The Effects of Rigid Labor Regulations in Latin America

Topic: Job Creation
Author: David S. Kaplan

Rigid regulations may prevent labor markets from being efficient. We quantify, for 14 Latin American countries, the extent to which rigid labor regulations affect both the hiring and dismissal decisions of firms. Making regulations more flexible would lead to an average net increase of 2.1 percent of total employment. These net employment gains would be the result of increased dismissals being more than compensated for by increased hires. These increased dismissals may explain the opposition to labor reforms designed to make regulations more flexible, despite the fact that total employment would increase. Unemployment insurance, which is designed to protect workers who lose jobs rather than protect the jobs themselves, may be more effective than rigid labor laws both at protecting workers and at creating jobs.

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