Enforcement matters: The effective regulation of labour

AuthorLucas RONCONI,Ravi KANBUR
Published date01 September 2018
DOIhttp://doi.org/10.1111/ilr.12112
Date01 September 2018
International Labour Review, Vol. 157 (2018), No. 3
Copyright © The authors 2018
Journal compilation © International Labour Organization 2018
Enforcement matters:
The effective regulation of labour
Ravi KANBUR* and Lucas RONCONI**
Abstract. The distinction between de jure and de facto regulation is well understood
in theory, but has rarely been applied to cross-country empirical work on the impact
of labour regulation on labour market outcomes for lack of data. Policy debate has
been based on measures of stringency of law, suggesting a negative correlation between
labour regulation and labour market outcomes. This article provides new cross-country
measures of labour law enforcement and evidence of a negative correlation between
stringency and intensity of enforcement. Previous results concerning the consequences
of labour regulation and the legal origins theory no longer hold when a measure of
effective labour regulation is used.
The causes and consequences of labour regulation have received sub-
stantial attention from economists and social scientists. Theory stresses
that the relevant concept to study is effective labour regulation; that is,
the combination of both de jure regulation and state enforcement efforts.
Country-specific studies confirm that there is a high level of non-compliance
with labour law, especially in developing countries,1 and yet cross-country
studies invariably use simple measures of labour law stringency. This is true,
in particular, of the highly influential study by Botero et al. (2004), whose
findings have been used as an argument for the negative consequences of
1 Studies that analyse the consequences of enforcement include Almeida and Carneiro
(2012), Ashenfelter and Smith, (1979), Bhorat, Kanbur and Mayet (2012), Ham (2015), Kanbur,
Ronconi and Wedenoja (2013), Pires (2008), Ronconi (2010), and Viollaz (2016); and studies that
analyse its determinants include Almeida and Ronconi (2016), Amengual (2010), Holland (2016),
Murillo, Ronconi and Schrank (2011), Piore and Schrank (2008), and Ronconi (2012).
*Ravi Kanbur, Cornell University, email: sk145@cornell.edu. **Lucas Ronconi, Centre
for Research and Social Action (CIAS) and National Scientific and Technical Research Council
(CONICET), email: ronconilucas@gmail.com.
The authors wish to thank Sami Berlinsky, Carlos Scartascini and seminar participants at
CIAS, Cornell University, the Inter-American Development Bank (IDB) and the University of
San Andrés for their useful comments. They also acknowledge the excellent research assistance
provided by Paulo Barbieri.
Responsibility for opinions expressed in signed articles rests solely with their authors, and
publication does not constitute an endorsement by the International Labour Organization (ILO).
332 International Labour Review
labour regulation.2 At the same time, a study by La Porta, López-de-Silanes
and Shleifer (2008) proposes and confirms “the legal origins theory” as an
explanation for cross-country variation in labour regulation, once again using
simple measures of labour law stringency.
Cross-country econometric studies that use these measures of labour
law stringency recognize the importance of enforcement, but in effect say that
they are forced to use de jure measures because they do not have any meas-
ures of enforcement. As pointed out by Ronconi (2015), though, how can we
credibly assess the causes and consequences of labour regulation if we only
consider the letter of the law, ignoring the possibility of enforcement being
lower in those places where the law is more stringent? This is not a purely
hypothetical question. Non-compliance with labour law is pervasive through-
out the world. Furthermore, non-compliance is particularly high in develop-
ing countries, whereas those countries tend to have the most stringent laws.
Is it correct to assume that state intervention in the labour market is more
stringent in Venezuela or Angola, for example, where labour law is relatively
protective but enforcement and compliance are very low, than in Canada or
New Zealand, where the opposite is true? The existing cross-country empiri-
cal research, however, tends to make this unrealistic assumption due to a lack
of data on enforcement.
The first contribution of this article is to attempt to fill this data gap. It
provides, to our knowledge for the first time, new measures of key components
in the enforcement of labour law across almost every country in the world. We
present measures of penalties and the functioning of the inspection agencies
and the judiciary. The second contribution of this article is to suggest that there
is a negative correlation between the stringency of labour law on paper and the
intensity of its enforcement on the ground. The third and perhaps most impor-
tant contribution is to show that when the methods of Botero et al. (2004) and
La Porta, López-de-Silanes and Shleifer (2008) are applied using our measure
of effective labour regulation, their findings no longer hold. For a range of
labour market outcomes, effective labour regulation does not appear to have
the negative consequences that are ascribed to labour regulation by Botero
etal. (2004), and variations in effective labour regulation across countries can-
not be explained by the legal origins theory of La Porta, López-de-Silanes and
Shleifer (2008).
This article is structured as follows: the following section presents the
development of our new data set on enforcement of labour law across more
than 100 countries worldwide; the second section shows the negative rela-
tionship across countries between stringency in the letter of the law and the
intensity of its enforcement; the third section tests the legal origins theory for
effective regulation, which combines the de jure measures used in previous
research with measures of enforcement, throwing serious doubt on the legal
origins theory; the fourth section revisits the influential findings of Botero
2 See also Galli and Kucera (2004), and Heckman and Pagés (2004).

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