How can we increase productivity in developing countries?

This post first appeared on The World Bank Jobs and Development Blog.

Developing countries have a history of determining working arrangements and pay through industry-level collective bargaining and union action. In his recent article for IZA World of Labor Carlos Lamarche from the University of Kentucky reviews the existing evidence on collective bargaining in developing countries. Understanding the implications of such arrangements can effectively guide evidence-based policy making in promoting effective regulations and policies. So, what does the profession know on this issue with respect to developing countries?

Lamarche shows that recent empirical evidence from Latin America indicates that negotiating work rules at firm level rather than industry level may lead to greater productivity gains.
Due to limited data availability and quality as well as the broad diversity of the institutional arrangements the evidence on this issue for developing countries is sparse. It is abundant for more developed economies, such as the US and Europe, and it is abundant on the effect of collective bargaining on wages but not on productivity.

Bargaining does not follow a single model across developing countries, or even countries in a region. Systems in Latin America vary wildly: Argentina has a highly centralized system, and has one of the highest coverage rates in the Western Hemisphere; whereas unlike Chile has a decentralized system.

Latin America provides the opportunity to focus on countries which have dramatically changed the relevant institutions in the short-run. This allows us to understand how reforms in collective bargaining can improve productivity, since Labor market reforms implemented in the early 1990s across the region changed institutions and significantly decentralized negotiations.

And within Latin America, Argentina is a specifically relevant case since it has strong unions and particularly high collective bargaining coverage rates despite decentralization reforms. This is necessary to examine the effects of work practices resulting from collective bargaining agreements on productivity.

Argentina’s substantial market-oriented reforms in the early 1990s introduced decentralization into its collective bargaining system specifically shifting from the traditional and widespread industry-wide agreements with binding norms for agreements at lower levels to firm-level bargaining.

Lamarche shows significant differences in the effects that work practices negotiated in Argentina through collective bargaining have on labor productivity before and after the reforms. These results suggest that firm-level negotiations are associated with higher labor productivity.

The association between productivity and work rules on dismissals, new technologies and training is positive after the decentralization. It was negative before. These results indicate that while industry-level bargaining may lower productivity by restricting managerial flexibility in response to market changes, firm-level negotiations are more efficient and improve productivity.

Despite the evidence discussed in Lamarche’s article, the empirical evidence on the effect of wage bargaining on labor productivity is just beginning to emerge for developing countries. The variety of institutional settings, economic conditions, and collective bargaining coverage and negotiation levels across developing countries, even in the same region, highlights the difficulty of drawing cross-country conclusions. Nonetheless, Argentina’s experience indicates that policies decentralizing collective bargaining to the firm level can increase labor productivity.

Of his work, Carlos Lamarche says: “In my article, I try to point out existing limitations of the analysis of collective bargaining in developing countries. I found myself very skeptical of fundamentally uncovering causal relationships and finding policies that can be easily generalizable from country to country. This is perhaps not too surprising… Nevertheless, I hope the article stimulates further discussion and analysis on the topic. I hope future generations of economists will advance knowledge to help improving institutions in developing countries.”

Reference and Source of Figures:
Lamarche, C. (2015) Collective bargaining in developing countries. IZA World of Labor 2015: 183 doi: 10.15185/izawol.183
IZA World of Labor is an open-access labor economics resource designed to assist policy-making by presenting empirically founded research on markets and related economic policy measures in an innovative way, to meet the needs of stakeholders in labor markets worldwide.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Alessio Brown joined IZA as Director of Strategy and Research Management in March 2014.

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