OIT - The Impact of Labour Laws on the Labour Share of National Income, Productivity, Unemployment and Employment - First Results from the 2023...

X The Impact of Labour Laws on the Labour Share of National Income, Productivity, Unemployment and Employment: First Results from the 2023 Update of the CBR Labour Regulation Index Authors / Bhumika Billa, Louise Bishop, Simon Deakin , Kamelia Pourkermani

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Authorization for publication: Sukti DASGUPTA, Director Workquality ILO Working Papers can be found at: www.ilo.org/research-and-publications/working-papers Suggested citation: Billa, B., Bishop, L., Deakin , S., Pourkermani, K. 2025. The Impact of Labour Laws on the Labour Share of National Income, Productivity, Unemployment and Employment:: First Results from the 2023 Update of the CBR Labour Regulation Index, ILO Working Paper 157 (Geneva, ILO). https://

doi.org/10.54394/FPSR123701 ILO Working Paper 157 Abstract This paper reports first results from the extension of the CBR Labour Regulation Index (CBR-LRI) to include changes in labour laws around the world over the last decade. The index, which previously went up to 2013, now codes for labour laws in 117 countries, equivalent to 95% of world GDP , for the period 1970 to 2022. The data show that the steady and incremental improvement of worker protections over time which was previously reported in studies of the index has been maintained. Findings specific to the 2023 update include data on the impact of Covid-19 and the

GDP , for the period 1970 to 2022. The data show that the steady and incremental improvement of worker protections over time which was previously reported in studies of the index has been maintained. Findings specific to the 2023 update include data on the impact of Covid-19 and the rise of gig work. The Covid-19 emergency led numerous countries to impose controls over dismissals, some of which were temporary, while others have persisted. Efforts to normalize gig or platform work, by extending certain labour law protections to cover the new forms of employment associated with the platform economy, are also identified in the 2023 update. Taking advantage of the new dataset and its extensive year and country coverage, we conduct a time series analysis which aims to understand the dynamic interaction of labour laws with the labour share of national income, productivity, unemployment and employment at country level. In virtually all of the countries we analyse, worker-protective changes in labour laws are positively correlated with increases in the labour share, and in a majority of them they are also positively correlated with productivity. The positive productivity effect is evidence that labour laws have efficiency implications: by redressing asymmetries of information and resources between labour and capital, they help overcome barriers to coordination and promote cooperation, enabling the sharing of knowledge and risk between workers and employers. However, we also find that productivity improvements do not always translate into higher employment or reduced unemployment. Productivity is inversely related with employment in some systems, mostly liberal market and common law countries. In others, mostly coordinated market and civil law countries, productivity and employment are positively related, suggesting that firm-level improvements in efficiency have beneficial second-order effects, leading to employment gains and unemployment reductions. Our results suggest that labour law rules promoting distributional fairness and worker voice may need to operate alongside complementary institutions in capital markets and training systems if firm-level efficiencies are to translate into employment growth. About the authors Bhumika Billa is a doctoral candidate at the Faculty of Law, Cambridge Trust scholar and Research Associate at the Centre for Business Research in the University of Cambridge. She is interested in

voice may need to operate alongside complementary institutions in capital markets and training systems if firm-level efficiencies are to translate into employment growth. About the authors Bhumika Billa is a doctoral candidate at the Faculty of Law, Cambridge Trust scholar and Research Associate at the Centre for Business Research in the University of Cambridge. She is interested in the intersecting themes of law, technology, identity, and futures of work from multidisciplinary, creative, and critical perspectives. Louise Bishop is a Research Associate at the Centre for Business Research, University of Cambridge, specialising in legal dataset construction and analysis (‘leximetrics’), and a Data Scientist at Twinkl Education Publishing. She is one of the principal authors of the CBR Labour Regulation Index. Simon Deakin is Professor of Law and Director of the Centre for Business Research, University of Cambridge, where he specialises in labour law, private law and corporate governance. With John Armour and Mathias Siems he is one of the founders of the Cambridge Leximetric Database.02 ILO Working Paper 157 Kamelia Pourkermani is a Research Fellow at the Centre for Business Research, University of Cambridge, specialising in labour markets, macroeconomics, and applied econometrics. Her research explores the impact of labour regulations on macroeconomic outcomes, using time series and panel data analysis.03 ILO Working Paper 157 Abstract 01 About the authors 01 X Introduction 08 X 1 Theorising the impact of labour laws on the economy 10 X 2 Constructing the CBR-LRI dataset 13 X 3 Trends in labour protection around the world 19 X 4 The economic impacts of labour laws: a review of recent studies using leximetric data 27 X 5 Econometric analysis: methods and data 30 X 6 Results 32 6.1 Summary of trends 32 6.2 Country level analysis 33 6.2.1 Liberal market/common law origin economies 34 6.2.2 Coordinated market/EU economies 39 6.2.3 Latin American countries 48

X 6 Results 32 6.1 Summary of trends 32 6.2 Country level analysis 33 6.2.1 Liberal market/common law origin economies 34 6.2.2 Coordinated market/EU economies 39 6.2.3 Latin American countries 48 6.2.4 African countries 54 6.2.5 Countries in South Asia 57 6.2.6 Countries in East Asia 61 6.3 A closer look at country trends by sub-categories of labour law rules 65 X 7 Assessment 72 X Conclusions 73 Appendix 1. Summary of empirical papers using the CBR-LRI 75 Table of contents04 ILO Working Paper 157 Appendix 2. Econometric model 91 References 92 Acknowledgements 9505 ILO Working Paper 157 List of Figures Figure 1. Strength of worker protection, all countries, all years 19 Figure 2. Neoliberal experiments 20 Figure 3. Outliers 21 Figure 4. Democratic transitions 21 Figure 5. East Asian Countries 22 Figure 6a. Laws on different forms of employment, UK and Europe 24 Figure 6b. Laws on working time, UK and Europe 24 Figure 6c. Laws on dismissal, UK and Europe 25 Figure 6d. Laws on employee representation, UK and Europe 25 Figure 6e. Laws on industrial action, UK and Europe 26 Figure 7. Impacts of changes in labour law in the United Kingdom 34 Figure 8. Impacts of changes in labour laws in Ireland 35 Figure 9. Impacts of changes in labour law in the USA 36 Figure 10. Impacts of changes in labour law in Canada 37 Figure 11. Impacts of changes in labour laws in Australia 38 Figure 12. Impacts of changes in labour law in New Zealand 39 Figure 13. Impact of changes in labour law in France 40 Figure 14. Impacts of changes in labour law in Germany 41

Figure 11. Impacts of changes in labour laws in Australia 38 Figure 12. Impacts of changes in labour law in New Zealand 39 Figure 13. Impact of changes in labour law in France 40 Figure 14. Impacts of changes in labour law in Germany 41 Figure 15. Impact of changes in labour law in the Netherlands 42 Figure 16. Impacts of changes in labour law in Italy 43 Figure 17. Impact of changes in labour law in Portugal 43 Figure 18: Impacts of changes in labour laws in Spain 44 Figure 19. Impacts of changes in labour laws in Romania 45 Figure 20. Impacts of changes in labour law in Finland 46 Figure 21. Impacts of changes in labour law in Sweden 47 Figure 22. Impacts of changes in labour law in Argentina 48 Figure 23. Impacts of changes in labour law in Brazil 49 Figure 24. Impacts of changes in labour law in Chile 50 Figure 25. Impacts of changes in labour law in Ecuador 51 Figure 26. Impacts of changes in labour law in Peru 52 Figure 27. Impacts of changes in labour law in Uruguay 53 Figure 28. Impact of changes in labour law in Kenya 54 Figure 29. Impact of changes in labour law in Nigeria 55 Figure 30. Impacts of changes in labour law in South Africa 56 Figure 31. Impacts of changes in labour law in India 57 Figure 32. Impacts of changes in labour laws in Indonesia 58 Figure 33. Impacts of changes in labour law in Malaysia 5906 ILO Working Paper 157 Figure 34. Impacts of change in labour law in the Philippines 60 Figure 35. Impacts of changes in labour law in China 61 Figure 36. Impacts of changes in labour laws in Japan 62 Figure 37. Impacts of changes in labour laws in Korea 63 Figure 38. Impacts of changes in labour laws in Vietnam 64

Figure 35. Impacts of changes in labour law in China 61 Figure 36. Impacts of changes in labour laws in Japan 62 Figure 37. Impacts of changes in labour laws in Korea 63 Figure 38. Impacts of changes in labour laws in Vietnam 64 Figure 39. Changes in labour laws in Brazil, 1970-2022 65 Figure 39. Changes in labour laws in China, 1986-2022 66 Figure 40. Changes in labour laws in South Africa, 1970-2022 67 Figure 41. Changes in labour laws in Spain, 1970-2022 68 Figure 42. Changes in labour laws in Sweden, 1970-2022 69 Figure 43. Changes in labour laws in the UK, 1970-2022 7107 ILO Working Paper 157 List of Tables Table 1. Elements of a composite index 13 Table 2: CBR-LRI sub-indices and indicators 13 Table 3. Example of coding (UK law, variable 1) 16 Table 4. The impact of aggregate labour law changes on the labour share, productivity, unemployment and employment in selected countries 32 Table 5. Impacts of changes of labour laws in Brazil 66 Table 6. Impacts of changes of labour laws in China 67 Table 7. Impacts of changes of labour laws in South Africa 68 Table 8. Impacts of changes of labour laws in Spain 69 Table 9. Impacts of changes of labour laws in Sweden 70 Table 10. Impacts of changes of labour laws in the UK 7108 ILO Working Paper 157 X Introduction The CBR Labour Regulation Index (CBR-LRI) is one of a number of leximetric datasets developed at the University of Cambridge for the purpose of enabling researchers and policy makers to track changes in labour, company and insolvency law in many countries over extended periods of time (Deakin et al., 2023). The CBR-LRI codes for changes in labour laws in over 100 countries since

at the University of Cambridge for the purpose of enabling researchers and policy makers to track changes in labour, company and insolvency law in many countries over extended periods of time (Deakin et al., 2023). The CBR-LRI codes for changes in labour laws in over 100 countries since the early 1970s. It employs a ‘leximetric’ coding method which provides a statistical measure of the content of legal rules (Adams et al., 2017; Deakin, 2018). Specifically, it makes it possible to ascertain how far a given labour law protects workers, on the one hand, and regulates employers, on the other. It can be used to compare countries’ labour laws and to benchmark changes in labour laws at country, region and global level over time. The index can also be deployed in econometric analysis to estimate the relationship between changes in the content of laws, on the one hand, and developments in the wider economy of a country, such as fluctuations in the levels of employment and unemployment, changes over time in productivity, and trends in income inequality, on the other (Adams et al., 2019). The CBR-LRI dataset has recently been updated to the end of 2022 (Adams et al., 2023). The previous iteration coded laws up to 2013. Thus a further decade or so of codings are now available. The publication of the 2023 iteration of the index makes it possible to conduct a systematic review of changes in labour laws around the world over the last ten years. It also throws light on long-run trends in labour law, now going back over five decades. Additionally, the updated index opens up new possibilities for studying the impact of labour law changes on national economies. The debate over the economic effects of labour laws is evolving, but is far from settled. Economic theory recognises that labour laws, rather than being the straightforward ‘burden’ or ‘distortion’ on employer decision making that had once been assumed, can have positive impacts on firm-level efficiencies. In protecting workers against the unmediated exercise of employer power,

theory recognises that labour laws, rather than being the straightforward ‘burden’ or ‘distortion’ on employer decision making that had once been assumed, can have positive impacts on firm-level efficiencies. In protecting workers against the unmediated exercise of employer power, labour laws may enhance labour-management cooperation, thereby contributing to innovation and productivity. The shift in thinking was reflected in the World Bank’s suggestion, in its 2015 Doing Business report, that in protecting workers against ‘arbitrary and unfair treatment’, labour regulations also ‘increase job stability’ and ‘improve productivity’; it was not just regulations that were ‘too strict’ but those which were ‘too loose’ which ran the risk of being counterproductive, ‘leading to losses of employment in an economy or to its missing out on job-supporting agglomeration effects and knowledge spillovers’ (World Bank, 2014: 231). The debate may have shifted but it is not resolved, in part because not enough is known about the conditions under which labour laws may produce beneficial economic effects. According to the World Bank, ‘finding the right balance’ between possible negative and positive impacts ‘is essential’. This is in part a question of assessing the level of protection which labour laws confer on workers, and also of understanding the ‘economic and political context’ in which laws operate (World Bank, 2014: 231). A first step to achieving an improved understanding of how labour laws work is to get better data on their regulatory content. It matters not just that labour laws protect workers, but how far they do so (Cazes et al., 2012). Although labour law systems around the world have a number of structural features in common, they also display a wide variation in the degree of protection they purport to confer on workers. The CBR-LRI aims to capture the extent of this diversity across labour law systems. It covers more detail on the types of labour laws, a lengthier time series by years included, and more extensive country coverage, than other, similarly constructed09 ILO Working Paper 157

tion they purport to confer on workers. The CBR-LRI aims to capture the extent of this diversity across labour law systems. It covers more detail on the types of labour laws, a lengthier time series by years included, and more extensive country coverage, than other, similarly constructed09 ILO Working Paper 157 datasets. As such it has the potential to be a useful resource for the social science community and for policy makers. Section 2 outlines the theoretical framing of the issue of labour laws’ economic effects, noting the growing influence of institutionalist theories of labour law and the labour market, and their implications. Section 3 outlines the methodology underlying the construction of the CBR dataset. Section 4 then describes some of the trends in labour laws around the world that the new dataset reveals or clarifies. Section 5 reviews the prior state of the art on empirical examination of the economic consequences of labour laws, including earlier studies using the CBR-LRI. Section 6 presents the methods and data used in the econometric analysis and section 7 sets out the results, detailing the impact of labour law changes on the labour share of national income, productivity, unemployment and employment in a cross section of countries from different regions and at different levels of economic development. Section 8 consists of an assessment of the results. Section 9 concludes.10 ILO Working Paper 157 X 1 Theorising the impact of labour laws on the economy

If labour markets were perfectly competitive, regulation aimed at protecting workers would have the effect of introducing distortions or rigidities, preventing the price mechanism from working to allocate resources to their most efficient use. This is the basis for believing that labour laws, while seeking to protect workers, ‘often hurt them’ (World Bank, 2007: 19). In practice, labour markets do not conform to textbook models of pure competition, a reality which, it is now widely accepted, economic theory should take on board (Manning 2003). Institutionalist approaches of various kinds have identified a role for labour laws in offsetting

markets do not conform to textbook models of pure competition, a reality which, it is now widely accepted, economic theory should take on board (Manning 2003). Institutionalist approaches of various kinds have identified a role for labour laws in offsetting asymmetries of information and power which are characteristic of labour contracting. ‘New institutionalism’ in economics, drawing on transaction cost theory, tends to emphasise the role of solutions which the parties themselves develop for building cooperation and trust (Williamson, Wachter and Harris, 1975). 'Legal institutionalist’ approaches see the law as having a more foundational role: it is not so much a question of law intervening in the employment contract, as constituting it through a combination of property rights allocations, private law liability rules, and legislative norms with varying degrees of bindingness (Deakin et al., 2017). Underlying institutional analyses, whatever their exact provenance, is a critique of the idea of the market as natural or self-ordering; contracts, practices, norms and laws are intrinsic to the way labour (and other) markets operate, and can have multiple effects, sometimes trading off equity against efficiency and sometimes combining them, depending on context (Deakin and Wilkinson, 2000). It may be profit-maximising for firms to contract with workers to offer job security and a premium over market-clearing wages in order to obtain greater effort and commitment, as recognised by efficiency wage theory (Bulow and Summers, 1986; Summers, 1989). Where that is the case, mandatory legal rules could be seen as unnecessary. If employers are not willing to offer job security and a wage premium, conversely, the law should not impose these benefits. However, it is recognised that adverse selection effects may deter firms from offering improved contractual terms and conditions (Levine, 1991). The standardisation of employment terms and conditions through collective bargaining and/or legislative compulsion (legal ‘mandates’) may then be efficiency enhancing. Behavioural and experimental studies have examined the conditions under which employment

tual terms and conditions (Levine, 1991). The standardisation of employment terms and conditions through collective bargaining and/or legislative compulsion (legal ‘mandates’) may then be efficiency enhancing. Behavioural and experimental studies have examined the conditions under which employment contracts, offering workers a degree of security and stability in return for commitment loyalty, might be expected to emerge in place of independent contracting or self-employment, in which the parties contract for the delivery of a specific job of work or service without the expectation of a regular or continuing relationship. Bartling et al. (2014) propose a behavioural model in which the parties can realise a surplus by moving from self-employment to employment, the insight here being that enhanced cooperation allowed for by the employment contract generates relative gains compared to independent contracting. However, experimental evidence shows that this result holds only in the presence of binding fairness norms, which penalise cheating or (in a game-theoretical sense) ‘defection’ by the party with market power, which will generally be the employer. Thus where fairness in contracting is something that workers value but employers have a tendency to under-provide, legal mandates may have positive equity and efficiency effects at the same time (Adams et al., 2019).11 ILO Working Paper 157 A subset of the literature has focused on the innovative firm as one particular context in which to explore the properties of labour regulation. It is recognised here that employment protection legislation, for example, can lead to increased labour productivity (achieving a higher output for a given labour input) and innovation (transforming productive inputs into tradable outputs in the form of more highly valued goods and services). From this point of view, reducing dismissal protection and promoting so-called non-standard forms work in the interests of labour market flexibility, a position argued for the OECD in its Jobs Study of the 1990s (OECD, 1994), may make it more difficult for firms to innovate. This is for the following reasons, summarised by Kleinknecht (2017): with easier firing and reduced job tenures, the incentives of both employer and workmore difficult for firms to innovate. This is for the following reasons, summarised by Kleinknecht (2017): with easier firing and reduced job tenures, the incentives of both employer and workers to invest in firm-specific training, the returns from which will take time to be realised, will be reduced; learning embedded in firm-level routines and practices will be lost as labour turnover increases; loyalty to the firm will be eroded, requiring more costly monitoring of workers by managers; and, knowledge sharing between firms and workers, particularly concerning tacit knowledge which may form an important part of a firm’s competitive advantage, will be diminished. Counter arguments, also discussed by Kleinknecht (2017), include the following: dismissal protection will slow down the movement of labour from established and stable sectors to new and rapidly growing ones; higher firing costs will deter firms from making labour-saving innovations which could be expected to generate redundancies; stronger labour laws will enable workers to capture a higher proportion of the firm’s profits, discouraging organisational change and deterring investment; and, laws requiring employers to justify dismissals will encourage workers to reduce their effort (‘shirking’). The first set of arguments may have greater weight in the context of established firms with a longer time horizon for returns from innovation, while the second set may be relevant to firms seeking to innovate in more radical or disruptive ways and with a shorter time horizon, as could be the case whith venture-capital funded start-ups (Damiani and Pompeii, 2010; Vergeer and Kleinknecht, 2014). Whether innovation is centred around firm-specific human capital and tacit knowledge, or generic skills, may also be relevant. In either case, empirical evidence would seem to be needed to establish which of the different effects is observed in practice, which may vary according to the presence of other institutions including the degree of centralisation of wage bargaining (Kleinknecht, 2017) and the operations of corporate laws and financial regulations which can be expected to impact on investment (Adams and Deakin, 2024).

according to the presence of other institutions including the degree of centralisation of wage bargaining (Kleinknecht, 2017) and the operations of corporate laws and financial regulations which can be expected to impact on investment (Adams and Deakin, 2024). Labour laws might also have a number of macro-level effects. In so far as labour laws increase returns to labour, in form of wage and salaries, and reduce those to capital, in the form of dividends and rents, they would, all things being equal, lead to a decrease in the level of overall income equality in a country, as rents and dividends tend to accrue to higher earners and better-off income groups, while returns to wages are more evenly distributed across the working population. The fit is not exact since some returns to labour include the incomes received by some very high earners, but the incomes of those in the top 0.1% or 0.01% of the earnings distributions are mostly in the form of returns from capital, so all things being equal an increase in the labour share will reduce overall income inequality (Deakin, 2021). There may be wider benefits from reducing inequality: rising income inequality caused by shifts in the legal protection accorded to workers and investors respectively has been found to be associated with a number of negative health effects, including increases in child mortality and obesity, with resulting costs for public healthcare systems (Ferguson et al., 2017). On the other hand, laws lowering the relative return to capital may, according to some analyses, depress productive investment, leading to reduced dynamism in the economy (Besley and Burgess, 2004, analysing the effects of d