| Poi icr RESEA1RCH \VWOkKIN(; PAiPHl 2884

# **Abstract**

SoImle critics of privatization argue that poor<sup>laborforce</sup> restructuring is a key concer-ni and th;at<sup>goverinimlelits</sup> should establishi better retrenichliimenit programs.<sup>Using</sup> ncw data from a sample of 400 companies<sup>inthe world,</sup> Chong anid l-6pez-de-Silanes test competinig<sup>thcories</sup> about the wisdom of retrencilhimenlt programs<sup>andtheir</sup> cffect on prices paid by buyers, and rehilrinlg<sup>policies hb</sup> private owners after- privatizatiotn. Thc<sup>restilts showthat</sup> adverse sccctioni plagues retrenchlimlenit<sup>programscarried</sup> **Out** by governments before privatization.<sup>Controllingfor</sup> cndogeneitv, several labor retrnchiclimienit<sup>policiesyielda</sup> negative imiipact oln net privatization<sup>priccs. In</sup> confirimiationi of the adverse selectioni<sup>argUmient,various</sup> types of voluIntary downsizing lead to a<sup>highierfrequelicy</sup> of rehil-inig of the same wvorkcrs by the<sup>newprivate</sup> owners. Compulsorv skill-bascd programs<sup>aretheonlI</sup> type of program that is miarginally associated<sup>withhigher</sup> prices and lower rchirinig rates after privatization,<sup>butthe</sup> political and economilic costs of this policy<sup>mav' makeit</sup> somewhat impractical. While<sup>a</sup> qualified<sup>**non-**</sup> intervention policy appears to be the<sup>safestbetinlabor</sup> retrcichimlenit before privatization, another<sup>one might be</sup> to set up a social safety' net or labor reallocation<sup>program</sup> hefore privatization, and theln let the new<sup>private owners</sup> decidle who is redulindant and who<sup>is</sup> not.<sup>Settingupthe</sup> program before privatization **may** hlelp with<sup>thepolitical</sup> viability of tllc process and letting the<sup>newvowyners</sup> manage the retrenchmienit may help<sup>avoidadverse</sup> selection.

I his paper-a prodtict of PulliC Services,<sup>DevelopmcnitResearchGrouIp-ispartofalargereffortinthegrouptO</sup> understand the labor implicationis of public<sup>sectorreform. Thestudy wasfundedbythieBank'sResearchSupport BLudget</sup> ulider the rescarch project "Ptublic Sector Downsizing"<sup>(Rl'O 683-69). Copics of thc paper are available freefrom the World</sup> 13ank, 18 18 H Street NW, Washinigtoni DCl<sup>20433.Pleasecontact Hedy Sladovicil,roomMC3-3 11,tclephonie 202-473-</sup> 7698, fax 202-522- 1154, email address<sup>lsladovichi(L/gxvorldbanik.org.PolicyResearchWorkingPapersarealsopostedon</sup> th'e Web at http ://ccon .worldhank. org.<sup>Theautlorsm11av</sup> be contacted at albertoch( )iadb. org<sup>or</sup> florcicio.lopczdcsilanesC(iyale.eduL. September<sup>2002.(40pages)</sup>

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Plroduced by the Research Advisory Staff