Trade Adjustment Costs in Developing Countries: - World Bank ...

Trade Reform, Employment Allocation and Worker Flows 107Table 7.1: Labor market rigidity comparisonsRigidity and Difficulty IndicesHiring Hiring Firing Employmentdifficulty difficulty difficulty rigidity Firing costs a(1) (2) (3) (4) (5)Brazil 67.0 80.0 70.0 72.0 165.0Trade partnersweighted by trade volume b1990 25.2 42.0 22.7 29.9 43.31997 28.1 45.3 24.4 32.4 47.6weighted by source-country imports1990 23.2 42.9 21.7 29.1 46.81997 27.2 44.3 23.6 31.6 46.0weighted by destination-country exports1990 26.4 41.5 23.4 30.3 41.21997 29.1 46.4 25.2 33.4 49.5aIn weekly wage equivalentsb Country sum of exports from and imports to Brazil.Source: Botero, Djankov, La Porta, Lopez de Silanes and Shleifer (2004) labor market rigidity measures.Note: A higher index and a higher rank indicate a more rigid labor market. Trade partner averagesweighted by WTF (NBER) bilateral trade data for 1990 and 1997.Brazil’s constitution of 1988 introduced a series of labor market reforms thataimed to increase workers’ benefits and the right to organize, thus raising laborcosts. Most important, firing costs increased substantially. 5 Given theirconstitutional status, these labor market institutions remained unalteredthroughout the 1990s, the period of chief interest for this chapter. Table 7.1compares World Bank indices of labor market rigidity for Brazil to its meantrading partner and shows that Brazil’s labor market is considerably more rigidthan its trading partners’ labor markets are. For the World Bank’s four rigidity anddifficulty indices (hiring difficulty, hours rigidity, firing difficulty, employmentrigidity) and its firing-cost measure, Brazil exhibits mean values between 67 and165, whereas the mean values for Brazil’s trading partners vary between 20 and49 for three choices of trade weighting (considering trade volume, source-countryimport, and destination-country export weighting using WTF (NBER) data forBrazil). The difference is partly due to the fact that Brazil’s largest trade partnersare highly flexible economies. Not weighted by trade, however, Brazil still ranksin the rigid tercile of countries.Among the reforms, trade liberalization played a dominant role for labor marketoutcomes. Multivariate regressions in Section 6 control for sector and year effects,5 The 1988 reforms reduced the maximum working hours per week from 48 to 44, increased theminimum overtime premium from 20 per cent to 50 per cent, reduced the maximum number of hoursin a continuous shift from 8 to 6 hours, increased maternity leave from 3 to 4 months, increased thevalue of paid vacations from 1 to 4/3 of the normal monthly wage, and increased the fine for an unjustifieddismissal from 10 per cent to 40 per cent of the employer-funded severance pay account(FGTS). See Heckman and Pagés (2004) and Gonzaga (2003) for further details.