_L. Fox and A.M. Oviedo_ _Institutions and Labor Market Outcomes in Africa_ these groups of workers are significantly more productive than others, which supports the rentsharing hypothesis.<sup>5</sup> Another approach to analyzing the effects of EPL is to study these regulations within the context of the historical background of the country’s private sector regulatory system. As La Porta _et al._ (1998) and Botero _et al._ (2004) note, through conquest and colonization European powers imposed on countries around the world legal systems adapted from two very distinct legal traditions coming from Western Europe, namely common and civil law.

Common law, which originated in England “is characterized by the importance of decisionmaking by juries, independent judges, and the emphasis on judicial discretion as opposed to codes” (Botero _et al.,_ 2004). Common law is the legal structure that predominates in Anglophone SSA countries. Civil law originated from Roman law and was adopted by civil codes in France and Germany. It is “characterized by less independent judiciaries, the relative unimportance of juries, and a greater role of both substantive and procedural codes as opposed to judicial discretion” (Botero _et al.,_ 2004). Civil law was adopted by Francophone and Lusophone SSA countries.<sup>6</sup> Because of the inherent differences between both legal structures, it is natural to find differences between regulatory environments, which themselves must fit within their own legal system. Naturally, the literature finds a strong correlation between the stringency of regulations and the legal origin of the country. This is an important empirical fact, because although the introduction of new regulations is likely endogenous to the current economic and political situation of the country, the legal system itself was imposed at the time of colonization, and therefore it can be considered exogenous. The correlation between legal origin and regulation then allows the researcher to use legal origin as an instrument of regulation. Botero _et al._ (2004) take this approach and use data from 85 countries to analyze the determinants of EPL, and the impact of EPL on labor market outcomes. They find that more stringent EPL is associated with the civil law tradition, and that countries with more stringent regulation have lower labor force participation, and higher unemployment, especially youth unemployment.

The main difficulty when comparing the effects of EPL in a cross-country context is that there is a potential endogeneity problem, hence, a positive correlation between EPL and the measured outcome cannot be taken as evidence of a causal relationship. For example, Fox and Gaal (2008) note that although few firms in Africa cite EPL as a main obstacle to business in enterprise surveys, EPL might well be correlated to factors outside the labor market, such as weak infrastructure, and poor governance (which are perceived as severe obstacles). In such a case, cross-country OLS analysis (such as that in Heckman and Pagés, 2000, which uses one fixed effect variable to control for all unobservable country effects) is unable to disentangle the effects coming from EPL from those of other country-specific policies.<sup>7</sup> In addition, EPL may create disincentives for investment in certain sub-sectors or technologies that require high labor

> 5 Note that EPL may be amplifying skill shortages, thus reducing investment and job creation. Analysis of the legal restrictions to hiring foreign workers in the countries from our sample reveals that the number of countries with special restrictions (usually requiring replacing foreign with native workers after some time) is high, and greater in the Francophone group. This can exacerbate skill shortages for firms.

> 6 With apologies to the Portuguese, for simplicity, hereafter we refer to common law countries as “Anglophone” and to civil law countries as “Francophone.”

> 7 Freeman (2007), among others complains about this type of analysis, and overall, the limitations of the technique of cross country regression analysis have been widely vetted in the discussion of growth analytics. Note that in their paper, Heckman and Pagés try to correct for this in subsequent estimations but the issues remain.

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