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HIRING AND FIRING WORKERS 31 FIGURE 4.5 Boosting production can be costly… …but reform works. Cost to temporarily expand production by 50% (percentage increase in labor cost) 111 Latvia, Slovakia 99 Hungary 90 Venezuela 80 Portugal 72 Norway 54 Namibia 48 Tunisia 30 Malaysia, United States Reforms in 2003 yielded big improvements Namibia Before 54 After 39 39 Norway 72 Hungary 99 90 Latvia 111 90 Slovakia 111 27 15 Morocco 6 Kenya 0 Ireland Source: Doing Business database. the approval is granted, the worker gets 25 months in severance pay. 21 Hardly anyone gets fired, but few people get hired. Both employers and employees in countries like Sri Lanka would be better off if the administrative approval were scrapped and severance payments are lowered. Colombia introduced such a system last year. Instead of (or together with) severance payments, which hit a troubled business during the worst possible time—economic downturns—middle income countries can introduce unemployment insurance. This shifts the focus of regulation from protecting jobs to protecting workers, by helping them deal with moving to new jobs. 22 The Korean government instituted a similar scheme in 1996. The timing was fortuitous, mitigating the effects on workers during the 1997–98 financial crisis. The Chilean reform of 2002 introduced savings accounts: the employee pays 0.6% of gross wages and the employer pays 2.4%, with two-thirds going to an individual account and a third to a common fund. Severance pay is cut from 30 days to 24 for each year worked. Unemployed Chilean workers receive benefits for 5 months, no matter how long they have been insured. The payments are progressively reduced each month, to encourage searching for another job. Australia followed suit, introducing individual savings accounts last year. Why make hiring and firing easier? Businesses seek other means of staying competitive if employment regulation is rigid. They hire informal workers, pay them under the table and avoid providing social benefits. 23 Women are 3 times more likely to be hired informally. And as parents fail to find decent employment, children often turn up in the workplace. The people employment regulation is supposed to protect are hurt the most (figure 4.6). When there are fewer job opportunities in the formal sector, inequality often rises as people turn to the informal sector, which offers lower pay and no health insurance or social benefits. 24 Foreign investment falls as well. Restrictive labor markets are cited as the third most important reason for foreign companies not to invest, behind high corporate taxes and corruption. 25 One study shows that an increase in flexibility at the rate of the Slovak reforms is associated with 14–18% more foreign investment. 26 Rigid employment regulation also imposes indirect costs, by restricting the ability of firms to adjust to shocks, such as new technologies, macroeconomic shocks and privatization. 27 For example, very rigid employment regulation reduces the benefits of trade liberalization. 28 As an economy opens, competition from now-cheaper imports drives jobs away from less productive sectors and into more productive ones, expanding the economy. This happens only if workers can move. With high barriers to hiring and firing, labor remains in unproductive sectors. The result is less job creation and a loss of competitiveness, as in much of Latin America in the last decade.
32 DOING BUSINESS IN 2005 FIGURE 4.6 Who loses from rigid employment regulation? Informal sector Child participation in employment Income share of the poorest 20% Greater share Greater share Greater share Lesser share Lesser share Lesser share Least rigid Most rigid Countries ranked by rigidity of employment, quintiles Note: Analysis controls for income per capita. Relationships are significant at the 5% level. Source: Doing Business database, World Bank (2004a). Least Most difficult difficult Countries ranked by difficulty of hiring, quintiles Least costly Countries ranked by firing cost, quintiles Most costly Notes 1. European Commission (2002). 2. Di Tella and McCullom (1999). 3. ILO (1998). 4. OECD (2004). 5. In the case of Latvia, for transport businesses only. 6. OECD (2004). 7. But note that previous reforms in Italy have not always achieved the desired effects. 8. Eironline (2004). 9. Jurajda and Mathernova (2004). 10. Eleven countries do not have a mandated minimum wage either by law or by economy or industrywide collective agreements. These are Ethiopia, Guinea, Hong Kong (China), Kuwait, Malaysia, Namibia, Saudi Arabia, Singapore, Switzerland, the United Arab Emirates and Yemen. They use other means for trying to provide good living standards for their working population. 11. Most studies express the minimum wage as a percentage of the average wage. However, data on average wages are only available for about 30 countries outside the OECD. In the absence of such data, the use of value added per worker is necessary. 12. See, for example, Neumark, Cunningham and Siga (2003). 13. Rutkowski (2004). 14. The methodology in last year’s report was different. This year’s changes bring the methodology closer to the one developed in Botero and others (forthcoming). 15. Echeverry and Santa Maria (2004). 16. Heckman and Pages (2003). 17. Saavedra and Torero (2003). 18. OECD (2004). 19. A number of countries have conducted studies on the effectiveness of such reform in attracting young employees and providing them onthe-job training. All have found positive results. See, for example, Neumark and Wascher (2003). 20. Normal production is 200 workers @ 40 hours = 8,000 hours. A 50% increase in demand requires 12,000 hours. The 200 workers can work 3 hours per day overtime, or 55 hours per week. Production with current workers therefore expands to 200 workers @ 55 hours = 11000 hours. The remaining shortfall of 1,000 hours requires 19 additional workers (=1,000/55). 21. Vodopivec (2004). 22. For a detailed discussion, see World Bank (2004). 23. Botero and others (forthcoming). 24. There are exceptions. Income inequality in Chile is among the highest in Latin America—with the poorest 20% receiving only 3.3% of income—yet informality is the lowest, at less than a fifth of business activity. 25. ATKearney (2004). 26. Javorcik and Spatareanu (2004). 27. Betcherman (2002). 28. Bolaky and Freund (2004).
Page 2 and 3: Doing Business in 2005 Removing Obs
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Page 22 and 23: 17 Starting a business Who is refor
Page 24 and 25: STARTING A BUSINESS 19 BOX 3.1 Who
Page 26 and 27: FIGURE 3.4 “More difficult” can
Page 28 and 29: STARTING A BUSINESS 23 Introduce te
Page 30 and 31: HIRING AND FIRING WORKERS 25 Hiring
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Page 34 and 35: HIRING AND FIRING WORKERS 29 FIGURE
Page 38 and 39: 33 Registering property Who makes r
Page 40 and 41: REGISTERING PROPERTY 35 BOX 5.1 Who
Page 42 and 43: REGISTERING PROPERTY 37 FIGURE 5.4
Page 44 and 45: REGISTERING PROPERTY 39 Others are
Page 46 and 47: 41 Getting credit Who is increasing
Page 48 and 49: GETTING CREDIT 43 TABLE 6.1 Coverag
Page 50 and 51: GETTING CREDIT 45 ment only takes t
Page 52 and 53: GETTING CREDIT 47 losing possession
Page 54 and 55: 49 Protecting investors Who uses eq
Page 56 and 57: PROTECTING INVESTORS 51 FIGURE 7.1
Page 58 and 59: PROTECTING INVESTORS 53 FIGURE 7.4
Page 60 and 61: PROTECTING INVESTORS 55 national in
Page 62: PROTECTING INVESTORS 57 With langui
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Page 80 and 81: 75 References Acemoglu, Daron. 2003
Page 82 and 83: REFERENCES 77 ———. forthcomin
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DATA NOTES 81 Cost measure The text
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DATA NOTES 83 Assumptions about the
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DATA NOTES 85 such as government or
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128 DOING BUSINESS IN 2005 TOGO GNI
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130 DOING BUSINESS IN 2005 URUGUAY
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ACKNOWLEDGMENTS 133 Acknowledgments
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ACKNOWLEDGMENTS 135 Angela Zaffalon
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ACKNOWLEDGMENTS 137 Nolan Stringfie
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ACKNOWLEDGMENTS 139 Thomas Bang LVP
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ACKNOWLEDGMENTS 141 Günter Schneid
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ACKNOWLEDGMENTS 143 Gavin Doherty E
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ACKNOWLEDGMENTS 145 Indrikis Liepa
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ACKNOWLEDGMENTS 147 Phillip Mwangal
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ACKNOWLEDGMENTS 149 Nestor Espenill
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ACKNOWLEDGMENTS 151 Beng Hong Ong W
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ACKNOWLEDGMENTS 153 Leopold Thomas
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ACKNOWLEDGMENTS 155 Marcela Hughes
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