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A Cost-Benefit Approach to Labor Market Reform

Labor reforms in Latin America have been scarce compared with the pace of structural reforms aimed at liberalizing product and capital markets. Some analysts contend that without continued liberalization labor market performance will fail to improve, hindering Latin American economies’ ability to compete in international markets. ; This article assesses labor market regulations in Latin America, documents their recent history, and assesses their costs and benefits. The author argues that existing regulatory systems, while generating costs in terms of labor market performance, constitute the base (albeit imperfect) of social protection policies in Latin America. ; Compared with industrialized countries, Latin American countries have more protective labor regulations governing working conditions and job security but lower social security benefits. Evidence from the existing literature points to sizable negative effects of mandatory benefits, particularly social security contributions, on employment. Job security provisions tend to bias employment toward prime-age workers and away from younger and less skilled workers. ; Since the demand for social protection in Latin America appears to be large, the author argues that reforms that seek only labor market deregulation do not address this demand. It is tempting to conclude that the solution lies in designing and implementing less costly social protection mechanisms, but the alternatives are not exempt from costs and are not warranted to improve upon existing systems. In these circumstances, the author recommends a mix of research, policy experimentation, and policy evaluation to find solutions that maximize benefits while minimizing costs.