data)
- Time period: quarter; discount factor set to 99.0=β.
- Matching function: Cobb-Douglas; elasticity of matching α set to 4.0=α (lower estimate from empirical range 0.4-0.7).
- Bargaining power: θ set equal to α for Hosios efficiency condition: 4.0==αθ.
- Idiosyncratic productivity ε distributed uniformly.
- Parameters k and γ chosen to match:
  - Average EPZ job destruction rate: 4.02 percent during 1989-2002.
  - Unemployment rate for low-skill workers from 2000 census: 9.6 percent.
- Matching efficiency chosen so labor market tightness ≈ two-thirds in decentralized bargaining equilibrium.
- Baseline wage compression assumptions (conservative):
  - Cross-market bleeding g = 02.0=g.
  - Within-market compression φ = 5.0=φ.

### Empirical results (model output)
- Table 2 columns: Unemployment Rate, Unemployment Duration (mths), Job Finding Rate, Job Destruction Rate, Unit Labor Costs, Excess Job Reallocation.
- Baseline Results — Benchmark 1/:
  - 9.6 11.5 37.8 4.0 0.89 8.0
- No Wage Compression:
  - 7.4 9.5 45.4 3.6 0.88 7.2
  - % Difference: -23.2 -16.8 20.2 -10.0 -0.6 -9.9
- Wage Compression — No Cross-Market Comp.:
  - 7.7 9.3 46.7 3.9 0.87 7.8
  - % Difference 2/ : 4.3 -2.7 2.8 7.7 -1.0 7.7
- Wage Compression — No Within-Market Comp.:
  - 9.5 12.0 36.1 3.8 0.89 7.6
  - % Difference 2/ : 28.6 25.7 -20.4 4.7 1.5 4.7
- Redeployment Restrictions — No Wage Compression — 10% lower redeployment rate:
  - 7.7 9.9 43.8 3.7 0.88 7.3
  - % Difference 2/ : 4.1 3.7 -3.5 0.8 -0.5 0.7
- Redeployment Restrictions — Wage Compression — 10% lower redeployment rate:
  - 9.9 11.8 36.7 4.0 0.88 8.1
  - % Difference 2/ : 34.2 23.7 -19.2 11.6 0.1 11.6
- % Difference No Wage Comp.: 29.0 19.4 -16.2 10.7 0.6 10.8
- Notes preserved exactly:
  - 1/ Assumes some cross-market (g = 0.02) and within-market (φ=0.5) wage compression.
  - 2/ Difference from “No Wage Compression” simulation.
- Key empirical findings from calibration:
  - Even minimal wage compression materially increases unemployment, average unemployment duration, and job fragility.
  - Removing wage compression raises job finding rate by 20.2 percent in the baseline experiment and reduces job destruction.
  - Cross-market compression is more harmful than within-market compression: removing cross-market compression yields a larger reduction in unemployment and a big increase in job creation.
  - A modeled 10 percent reduction in redeployment (output) raises unemployment and durations; wage compression amplifies these effects (e.g., 4.1 percent rise in unemployment without wage compression vs. 34.2 percent with wage compression in the simulated restriction).

### Comparative statics and simulated patterns (qualitative)
- Increasing cross-market wage compression (up to 5 percent increase in average wages):
  - Monotonic increases in unemployment and job destruction.
  - Also increases average unemployment spell length and inefficient churning.
- Increasing within-market wage compression:
  - Tends to increase unemployment and job fragility; increases inefficient churning; average duration of each job falls by over 10 percent.
  - For very high within-market compression, a slight reduction in unemployment can occur because new jobs are assumed to start at highest productivity, raising job finding rate.
- Increasing degree of redeployment (greater flexibility) reduces unemployment and job fragility; gains are larger when wages are not compressed.

### Policy implications and conclusions
- Even minimal wage compression and modest redeployment restrictions reduce employment for affected (low-skill) workers and increase the length of unemployment spells.
- These distortions generate excessive turnover, reduce workers’ opportunities to acquire skills when employed, and hasten skill atrophy when unemployed.
- Wage compression intensifies negative effects of other distortions and negative shocks.
- Cross-market and within-market wage compression both impose costs; cross-market compression appears more harmful for aggregate unemployment and job creation.
- Shielding some sectors temporarily mitigates effects but ultimately harms low-skill workers and long-term growth by distorting reallocation incentives.
- Educational reforms are necessary but insufficient: with only 7.3 percent of Mauritians having their higher school certificate, education will take time to absorb low-skill labor; therefore, general labor market reform is crucial.

*Source: _wp04205 (IMF working paper excerpts).*

### References..............................................................................................................

### References

### I. INTRODUCTION — Overview and research focus
- Investigates consequences of wage compression and restrictions on worker redeployment for low-skill workers in Mauritius.
- Key finding: "even relatively minor wage compression and restrictions on the redeployment of workers can have a dramatic impact on the fragility of jobs, the length of unemployment spells, as well as the extent of unemployment and labor market churning."
- Scope: Empirical analysis of the EPZ (export processing zone / textiles) sector (Section II) and a stylized calibrated model of job creation and destruction to assess potential benefits of labor market reform (Section III).
- Comparative relevance: similar wage compression and labor market restrictions documented in western Europe and transitional economies (cites Bertola and Rogerson (1997); OECD (1994, 1995); Svejnar (1999); Haltiwanger and Vodopivec (2002)).

### A. Mauritius’s Unemployment Problem — Observations and implications
- Unemployment trends and composition:
  - "Mauritian unemployment has increased in every year since 1991, with the unemployment rate reaching 10.2 percent in 2003."
  - Unemployment concentrated among low-skill workers: "The 2000 Census reported that 90 percent of the unemployed have not completed the high school certificate."
- Policy responses and limits:
  - Government implementing "far-reaching educational reforms" to address skills mismatch.
  - Paper's conclusion: "educational reform can only be a partial solution to the unemployment problem."
- Mismatch measure:
  - Using labor market data by educational category, the variance of relative unemployment rates declined "from 17 percent to 12 percent" between the 1990 and 2000 censuses (measure described per Layard, Nickell, and Jackman, 1991, Ch. 6).
- Structural challenges and timing:
  - Significant structural challenge: loss of preferential arrangements for sugar and textile exports.
  - Textile quota under the Agreement on Textiles and Clothing "is set to lapse by end-2004."
  - Government action: Sugar Sector Strategy has "reduced employment by around a quarter."
  - Risk: Delaying labor market reform "will exacerbate the pain involved in this adjustment, especially for those with few skills."
- Policy implication:
  - "Employment opportunities for these workers can be enhanced over the medium term by simply liberalizing the regulations that govern the labor market."

### B. Mauritius’s Labor Market Institutions — Structure and effects
- Institutional features:
  - Wages and conditions determined centrally via industry-specific Remuneration Orders (RO).
  - ROs "specify the exact duties of every type of worker in the firm in great detail."
  - ROs "are aggressively enforced by the Ministry of Labor," making worker redeployment "extremely difficult."
  - Termination procedures: approvals required from the Termination of Contracts Services Board; "often leading to delays on the order of four months."
- Wage-setting mechanics:
  - Annual tripartite wage setting results in a "new wage for all categories," typically indexed to inflation, with "lower wages rising by more than higher ones."
  - Every five years the Pay Research Bureau establishes a catch-up wage increase for the public sector, which "typically puts some additional pressure on private sector wages."
- Labor market consequences:
  - Centralized wage determination "tends to compress the wage distribution."
  - With "wages being compressed and workers unable to be redeployed as circumstances change, jobs become substantially more fragile."
  - Incentives to create new jobs "can also be reduced significantly," potentially constraining low-skill workforce access to emerging sectors such as ICT.
- Note on scope of ROs:
  - ROs "do not cover the EPZ sector, and are not expected to cover new information, communications, and technology (ICT) activity."

### II. EVOLUTION OF EMPLOYMENT IN THE EPZ (TEXTILES) SECTOR — Dynamics and evidence
- Role of textiles:
  - "Textile production, especially in the EPZ sector, has contributed significantly to the Mauritian 'growth miracle.'"
  - Textiles account for "almost 90 percent of EPZ sector employment"; hence "textiles and EPZ will be referred to interchangeably in this section."
- Job flows and reallocation:
  - Decomposition of EPZ employment growth into job creation and job destruction since 1983 shows "remarkable transformation in the early 1980s," then stabilization around longer-term values.
  - Job creation and destruction are "a persistent and continual process of renewal," with "sizable job destruction occurring even during periods of high employment growth."
  - Interpretation: substantial "reallocation" of activity across firms within the EPZ sector.
  - Job reallocation rate defined as "the sum of job creation and destruction rates" (following Davis, Haltiwanger and Schuh (1997)); excess job reallocation rate is "job reallocation in excess of absolute employment growth"—a measure of "churning."
  - Observation: "The exceptional job reallocation seen initially... subsequently declined as the industry matured."
- Data and measurement notes:
  - Job creation, destruction, and employment growth rates are calculated "by dividing the change in employment between two periods by the average employment in those periods"—consistent with the job flows literature definition in Davis, Haltiwanger and Schuh (1997).
- Figures and tables referenced (descriptive):
  - Figure 1: Decomposition of Annual EPZ Employment Growth, 1983-2002 (shows Job Creation Rate, Job Destruction Rate, Employment Growth Rate).
  - Figure 2: Annual EPZ Employment Growth and Reallocation Rates, 1983-2002 (shows Job Reallocation Rate, Excess JR Rate, Employment Growth Rate).
  - Figure 3–8 and Tables 1–2 referenced later in the text (titles listed in the document's Figures and Tables inventory), including quarterly decompositions and model output on the impact of labor market restrictions.
- Emerging trend:
  - "Quarterly job creation and destruction data show signs of a weakening in textiles during" (text truncated at supplied content end).

*Italic: Source: _wp04205 - References (IMF working paper PDF) — provided content excerpt.*

### 2003. Figure 3 shows the quarterly decomposition of employment growth (from March 1986 to

### _wp04205 - 2003. Figure 3 shows the quarterly decomposition of employment growth (from March 1986 to

### EPZ employment trends and recent shocks
- Rapid growth in EPZ employment in the mid-1980s, followed by moderation throughout the 1990s.
- First three quarters of 2003 show:
  - A substantial decline in the rate of job creation (to its lowest level ever).
  - A rapid increase in the rate of job destruction.
- Average size of firms closing down increased markedly in the last two years (Figure 4).
- Interpretation: the dramatic recent increase in job destruction and decline in job creation is consistent with a rapid structural decline in Mauritian textiles; the industry is unlikely to disappear but could become much smaller.

### Labor market characteristics in Mauritius
- High unemployment with long unemployment spells:
  - Average (median) unemployment duration: 20 (9) months.
- Low rates of job flows relative to the United States; EPZ and Portuguese markets show much smaller quarterly job flows than the U.S., suggesting less dynamic labor markets and less frequent flows into and out of unemployment.
- Table 1 (quarterly job flow rates):
  - United States, 1972(2)-1993(4), Manufacturing: Job Creation 5.07, Job Destruction 5.47.
  - United States, Apparel and Textiles: Job Creation 4.58, Job Destruction 5.40.
  - Portugal, 1991(1)-1995(4), Manufacturing: Job Creation 3.20, Job Destruction 3.90.
  - Portugal/U.S. 1/: Job Creation 0.63, Job Destruction 0.71.
  - Mauritius, 1989(1)-2003(1), EPZ: Job Creation 3.96, Job Destruction 4.02.
  - Mauritius/U.S. 2/: Job Creation 0.86, Job Destruction 0.74.

### Model framework (equilibrium labor market model)
- Model type: standard frictional matching model similar to Pissarides (2000) and Mortensen and Pissarides (1994); captures job creation and destruction and bargaining or exogenous wage settings.
- Entrepreneurs post vacancies at cost k and discount factor set to β (0,1)∈.
- Key equations and concepts preserved exactly as in source:
  - Zero profit condition for vacancy posting: (1) ()()0=⋅+−εβJqk, whenever v>0.
  - Bellman equation for match value (entrepreneur): (2) ()  ()()()()(){}0,'max1εβγεγβεεJEJwfJ+−+−=,.
  - Worker Bellman equation: ()()()()(){}0,'max1εβγεγβεε eee VEVwV+−+=,.
  - Unemployed value: ()()()() [] ueu VpVpV⋅−+⋅=1εβ.
  - Matching function with constant returns-to-scale: jobs formed m(v,u) with finding rates p(.) and q(.); steady state unemployment *u = *δ /(δ*+p).
- Two wage regimes analyzed:
  - Decentralized Nash bargaining: wage function linear in productivity: ()εε 10 www+=; bargaining power θ; reservation productivity dε and labor market tightness u/v characterize equilibrium via (3) and (4) as given.
  - Exogenous (compressed) wage schedule: wage ~ ()εw~, modifies entrepreneur value (5) and leads to creation and destruction rules (6) and (7); with exogenous wage the JD curve becomes vertical (reservation productivity independent of tightness).

### Comparative statics and intuition (from model)
- Wage compression effects:
  - Raises average wages for low-skill workers (cross-market) and flattens wage slope (within-market), parametrized by g and φ respectively.
  - Raising average wages for low-skill workers makes marginal jobs unprofitable, increasing reservation productivity dε and moving JD curve right (more destruction).
  - New-job creation may rise slightly since new matches begin at high productivity (JC curve moves right), but aggregate effect is typically more destruction and fewer jobs.
- Redeployment restrictions:
  - Modeled as lower average per period output from the worker (reduced expected productivity).
  - Reducing redeployment raises job fragility and increases destruction (JD moves right); can indirectly raise creation of new jobs but overall worsens unemployment outcomes.
- Interaction: wage compression intensifies the adverse effects of redeployment restrictions and negative output shocks.

### Calibration (to Mauritian data)
- Time period: quarter; discount factor set to 99.0=β.
- Matching function: Cobb-Douglas; elasticity of matching α set to 4.0=α (lower estimate from empirical range 0.4-0.7).
- Bargaining power: θ set equal to α for Hosios efficiency condition: 4.0==αθ.
- Idiosyncratic productivity ε distributed uniformly.
- Parameters k and γ chosen to match:
  - Average EPZ job destruction rate: 4.02 percent during 1989-2002.
  - Unemployment rate for low-skill workers from 2000 census: 9.6 percent.
- Matching efficiency chosen so labor market tightness ≈ two-thirds in decentralized bargaining equilibrium.
- Baseline wage compression assumptions (conservative):
  - Cross-market bleeding g = 02.0=g.
  - Within-market compression φ = 5.0=φ.

### Empirical results (model output)
- Baseline and counterfactual table values (Table 2). Columns correspond to: Unemployment Rate, Unemployment Duration (mths), Job Finding Rate, Job Destruction Rate, Unit Labor Costs, Excess Job Reallocation.
- Baseline Results — Benchmark 1/:
  - 9.6 11.5 37.8 4.0 0.89 8.0
- No Wage Compression:
  - 7.4 9.5 45.4 3.6 0.88 7.2
  - % Difference: -23.2 -16.8 20.2 -10.0 -0.6 -9.9
- Wage Compression — No Cross-Market Comp.:
  - 7.7 9.3 46.7 3.9 0.87 7.8
  - % Difference 2/ : 4.3 -2.7 2.8 7.7 -1.0 7.7
- Wage Compression — No Within-Market Comp.:
  - 9.5 12.0 36.1 3.8 0.89 7.6
  - % Difference 2/ : 28.6 25.7 -20.4 4.7 1.5 4.7
- Redeployment Restrictions — No Wage Compression — 10% lower redeployment rate:
  - 7.7 9.9 43.8 3.7 0.88 7.3
  - % Difference 2/ : 4.1 3.7 -3.5 0.8 -0.5 0.7
- Redeployment Restrictions — Wage Compression — 10% lower redeployment rate:
  - 9.9 11.8 36.7 4.0 0.88 8.1
  - % Difference 2/ : 34.2 23.7 -19.2 11.6 0.1 11.6
- % Difference No Wage Comp.: 29.0 19.4 -16.2 10.7 0.6 10.8
- Notes preserved exactly:
  - 1/ Assumes some cross-market (g = 0.02) and within-market (φ=0.5) wage compression.
  - 2/ Difference from “No Wage Compression” simulation.
- Key empirical findings from calibration:
  - Even minimal wage compression materially increases unemployment, average unemployment duration, and job fragility.
  - Removing wage compression raises job finding rate by 20.2 percent in the baseline experiment and reduces job destruction.
  - Cross-market compression is more harmful than within-market compression: removing cross-market compression yields a larger reduction in unemployment and a big increase in job creation.
  - A modeled 10 percent reduction in redeployment (output) raises unemployment and durations; wage compression amplifies these effects (e.g., 4.1 percent rise in unemployment without wage compression vs. 34.2 percent with wage compression in the simulated restriction).

### Figures and simulated comparative statics (qualitative summary)
- Increasing cross-market wage compression (up to 5 percent increase in average wages):
  - Monotonic increases in unemployment and job destruction.
  - Also increases average unemployment spell length and inefficient churning.
- Increasing within-market wage compression:
  - Tends to increase unemployment and job fragility; increases inefficient churning; average duration of each job falls by over 10 percent.
  - For very high within-market compression, a slight reduction in unemployment can occur because new jobs are assumed to start at highest productivity, raising job finding rate.
- Increasing degree of redeployment (greater flexibility) reduces unemployment and job fragility; gains are larger when wages are not compressed.

### Policy implications and conclusions
- Even minimal wage compression and modest redeployment restrictions reduce employment for affected (low-skill) workers and increase the length of unemployment spells.
- These distortions generate excessive turnover, reduce workers’ opportunities to acquire skills when employed, and hasten skill atrophy when unemployed.
- Wage compression intensifies negative effects of other distortions and negative shocks.
- Cross-market and within-market wage compression both impose costs; cross-market compression appears more harmful for aggregate unemployment and job creation.
- Shielding some sectors temporarily mitigates effects but ultimately harms low-skill workers and long-term growth by distorting reallocation incentives.
- Educational reforms are necessary but insufficient: with only 7.3 percent of Mauritians having their higher school certificate, education will take time to absorb low-skill labor; therefore, general labor market reform is crucial.

*Source: Central Statistical Office, Mauritius, and author's estimates, as presented in _wp04205 (2003) excerpts.*

### REFERENCES

### _wp04205 - REFERENCES

### References
- Bentolila, S. and G. Bertola, 1990, “Firing Costs and Labor Demand: How Bad is Eurosclerosis?,” Review of Economic Studies, Vol. 57, pp. 381-402.
- Bertola, Giuseppe, and Richard Rogerson, 1997, “Institutions and Labor Reallocation,” European Economic Review, Vol. 41, pp. 1147-71.
- Blanchard, O., and P. Portugal, 2001, “What Lies Behind the Unemployment Rate: Comparing Portuguese and U.S. Labor Markets,” American Economic Review, Vol. 91 (March), pp. 187-207.
- Davis, Steven J., John C. Haltiwanger, and Scott Schuh, 1997, Job Creation and Destruction (Cambridge: MIT Press).
- Garibaldi, Pietro, 1998, “Job Flow Dynamics and Firing Restrictions,” European Economic Review, Vol. 42, pp. 245-75.
- Haltiwanger, John C., and Milan Vodopivec, 2002, “Worker Flows, Job Flows and Firm Wage Policies: An Analysis of Slovenia,” IZA Discussion Paper No. 569 (September).
- Hopenhayn, Hugo and Richard Rogerson, 1993, “Job Turnover and Policy Evaluation: A General Equilibrium Analysis,” Journal of Political Economy, Vol. 101, pp. 915-938.
- Hosios, Arthur, J., 1990, “On the Efficiency of Matching and Related Models of Search and Unemployment,” Review of Economic Studies, Vol. 57 (April), pp. 279-98.
- Layard, Richard, Stephen Nickell, and Richard Jackman, 1991, Unemployment: Macroeconomic Performance and the Labour Market (New York: Oxford University Press).
- Lazear, Edward, P., 1990, “Job Security Provisions and Employment,” Quarterly Journal of Economics, Vol. 105, pp. 699-726.
- McDonald, Calvin, and James Yao, 2003, “Mauritius: Unemployment and the Role of Institutions,” IMF Working Paper 03/211 (Washington: International Monetary Fund).
- Mortensen, Dale T., and Christopher A. Pissarides, 1994, “Job Creation and Job Destruction in the Theory of Unemployment,” Review of Economic Studies, Vol. 61 (July), pp. 397-415.
- OECD, 1994, Employment Outlook 1994 (Paris: OECD).
- OECD, 1995, The OECD Jobs Study (Paris: OECD).
- Petrongolo, Barbara, and Christopher A. Pissarides, 2001, “Looking into the Black Box: A Survey of the Matching Function,” Journal of Economic Literature, Vol. 39 (June), pp. 390-431.
- Pissarides, Christopher A., 2000, Equilibrium Unemployment Theory (Cambridge: MIT Press, 2nd ed.).
- Subramanian, Arvind, and Devesh Roy, 2001, “Who Can Explain the Mauritian Miracle: Meade, Romer, Sachs, or Rodrick?,” IMF Working Paper 01/116 (Washington: International Monetary Fund).
- Svejnar, Jan, 1999, “Labor Markets in the Transitional Central and East European Economies,” in Handbook of Labor Economics, Vol. 3B, ed. by Orley Ashenfelter and David Card (Amsterdam: Elsevier).

*Source: _wp04205 - REFERENCES.*

---


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