# **I** . **Introduction, motivation and summary of findings**

Productivity has become particularly pertinent to policy makers in Latin America and the Caribbean, eagerly looking for ways to sustain job-related gains against poverty and inequality since the ‘tailwinds’ of the commodity super-cycle abated. For countries in the region, advancing productivity through innovation has, therefore, become a critical objective. Productivity growth is sustained by the process of innovation and creative destruction. Innovating firms take risks. The adoption or use-at-scale of digital technology is a case in point. Policy can help or hinder firms’ decisions to innovate. In this paper, we scrutinize the role of labor policy.

Do a country’s labor policies support or constrain firms’ ability to adopt and use digital technology? Are firms’ decisions to use digital technology affected by different regulatory instruments in the same ways? Labor market regulations and accompanying social insurance programs in most of Latin America and the Caribbean region were designed in industrializing countries for an industrial economy, to correct market failures and help working people mitigate losses from adverse shocks. However, unlike in Europe where many of these policy models were conceived, the reach and relevance of labor market interventions remains limited to employment in the public sector, stateowned enterprises and larger firms. As countries shift further away from manufacturing and into services, and a greater number of firms move confidently into the digital economy -or adopt digital technologies as part of their production processes- the business models and employment norms on which prevailing labor institutions are based are becoming strained. Labor policies often fail to keep pace with the demands of changing economies, or the needs of firms and workers. The concern that motivates our analysis is that prevailing labor market policies may not be suited to facilitate productivity gains through innovations, like firms’ adoption of digital technologies.

We conduct analysis on country-level aggregate data, to exploit variation in labor regulations and social insurance provisions across national jurisdictions. Given our research questions, a crosscountry analytical approach is empirically critical. First, with some notable exceptions, labor regulations typically do not vary substantially across municipalities and regions of the same country.<sup>2</sup> And while labor regulation and social insurance arrangements can sometimes vary in the same jurisdiction by firm size, industry and between the private and public sectors (including state owned enterprises), in most countries the share of firms that are subject to legally differential treatment is relatively small.

Second, analysis of country level data also allows us to exploit variation in how intensively countries use different regulatory instruments, such as statutory minimum wages or different forms of employment protection. Within a given jurisdiction, the labor code will typically mandate these measures as a single, indivisible package. Regulators typically do not exercise discretion over which or how intensively to apply each instrument. Nor are firms normally allowed the freedom to pick and choose between instruments, although variation in enforcement capacity across sub-national administrative units can yield useful insights (per Almeida and Carneiro, 2008; and Almeida, Corseuil and Poole, 2017).

> 2 Notable exceptions to this assertion include, differences in the level and adjustment protocols for statutory minimum wages in countries such as Indonesia and the Philippines (Del Carpio and Pabon, 2014 and 2017); and differences in employment protection regulation across the states of India (Ahsan and Pagés, 2008).

2