_L. Fox and A.M. Oviedo_ _Institutions and Labor Market Outcomes in Africa_

# **I. Introduction**

The last two decades have seen the emergence of a rich literature on the economic impact of generous employment protection legislation (EPL hereafter) in certain countries, motivated in part by the widening gap in employment between continental European countries and the United States during the 1990s, and by subsequent regulatory reforms in Europe and Latin America to boost job creation and reduce unemployment. There are very few empirical studies on the impact of EPL in Sub-Saharan Africa (SSA hereafter), despite the importance of job creation for poverty reduction in Africa.

EPL is usually enacted with the goal of preventing unfair or discriminatory treatment and providing protection for workers who either lose their jobs or are temporarily unable to work. Empirical evidence suggests that a side effect of some EPL provisions is to reduce labor demand overall, which translates into a reduction in wage and salary employment, especially for particular groups.

We exploit the firm level data provided by the Enterprise Surveys conducted in SSA between 2003 and 2007 to investigate how labor market outcomes, in particular net job creation, relate to country labor regulations. Ideally, we would like to analyze _gross_ job flows, that is, the sum of job creation and job destruction, rather than _net_ flows. Unfortunately these data are not available in the surveys, so we use net flows as an indicator, albeit imperfect, of labor adjustment. Therefore, our results should not be interpreted as definitive evidence of a relation – or lack thereofbetween employment creation, labor adjustment and regulation, but rather as a first indication of the importance of regulation, relative to other factors that matter to African firms.

We find that employment growth is strongly associated – as in other regions- with firm size, age, and other indicators of productivity, such as investment in human capital, technology use, etc. Employment growth is not associated with measures of labor regulation, and firms’ perceptions indicate that regulation is a minor obstacle, when compared to the lack of infrastructure, limited access to credit, and others. In addition, a structural change that occurred in certain SSA countries between 2003 and 2006 seems to have encouraged firm expansion, irrespective of the regulatory environment. Multivariate analysis of firm recall data show that over the last three years, regulation is not associated with employment growth at the firm level. But our analysis also reveals a significant relationship between regulation – as measured by the labor and overall regulation indicators from _Doing Business_ - and <u>long-run employment growth at the firm level.</u> Thus, the hypothesis that regulation does not matter or will not matter in the future for SSA employment growth cannot be firmly rejected.

The rest of the paper is organized as follows. Section I summarizes the current literature on the effects of labor regulation on various labor market outcomes in other regions and in SSA, including the methodological problems with isolating this effect. Section III describes the data. Section IV provides a bivariate analysis of firms’ characteristics, their perceptions, the regulatory environment and employment expansion. Section V provides a multivariate econometric estimation of the impact of legal origin on job creation. Section VI concludes.

# **II. Employment protection legislation and labor market outcomes**

A large number of cross-country studies document the effects of EPL on labor market outcomes. The bulk of the work has focused on OECD countries, and on the costs of severance pay, mainly in order to shed light on the persistent differences in unemployment between continental Europe and the United States since the 1970s. In general, the argument is that if