Minimum Wage Policy and Employment in Argentina between 1995 and 2010

Minimum Wage Policy and Employment in Argentina between 1995 and 2010

1 Minimum Wage Policy and Employment in Argentina between 1995 and 2010 Lucas Ronconi and Rodrigo Zarazaga1 Working Paper #30 Abstract This paper analyzes the effects of changes in minimum wages and government enforcement on employment levels and composition in Argentina from 1995 to 2010. Using election years as IV, we find that the policy combination adopted between 1995 and 2001 (i.e., constant real MW and reduction in inspections) produced less compliance particularly among low skilled workers and did not have any clear effect on the employment level. From 2003 to 2010 the government increased the real MW and inspections, and employment also increased; however, we are not able to break the simultaneous relationship between them during this latter period.

Resumen Este documento analiza el impacto del salario mínimo y la inspección laboral sobre el nivel y la composición del empleo en Argentina entre 1995 y 2010. Utilizando los años electorales como variable instrumental, resulta que la combinación de políticas adoptadas entre 1995 y 2001 (es decir, salario mínimo real constante y caída en la inspección) produjo una caída en la formalidad entre los trabajadores poco calificados 1 Lucas Ronconi is Senior Researcher at Centro de Investigación y Acción Social CIAS. Rodrigo Zarazaga is Director and Senior Researcher at Centro de Investigación y Acción Social CIAS.

This paper received funding from the International Development Research Center (IDRC, Canada). We thank Ravi Kanbur, Sebastian Etchemendy, Adriana Marshall, Martha Melesse, Diego Schlesser and seminar participants for useful comments. Paula Forteza and Javier Cicciaro provided excellent research assistance.

2 pero no redundó en cambios en el nivel de empleo. Entre el 2003 y el 2010 el gobierno aumentó el salario mínimo real y las inspecciones, y durante el mismo periodo el empleo también se incrementó; sin embargo este resultado debe interpretarse como una correlación ya que no estamos en condiciones de resolver el problema de simultaneidad en este último período. 1 – Introduction The regulation of labor in developing countries –such as minimum wage policy –is a highly contentious issue. On the one hand, labor market regulations are seen as effective mechanisms to redistribute income and protect workers with none or minimal disemployment effects.

On the other hand, regulations are seen as a main cause of labor informality and unemployment.

Despite the attention devoted by applied economists, we still know little about the impacts of the minimum wage or other labor regulations on labor market outcomes in less developed countries.1 This is in part because previous empirical research has usually focused on in-form regulations but has ignored enforcement.2 Estimating the effects of in-form labor regulations on employment omitting enforcement is reasonable when compliance with the law is very high. In this case, rules-in-use are identical (or very similar) to rules-in-form, and hence, employers and workers are affected by changes in the legislation.

But in Latin America, as well as in other developing countries, noncompliance is pervasive. Estimates suggest that only half of employees have contributions to the legally-mandated social security system (that is, there is large

3 evasion of payroll taxes), and that in several countries (e.g., Argentina, Colombia, Ecuador, Guatemala, Nicaragua, Paraguay, Peru and Venezuela) a large share of the workforce earn less than the legal minimum wage (for detailed analysis of compliance with minimum wages see: Cunningham, 2007; Gindling and Terrell, 2005, 2007 and 2009; Kanbur et al. 2013; Harrison and Scorse, 2004; IADB, 2004; Lemos, 2004; Ronconi, 2010, Strobl and Walsh, 2001). In this environment of low enforcement, where the law is often violated by employers, changes in the legislation (such as an increase in the minimum wage) would tend to have smaller effects on employment (in absolute value) compared to a situation where there is full enforcement and compliance with the law.

Therefore, estimates of the effect of in-form labor regulations on employment would be biased towards zero. Furthermore, in-form regulations and enforcement could be negatively or positively correlated. For example, a government can introduce a more protective labor regulation and at the same time reduce the intensity of enforcement in order to satisfy different constituencies; or the executive power can reduce the number of inspections in order to avoid the negative consequences of a stringent labor law passed by Congress. In this case, although rules-in-form become more costly, employers could actually face a decline on labor costs if the reduction on enforcement is sufficiently large.

If the econometrician attempts to estimate the effect of the reform on employment using a measure of in-form labor regulations and ignoring enforcement, then he could obtain a coefficient with the wrong sign. (For a formal model see Basu et al. (2010)).

4 The objective of this paper is to analyze the employment effects of minimum wage policy in Argentina. As discussed above, the impacts depend on whether the legislation is effectively enforced. However, and despite the prevalence of noncompliance with the minimum wage in developing countries, little knowledge is available about government enforcement (some exceptions are Bhorat et al. 2011; Piore and Schrank 2008; Murillo et al. 2009; and Ronconi 2012).3 This paper attempts to address these gaps by analyzing enforcement of minimum wages in Argentina, and estimating the effect of minimum wage policy (that is, both the minimum wage legislation and government enforcement) on employment level and composition.

To break the simultaneous relationship we exploit the existence of an electoral cycle in labor inspection staffing.4 2 – Minimum wage policy in Argentina This section describes minimum wage policy, that is, the combination of both the legislated minimum wage and government enforcement, between January 1995 and December 2010 in Argentina. We show that two clearly different policies were implemented marked by the political and economic crisis of 2002. Between 1995 and 2002, the minimum wage was kept constant and enforcement was reduced. After 2002, there was an increase in both the (nominal and real) minimum wage and in government enforcement.

5 2.1 – Minimum wage legislation In Argentina there is a single national minimum wage (know as salario mínimo vital y móvil) that applies all over the country. There are no local minimum wages, despite the fact that it is a federal country comprised of 23 provinces and the Autonomous City of Buenos Aires. The minimum wage covers all employees except workers 18 years old or less (who have no legislated minimum wage) and rural and domestic workers (who have a separate minimum wage). According to the Constitution, the minimum wage should allow a full time employee to afford “adequate food, decent housing, education, clothing, health coverage, transportation and spreading, holidays and insurance”; and it should be expressed as a monetary amount (both as a monthly wage for full time employees and as an hourly wage for part time employees).

The minimum wage is decided by the national executive power after consultation with a council, the Consejo Nacional del Empleo, la Productividad y el Salario Mínimo, Vital y Móvil. The council was created in 1991 and it is formed by a President (from the national Ministry of Labor) and 32 members: 16 members representing labor unions, 12 members representing business associations, 2 members from the provincial governments and 2 members from the national government. Decisions are taken with 2/3 of the votes, although all members are selected by the national executive power. Furthermore, the national executive power decides whether the council meets or not.

6 Figure 1 presents the evolution of the monthly minimum wage between January 1995 and December 2010. The 2002 crisis marks two clearly separate periods: Before the 2002 crisis, the minimum wage was kept constant at 200 pesos per month. Because the exchange rate was fixed during that period at 1 peso per US dollar and the inflation rate was practically zero, the minimum wage expressed either in US$ or in constant pesos remained constant. The severe crisis that hit the country in 2002 implied a 360% devaluation of the peso and a 12% reduction in real GDP. Since 2003, the nominal minimum wage has increased by about 30% per year reaching 1,740 pesos in December 2010.

Despite the inflation and devaluation of the peso, the real minimum wage has increased by 111% and the US$ value by 119% (from US$ 55 in 2003 to US$ 440 in 2010).5 The main increase in the real minimum wage occurred between mid-2003 and 2005.

2.2 – Enforcement Enforcement of the minimum wage (as well as all other employment regulations) in Argentina is decentralized at the provincial level. Provincial enforcement agencies can impose fines against employers who do not comply with employment regulations and who do not register their employees in the social security system, but they cannot impose fines against employers who evade the social security payroll tax.

7 The national government, on the other hand, has the authority to enforce registration and payment of social security taxes in the whole country, but it is not allowed to impose fines against violations of the minimum wage.

Until 2003, the mandate of the national government was in the hands of the National Tax Collection Agency (AFIP), but since then, it is shared with the National Ministry of Labor. This change produced an important improvement in enforcement: In 2003, the National Ministry of Labor launched an inspection program (i.e., Programa Nacional de Regularizacion del Trabajo, hereafter PNRT) which implied a 62% increase in the number of labor inspectors in the country. Although, PNRT labor inspectors cannot fine employers who violate the minimum wage, there are reasons to suspect they can help increasing compliance with this regulation.

First, the inspector can inform the employer that a minimum wage regulation is being violated. Second, the inspector can notify the corresponding provincial enforcement agency about the violation. This suggests, that the effectiveness of PNRT in producing compliance with minimum wages would be higher the more coordination and cooperation between the National Ministry of Labor and the provincial agencies.

There is a federal council, the Consejo Federal del Trabajo (CFT), which has the objective of coordinating enforcement activities in the country and collecting information on enforcement resources and activities. The CFT is comprised by the National Ministry of Labor and the provincial administrations. The CFT has the authority to intervene a provincial inspection agency in case of inadequate enforcement, but this has never occurred.

8 Figure 2 shows the evolution of the total number of labor inspectors per capita from 1995 to 2010 (that is, the sum of provincial labor inspectors and national labor inspectors of PNRT).

Between 1995 and 2002, there was a reduction in enforcement. In 2003 there is a large increase in enforcement mainly due to the implementation of PNRT, and enforcement continued increasing afterwards.6 Summing up, two different minimum wage policies have been implemented in Argentina since 1995. Before the 2002 crisis, the minimum wage was kept constant and provincial governments reduced the number of labor inspectors (per capita). Since 2003, the minimum wage was increased, the national government launched a new inspection program, and provinces have increased the number of labor inspectors.

3 – Estimating the effect of minimum wage policy on employment This section provides estimates of the effect of minimum wage policy on employment level and composition between 1995 and 2010. We compute estimates distinguishing between two periods.7 First, between 1995 and 2001, the legislated minimum wage was kept constant, and hence, we exploit variation in provincial enforcement across provinces and over time using election years as an instrumental variable. Second, between 2003 and 2010, we exploit variation both in the minimum wage (over time) and in enforcement (over time and across provinces), but this exercise is substantially

9 more speculative than the previous because we lack a strategy to break simultaneity. We discuss these issues in more detail below. Theoretically, the effect of government enforcement of labor regulations on the total number of people employed is ambiguous. According to the neoclassical model, each employee is paid his or her marginal product. Enforcing certain labor regulations, such as the minimum wage, is expected to reduce employment because it would no longer be profitable to employ workers whose salary is below the legal minimum. Enforcing other labor regulations, however, can increase the number of people employed.

Firms that are forced to comply with legally-mandated vacations and overtime provisions are likely to hire additional workers to carry out some of the tasks that were previously performed by the overworked employees. Furthermore, assuming that firms have some monopsony power, even enforcing regulations such as the minimum wage can lead employers to hire additional workers.8 Third, access to legallymandated benefits can increase workers productivity and, therefore, lead to higher employment (e.g., access to work-related injuries insurance is likely to reduce work accidents because insurers require employers to implement preventive measures).

Finally, enforcement can affect employment via changes in the labor supply. More people may enter the labor force when they observe that compliance is higher because work is more attractive. How enforcement of labor regulations affects employment is, therefore, an empirical question.

Figure 3 shows the evolution of private sector employment (as a share of the population) between 1995 and 2010. Employment did not increase during the first

10 period we study. That is, keeping the minimum wage constant and reducing enforcement was not associated with an increase in employment levels. On the other hand, we observe a large increase in the employment rate during the period when the economy recovered after the 2002 crisis and both enforcement and the legislated minimum wage were increased. Employment effects can also differ across skills groups.

First, enforcing the minimum wage is likely to affect the employment decision of firms employing lowskilled workers, but it is unlikely to have a direct effect on firms employing high-skilled workers. Second, firms’ elasticity of demand for labor is likely to differ between firms in low-skilled labor intensive industries and firms in high-skilled industries. The larger the elasticity of demand for labor, the higher the expected employment effect of enforcement. Third, supply responses to enforcement can also differ across skills groups.

Estimating the employment effects of minimum wage policy is complicated due to the potentially simultaneous relation between these three variables. First, the theory of the firm indicates that the demand for labor depends on the minimum wage and the level of enforcement. Second, the minimum wage is set by the national government and –although there is not total agreement about the objective function of the government – it is likely to depend on the performance of the labor market and on the enforcement

11 efforts of the provincial governments. For example, a national government may choose to avoid increasing the minimum wage during a recession because of fear that it would lead to job destruction, particularly if provincial governments are expected to enforce it.

Finally, the level of enforcement set by a provincial government is also likely to depend on labor market outcomes and the level of the minimum wage set by the national government. That is, we can think of a system of three simultaneous equations. For the first period we study (that is, from 1995 to 2001) the simultaneity could be between labor market outcomes and enforcement because the legislated minimum wage was kept constant. On the one hand, firms’ propensity to hire workers and comply with the minimum wage depends on the probability of being penalized, and, on the other hand, public enforcement agencies’ resources are likely to be affected by the level of employment.

For the second period we study, endogeneity could additionally exist between labor market outcomes and the legislated minimum wage, and between enforcement and the minimum wage.

3.1 – Data The Permanent Household Survey (EPH) is the main household survey in Argentina and it is conducted by the National Institute of Statistics (INDEC). It is a stratified random sample that includes approximately 50,000 observations and covers all Argentine provinces. Workers report in the survey their salary, hours of work, and a number of demographic characteristics. Some methodological changes were introduced in 2003

12 making the comparison between 2002 and 2003 not strictly comparable. The dataset is available at www.inde.gov.ar Data about provincial government enforcement presents some limitations.

First, there is very little information about fines, and whether fines are effectively collected. Second, provincial inspection data is available from the national Ministry of Labor for the years 1995 to 2002, but after that date the national government stopped collecting that information. Therefore, we contacted each provincial government requesting information about labor inspections during the period 2003 to 2010 and obtained an unbalanced panel. Data about national government inspections was obtained from the national Ministry of Labor and it is available by year and province since 2003 –the year when PNRT was launched.

3.2 – Estimates for the period 1995-2001 To break the simultaneity between enforcement and compliance we exploit the existence of an electoral cycle in labor inspector staffing (Ronconi, 2010). First, because the executive power controls enforcement agencies’ resources and because employment in general and the protection of workers’ rights in particular are important political issues, it is likely that incumbent politicians will change the labor inspector force in advance of elections. Second, the data shows that there is in fact a strong correlation: the average number of labor inspectors per province is 23.5 in election years (i.e., 1995

13 and 1999) compared to 19.8 labor inspectors in nonelection years and the difference is statistically significant at the 1% level. We estimate the effect of enforcement on employment using equation (1) and election years as the instrumental variable. Employmentit = α + βEnforcementit + Xitπ + εit (1), where Employmentit is the percentage of the population working in the private sector (as employees) in province i in year t; Enforcement is the number of provincial labor inspectors per 100,000 people; and X is a set of controls including the demographic characteristics of private sector employees in each province (i.e., average age, share male, percentage illiterate, born in other province, foreign-born, and average firm size), the provincial level of public expenditure per capita, inflation, workfare beneficiaries per capita, and the payroll tax rate.

We also include province fixed effects and a linear time trend.

We run separate regressions for formal and informal employment, and for lowskilled (i.e., less than high school) and high-skilled workers. In column (1) the dependent variable is the share of the population working in the private sector as employees and earning at least the minimum wage (formal), and in column (2), the share earning below the legal minimum (informal). Note that since the denominator for both dependent variables is the population (rather than total employment), the coefficient β can be interpreted as the degree to which enforcement destroys or creates employment in

14 each sector.

Employment effects are computed for three groups: all employees, highskilled, and low-skilled. Table (1) presents the two-stage least squares estimates where the number of labor inspectors is instrumented by elections years. The estimates in Panel A are obtained using the sample of all employees. Although the estimates are imprecise, they suggest a negative relationship between labor inspectors and informal employment. That is, the reduction if enforcement that occurred in the late nineties in Argentina caused an increase in the share of the population earning below the minimum wage. However, the net employment effect of labor inspection is indistinguishable from zero because formal employment declined due to less enforcement.

These estimates suggest that –during the analyzed period– firms reacted to lower enforcement of the minimum wage via noncompliance rather than job creation.

Panel B presents estimates of the effect of enforcement on high-skilled employment, and panel C on low-skilled employment. The results show that the overall findings in panel A are driven by the effects of enforcement on low skilled workers. Less enforcement increases the number of low skilled workers earning a salary below the legal minimum, but it does not produce creation of low skilled jobs. 3.3 – Correlations for the period 2003-2010

15 During this period, there were changes in both the minimum wage and in enforcement. As discussed before, estimating a causal effect of minimum wage policy on employment in this context is complex due to the potential simultaneous relation among the three variables.

We use changes in the legislated minimum wage as a quasiexperiment, and compute before-after estimates using quarterly data as an attempt to reduce simultaneity problems. For enforcement, regrettably, we have no instrumental variable. By including province fixed effects, and year and quarter dummies, we attempt to reduce endogeneity. We estimate the following equation: Employmentit = α + βEnforcementit + δMinimumWageit + Xitπ + εit (2), where Employmentit is the percentage of the population working in the private sector (as employees) in province i in quarter-year t; Enforcement is the number of labor inspectors per 100,000 people; Minimum Wage is the real minimum wage (in 100 pesos of 2000); and X is a set of controls including the demographic characteristics of private sector employees in each province (i.e., average age, share male, percentage illiterate, born in other province, foreign-born, and average firm size), the provincial level of public expenditure per capita, and workfare beneficiaries per capita.

We also include province fixed effects, and year and quarterly dummies.

As in the previous section, we run separate regressions for formal and informal employment, and for low-skilled (i.e., less than high school) and high-skilled workers. Table (2) presents the results. The estimates in Panel A, which are obtained using the whole sample of workers, suggest that the real minimum wage is positively correlated with total employment and with noncompliance (i.e., increase in informal and reduction

16 in formal employment); and enforcement is not correlated with the employment rate but positively correlated with compliance. The estimates in Panel B and C show that the positive correlation between the real minimum wage and total employment is mainly driven by low skilled workers.9 These OLS estimates should be interpreted as correlations, not as a causal effect, because of the potential simultaneous relationship between these variables.

For example, the positive correlation between the minimum wage and low skilled employment could in part indicate the presence of monopsony power, but it is also likely to indicate that the government increased the minimum wage when labor demand was strong. What these results suggest, however, is that the substantial increase in the real minimum wage and in enforcement that the government implemented when the economy was recovering from the 2002 crisis, did not –at least – produced job destruction.

4 – Conclusions and Policy Discussion This paper argues that estimating the economic effects of minimum wages, or any other labor regulation, is particularly challenging in less developed countries where noncompliance with the law is pervasive and where the executive power usually has ample discretion over enforcement due to lack of institutionalized bureaucracies. While in a developed country context the main concern to estimating a causal effect is

17 breaking the endogeneity between economic outcomes and the legislation, in a developing country context there is an additional layer of complexity due to variable compliance and endogenous enforcement.

This paper analyzes the effects of changes in minimum wages and government enforcement on employment levels and composition in Argentina between 1995 and 2010. During this period two different policies were implemented: Between 1995 and 2001, the minimum wage was set constant at US$ 200 and enforcement was reduced (although with variation across provinces). After the 2002 crisis, which implied a 360% devaluation of the peso and a 12% reduction in real GDP, the minimum wage was increased from US$ 55 in 2003 to US$ 440 in 2010 and enforcement increased (again with variation across provinces).

We find that the policy combination adopted between 1995 and 2001 (that is, a constant minimum wage and a reduction in enforcement) produced less compliance particularly among low skilled workers and did not have any clear effect on the employment level. In order to break the simultaneous relationship between outcomes and enforcement, we exploit the existence of an electoral cycle in labor inspection. The policy combination adopted between 2002 and 2010, on the other hand, is associated with an increased in employment mainly among low skilled workers, but we are not able to confront potential endogeneity.

These results suggest that minimum wages can indeed be an effective policy instrument to improve the performance of the labor market helping low skilled workers. The low wage labor market in Argentina appears not to be in perfect competition (presumably due to monopsony power), and hence, government interventions such as

18 the minimum wage can be welfare enhancing. The current policy in Argentina, however, does not seem to be exploiting all its potential benefits. First, almost 20% of employees earn a salary below the legal minimum indicating insufficient enforcement.

Second, a single minimum wage in a country with large disparities in the level of development across provinces (e.g., wide differences in cost of living and productivity), also suggests the need for reform. It appears that, for a large federal country as Argentina, a more adequate policy would be to allow the legal minimum to vary by province and devote the necessary resources to enforce it.

19 Table 1 – 2SLS estimates of the effect of Enforcement on Employment, 1995-2001 Share of population employed Formal – Share of population employed and earning not below legal minimum Informal – Share of population employed and earning below legal minimum Panel A: All Employees Enforcemen t 0.12 0.18 -0.06 * (0.15) (0.15) (0.03) Panel B: High-Skilled Employees Enforcemen t 0.12 0.12 0.01 (0.09) (0.09) (0.01) Panel C: Low-Skilled Employees Enforcemen t 0.04 0.09 -0.05 * (0.11) (0.11) (0.03) Notes: Formal employment is defined as the percentage of the population working in the private sector as employees with a salary not below the legal minimum; the Informal measure is the share of the population with a salary below the legal minimum.

Panel A includes all workers in the sample; panel B is restricted to employees whose education attainment is complete high school or more; panel C is restricted to employees with less than complete high school. Enforcement is instrumented by election years in all models (F-statistic 7.69). All regression models are weighted by the sample size used to calculate the average serving as the dependent variable. Number of observations is 143. * Significant at the .10 level.

20 Table 2 – OLS estimates of the effect of Enforcement and Real Minimum Wages on Employment, 2003-2010 Share of population employed Formal – Share of population employed and earning not below legal minimum Informal – Share of population employed and earning below legal minimum Panel A: All Employees Enforcemen t -0.002 0.009 * -0.011 *** (0.004) (0.005) (0.003) Real MW 0.008 *** -0.007 ** 0.014 *** (0.003) (0.002) (0.002) Panel B: High-Skilled Employees Enforcemen t 0.002 0.006 ** -0.004 ** (0.003) (0.003) (0.002) Real MW 0.003 -0.004 * 0.007 *** (0.002) (0.002) (0.001) Panel C: Low-Skilled Employees Enforcemen t -0.004 0.003 -0.007 *** (0.003) (0.003) (0.002) Real MW 0.005** -0.003 ** 0.008 *** (0.002) (0.002) (0.001) Notes: Formal employment is defined as the percentage of the population working in the private sector as employees with a salary not below the legal minimum; the Informal measure is the share of the population with a salary below the legal minimum.

Panel A includes all workers in the sample; panel B is restricted to employees whose education attainment is complete high school or more; panel C is restricted to employees with less than complete high school. All regression models include province fixed effects, and year and quarterly dummies. Number of observations is 667. * Significant at the .10 level, ** 0.05 * and 0.01.

21 Figure 1 – Nominal, real and US$ value of the monthly minimum wage, 2001-2010 200 400 600 800 1,000 1,200 1,400 1,600 1,800 in pesos in US$ in constant pesos

22 Figure 2 – Number of Labor Inspectors per million people, 1995-2010 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Number of Labor Inspectors per million people

23 Figure 3 – Private Sector Employment (as a % of population), 1995-2010 Note: Methodological changes were introduced to the household survey (EPH) in 2003, making the figures for the years 2002 and 2003 not strictly comparable.

5 10 15 20 25 Private Sector Employees as a share of the Population (%)

24 Competing interest The authors declare that they have no competing interests, and that they have observed the IZA Guiding Principles of Research Integrity.

25 References Almeida, R, and P Carneiro (2009) Enforcement of Labor Regulation and Firm Size. Journal of Comparative Economics 47(1):28-46. Almeida, R, and L Ronconi (2012) The Enforcement of Labor Law in the Developing World: Some Stylized Facts from Labor Inspections. In Seventh IZA/World Bank Conference on Employment and Developing, New Delhi. Basu, A, N Chau, and R Kanbur (2010) Turning a blind eye: Costly enforcement, credible commitment and minimum wage laws.

The Economic Journal 120(543):244–69. Beccaria, L, and R Maurizio (2004) Efectos del salario minimo y de la asignacion no remunerativa. V OIT Buenos Aires Serie documentos de trabajo 6. Bhorat, H, R Kanbur, and N Mayet (2011) The Determinants of Minimum Wage Violations in South Africa. Charles H. Dyson School WP 2011-05. Botero, J, S Djankov, R La Porta, F Lopez-de-Silanes, and A Shleifer (2004) The Regulation of Labor. Quarterly Journal of Economics 119(4):1339–82.

Card, D, and A Krueger (1995) Myth and Measurement: The New Economics of the Minimum Wage. New Jersey, NJ: Princeton University Press. Carnes, M (2014) Continuity Despite Change: The Politics of Labor Regulation in Latin America. Stanford University Press. Collier, R, and D Collier (1979) Inducements versus Constraints: Disaggregating Corporatism. American Political Science Review 73(4):967-86.

26 Cook, M (2007) The Politics of Labor Reform in Latin America: between flexibility and rights. University Park: Pennsylvania State University Press. Cunningham, W (2007) Minimum Wages and Social Policy: Lessons from Developing Countries.

The World Bank, Washington. Galli, R and D Kucera (2004) Labor standards and informal employment in Latin America. World Development 32(5):809-828. Gimpelson, V, R Kapelyushnikov, and A Lukyanova (2010) Employment Protection Legislation in Russia: Regional Enforcement and Labor Market Outcomes. Comparative Economic Studies 52(4):611-36.

Gindling, T and K Terrell (2009) Minimum Wages and Employment in Various Sectors in Honduras. Labour Economics 16(3):291-303. Gindling, T and K Terrell (2007) The Effects of Multiple Minimum Wages throughout the Labor Market: the Case of Costa Rica. Labour Economics 14:485-511. Gindling, T and K Terrell (2005) Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica. World Development 33(11):1905-21. Gruber, J (1997) The Incidence of Payroll Taxation: Evidence from Chile. Journal of Labor Economics 15(3):S72-S101.

Harrison, A and J Scorse (2004) The Impact of Globalization on Compliance With Labor Standards: a Plant-level Study, in S.

Collins and D. Rodrik, eds., Brookings Trade Forum 2003, 83-94, Washington, DC, Brookings Institution Press.

27 Heckman, J and C Pages (2003) Law and Employment: Lessons from Latin America and the Caribbean, NBER Working Paper 10129 IADB (Inter-American Development Bank) (2004) Good Jobs Wanted: Labor Markets in Latin America. Washington D.C.: IDB. Khamis, M (2013) Does the minimum wage have a higher impact on the informal than on the formal labour market? Evidence from quasi-experiments. Applied Economics 45(4): 477-495. Kanbur, R, L Ronconi, and L Wedenoja (2013) Labour Law Violations in Chile. International Labour Review 152(3-4):431-444.

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Economic Development and Cultural Change 57: 335–358. Marshall, A (2004) Labour market policies and regulations in Argentina, Brazil and Mexico: Programmes and impacts (No. 2004-13). International Labour Office. Murillo, MV (2005) Partisanship amidst Convergence: The Politics of Labor Reform in Latin America. Comparative Politics 37(4):441-458. Murillo, MV and A Schrank (2005) With a little help from my friends: Partisan Politics, Transnational Alliances, and Labor Rights in Latin America. Comparative Political Studies 38(8):971-99.

28 Murillo, MV, L Ronconi, and A Schrank (2011) Latin American Labor Reforms: Evaluating Risk and Security. In JA Ocampo and J Ross (Eds.), The Oxford Handbook of Latin American Economics. Oxford, UK: Oxford University Press. Piore, M, and A Schrank (2008) Toward managed flexibility: The revival of labour inspection in the Latin world. International Labour Review 147(1):1-23. Pires, R (2008) Promoting sustainable compliance: Styles of labour inspection and compliance outcomes in Brazil. International Labour Review 147(2–3):199-229. Ronconi, L (2012) Globalization, Domestic Institutions and Enforcement of Labor Law: Evidence from Latin America.

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29 1 The available evidence is mixed. Galli and Kucera (2004) use a panel of 14 Latin American countries covering the 1990-1997 period and find that countries with higher labor standards tend to have higher shares of formal employment, and Gruber (1997) finds that changes in payroll taxes in Chile have no employment effects. However, Heckman and Pages (2003), using a sample of 38 OECD and Latin American countries from 1983 to 1999, find that job security regulations and payroll taxes reduce employment, and Krueger and Krueger (2009) find that a 10 per cent increase in payroll taxes in Colombia is associated with a 4 per cent reduction in formal employment.

Finally, Botero et al. (2004) use a crosssection of 65 developed and developing countries in 1997 and find that countries with more stringent employment law tend to have a higher unemployment rate, but do not find any significant effect of either social security law or collective relations law on unemployment.

2 Some exceptions are Almeida and Carneiro 2009, and Pires 2008 for Brazil; Ronconi 2010 for Argentina; Gimpelson et al. 2010 for Russia; Bhorat et al. 2011 for South Africa; and Almeida and Ronconi 2012 for a sample of developing countries. 3 There is a large literature in political science that analyzes labor laws in Latin America beginning with the groundbreaking study by Collier and Collier (1979), and the more recent work by Botero et al. (2004), Murillo (2005), Murillo and Schrank (2005), Cook (2007), and Carnes (2014). This research, however, does not analyze the enforcement of labor legislation.

4 Khamis (2013) computes estimates of the effect of minimum wages on the income of formal and informal workers in Argentina and summarizes the previous empirical work; which includes Beccaria and Maurizio (2004) and Marshall (2004). This work, while informative, does not deal with the potential simultaneous relationship between labor market outcomes, de jure, and enforcement. 5 The real minimum wage is computed at constant pesos of January 1995 using the Argentine consumer price index. We use the official price index until December 2006, and then an average of the provincial price indexes because the official figures are not credible since the national government took control of the agency in charge of computing the index in January 2007.

6 The number of provincial labor inspectors from 2002 to 2010 is missing for several provinces-years. We assume that the value for missing year t in province j, is equal to the average between years t-1 and t+1 in province j. 7 Methodological changes in the household survey (implemented in 2003) also suggest the convenience of distinguishing between both periods. One useful methodological change that we exploit below is that, since 2003, the household survey is conducted quarterly, that is four times per year. 8 The employment effect of the minimum wage has received a great deal of attention in the U.S.

Card and Krueger (1995) present compelling evidence that minimum-wage increases have no systematic effect on employment.

9 We estimated separate coefficients for females and males, and they do not differ in any significant way.

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