Pending issues in protection, productivity growth, and poverty reduction

This paper provides a synthesis of recent research on the Latin American and Caribbean (LAC) labour markets. Particular attention is paid to the impact of labour market legislation on poverty and equity. The overall finding is that the present constellation of labour regulations serves workers and firms poorly and could benefit from substantial reform.

The paper examines the overall evolution of the LAC labour markets, covering changes in productivity, unemployment and wages. It then looks at the impacts of trade liberalisation, finding a negative relationship between this and unemployment. The informal sector, employment protection, unionism, the impact on poverty and inequality and race and ethnicity are also covered.

The general conclusions of the paper include:

• labour legislation matters, but markets may be less segmented than previously thought - whilst regulations do affect most labour outcomes, their magnitude is debatable, and is influenced by a rising trend in voluntary abandonment of formal institutions
• the impact of labour market institutions on productivity growth has probably been under-emphasized - reaping the benefits of greater integration in the liberalisation era will require greater attention paid to the interactions between trade and labour regulation
• institutions can affect poverty and equity, although the effects seem generally small and channels are not always clear - the majority of earnings differentials are generated by human capital endowments, not labour market institutions, and labour reforms have had indeterminate effects.