Labor Standards and Economic Development in Latin America: Competitors or Complements?

By Schrank, Andrew | The Brown Journal of World Affairs, Spring/Summer 2014 | Go to article overview

Labor Standards and Economic Development in Latin America: Competitors or Complements?


Schrank, Andrew, The Brown Journal of World Affairs


PROTECTIVE LABOR LAWS HAVE TRADITIONALLY been portrayed as luxuries developing countries cannot afford, and mainstream economists have frequently been among their most outspoken critics. By prematurely raising labor costs, they argue, laws governing wages and working conditions, or facilitating collective bargaining, will price developing country labor out of world markets and in so doing destroy (or at least damage) the very jobs they are designed to improve. Policymakers in the developing world would thus be well advised to focus on job creation, they argue, and to leave the question of job quality to the market or perhaps to their successors down the road.

The debate over developing country labor law thus constitutes a veritable case study in what the late Albert ffirschman referred to as the "rhetoric of reaction."1 According to ffirschman, critics of social reform tend to invoke three standard tropes in their efforts to defend the status quo: futility, which holds that reform will not solve the problem at hand; perversity, which holds that reform will actually make the problem worse; and jeopardy, which holds that the direct and indirect costs of reform are likely to outweigh any conceivable benefit. When skeptics assert that employers will evade labor laws by taking their workers off the books, they are invoking the futility thesis. When they note that the underground (informal) jobs that result are likely to be worse-in terms of wages and working conditions-than their formal sector predecessors, they are invoking the perversity thesis. And when they decry the fact that many jobs will simply be destroyed in the process, they are invoking the jeopardy thesis.

This brief essay challenges the rhetoric of reaction, however, by noting first that employers have been able to reconcile compliance with competitiveness in developed market economies such as the United States. Second, it notes that similar efforts are underway in Latin America, where a number of governments are trying to bring firms up to the productivity levels implied by their regulatory obligations rather than driving these regulatory obligations down to the productivity levels characteristic of their firms. The point is neither to argue that these efforts are inexorable nor to treat their success as a foregone conclusion, but to note that they are possible-and that their very possibility constitutes both a challenge to the rhetoric of reaction and an important addition to the menu of policy choices available to public officials in the developing world.

LABOR LAWS AND EMPLOYMENT OUTCOMES IN THE DEVELOPED MARKET ECONOMIES

Mainstream economic theory implies a stark tradeoff between the quality and the quantity of employment available to workers in competitive labor markets. According to the theory, efforts to improve job quality are costly and, in the absence of compensating productivity gains, are more likely to foster divestment, evasion, and layoffs than the improved wages and working conditions anticipated by their sponsors. No less an authority than the late Nobel Prize winner Milton Friedman therefore declared that " minimum wage laws are about as clear a case as one can find" of a counterproductive policy intervention, and went on to condemn occupational safety and health, collective bargaining, and equal opportunity laws for good measure.2

For the better part of the late twentieth century, the economics profession stood squarely in Friedman's corner, and textbook portraits of labor market regulation are therefore skeptical in the extreme.3 They imply the burden of labor legislation will be borne by unskilled workers, who will lose their jobs, or labor force entrants, who will have trouble finding good jobs when their costs-including not only the costs of their wages and benefits but also the costs of their broader workplace protections-are decoupled from the marginal products of their labor.

But a growing body of research implies that employers in the United States, at least, adjust to the minimum wage not by laying off large numbers of unskilled workers but by improving productivity, combating turnover, delaying or limiting wage increases for their better paid employees (wage compression), and passing the costs of the regulations along to their customers in the form of small price increases. …

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