_L. Fox and A.M. Oviedo_ _Institutions and Labor Market Outcomes in Africa_ turnover (i.e., labor market flexibility) to be efficient and competitive, and this cannot be detected by traditional cross-country analysis.<sup>8</sup> Recent micro-based empirical work that estimates the effects of employment protection legislation (EPL) on labor market outcomes usually takes one of three methodological approaches to deal with endogeneity concerns. The first is to do a “quasi-experimental” analysis that estimates the effects of EPL by comparing labor market outcomes before and after EPL reforms that affected only a selected group of workers in one country.<sup>9</sup> These episodes constitute “natural experiments” that allow researchers to isolate more accurately the effects of EPL from other, unobserved variables, that might be correlated with EPL. For instance, Kugler (1999) finds that reducing firing costs in Colombia in the early 1990s increased labor mobility by facilitating entry into unemployment; at the same time, it encouraged formal employment, thus having an overall negative effect on unemployment in a period of economic expansion, whereas unemployment increased faster during the subsequent recession than it did before the reform. Saavedra and Torero (2000) examine the effects of EPL reforms in Peru during the 1990s, and find that reductions in the severance payments’ structure reduced the effect of labor costs on labor demand and led to faster adjustments of the labor demand. In addition, the average job tenure fell. Depending on how quickly workers were able to find jobs, this result could potentially be a negative labor market outcome from the point of view of household welfare.

The second approach consists in comparing outcomes across different regions within a country, exploiting intra-country differences in legislation, or enforcement. For example, in a study of Indian manufacturing, Besley and Burgess (2004) find that in states with a more pro-worker EPL firms have lower average productivity, output, employment, and investment; the share of informal firms is larger, and urban poverty rates are higher. Ahsan and Pagés (2007) extend Besley and Burgess’ analysis to distinguish which types of EPL have the largest impact on labor market outcomes. They conclude that regulations pertaining to dispute resolution have a relatively stronger effect than other types of EPL.

In countries with strict formal employment regulations (translated into high costs of hiring and firing workers), hiring workers informally might be a way for formal firms to adjust their employment level cheaply according to the business cycle (similarly for workers, selfemployment is always preferable to unemployment in the absence of unemployment benefits). Thus, preventing firms from using this “illegal” adjustment margin might indeed reduce informal employment, but at the expense of firm performance, if formal employment is kept highly protected. Almeida and Carneiro (2006) test this by exploiting differences in enforcement across cities in Brazil, and find that labor inspections significantly reduce employment, output, sales, capital stock, and job creation (measured in new hires).

Another alternative is to look at how gross job flows (i.e., the sum of job creation and job destruction) behave across sectors in countries with different EPLs. The idea is that “natural” differences across sectors (for instance, technological differences) result in different labor adjustment patterns, making some industries more volatile than others in terms of job flows, regardless of the stringency of EPL. Thus, these “natural” differences can be affected in the presence of distortions (for instance EPL). Looking at the differences rather than the levels is a

> 8 This could include firms whose final product’s demand varies unpredictably (e.g. garments), or who suffer effects of seasonality and need to be able to lay off workers flexibly.

> 9 See, for instance, Autor _et al._ (2007), Kugler and Saint-Paul (2004), Kugler and Pica (2008), Kugler _et al._ (2003).

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