employment- or health-related risks). The existence of monopsony (or labor market) power, which arises in labor markets where only a few employers demand labor, can also be considered a market failure.<sup>6</sup> This is closely tied to the issue of low competition in product markets (see Section 3.2), and can have detrimental implications for workers’ labor market outcomes (working conditions, wages, etc.).

While LMR may be warranted to combat market failures, there is a trade-off between regulation and economic dynamism. For this reason, policy makers have good reason to avoid over-regulation as it hinders economic efficiency (OECD, 2018), by undermining the reallocation of economic activity across sectors and firms. This argument is also a typical reason why producers tend to oppose regulations that impose constraints on how they can employ workers, who represent an essential factor of production. The Great Recession led to increased public support for increasing the flexibility of labor markets and thereby contributing to a more crisis-resilient economy. Such measures included making existing LMR more flexible or abolishing some of them entirely (Blanchard et al., 2014). The COVID-19 pandemic added nuances to the discussions of how much flexibility is necessary in times of crisis.

With both rationales for the existence of LMR and cautionary tales of its overuse in mind, we review the evidence available in the recent literature.<sup>7</sup> Specifically, Section 4.2 highlights the nuanced impact of minimum wage regulations, noting a small short-term unemployment effect and mixed evidence of long-term effects depending on the degrees of labor market power and exposure to international competition. Minimum wages are recognized as a tool for reducing income inequality, particularly contributing to decreased racial income disparities historically. The evidence suggests positive effects on aggregate consumption, durable goods purchases, and even productivity, with uncertain impacts on social cohesion. Section 4.3 reviews employment protection legislation, emphasizing the negative impact on wages, mixed effects on unemployment, and varying influences on productivity. Flexibilization through temporary contracts is acknowledged as a potential means to boost productivity but requires careful implementation to avoid the emergence of dual labor markets with job instability for certain workers. Furthermore, union presence is associated with higher wages and lower wage inequality, with outcomes dependent on bargaining levels (Section 4.4), while mandated benefits such as unemployment insurance and pension schemes show mixed effects on employment, wages, and productivity (Section 4.5). Finally, paid family leave is noted to have contested long-run employment effects but a positive impact on productivity through lower turnover and increased labor productivity.

In broad terms, the evidence on the effects of LMR is qualitatively equivalent between high and low income countries. This is despite the fact that the share of non-covered workers in developing countries is much higher (as the size of the informal sector is larger) and the levels of noncompliance within the formal sector are greater. The quality of the evidence available is lower though: developing countries count on much less rigorous evidence given the lack of readily accessible high-quality microdata (with the exception of Brazil). Instead, most of the information comes from

> 6See Manning (2021b) for a discussion of the available evidence in favor of the existence of monopsony power in the labor market.

> 7The evidence before 2012 is discussed in more detail in Betcherman (2012b).

37