_L. Fox and A.M. Oviedo_ _Institutions and Labor Market Outcomes in Africa_ firms face high severance costs, they are less inclined to hire workers, especially marginal workers such as unskilled workers, young workers, and women. This may eventually lead to lower overall employment (and in developing countries it can also lower employment in the formal sector, while increasing employment in the informal sector). To cite a few studies, Lazear (1990) finds that in the OECD, stringent EPL is associated with lower employment and labor participation rates. Similarly, the 1994 OECD Jobs Study concluded that reform in job security provision was necessary to expand employment in the private sector. However, there is some disagreement, for instance, Blank (1994) argues that the supposed trade-off between social protection and economic performance is far from obvious. For example, in some cases EPL leads to lower wages, but not lower overall employment. More generally, most analyses of EPL and other regulations look only at particular outcomes, but not at overall welfare.

Studies of the impact of EPL on certain labor market outcomes in less developed economies byand-large confirm the evidence from advanced economies. For instance, Heckman and Pagés (2000) construct an index of job security legislation in Latin America, and look at how it is related to the level of employment using cross-section data. They find that higher job security is associated with lower levels of employment across Latin American countries.<sup>1</sup> Using Chilean data, Montenegro and Pagés (2003) find that EPL both reduces overall employment levels and changes the composition of the workforce by reducing the share of female and young workers. In a cross-section analysis of countries over 80 countries, Pierre and Scarpetta (2004) compare firms’ perceptions about the stringency of labor market regulations with actual legislation.<sup>2</sup> They find that both match closely; in addition they find that firms that are relatively more exposed to EPL also rely more heavily on temporary contracts and on-the-job training.<sup>3</sup> It has been assumed that in SSA the effect of EPL on employment in the private sector is similar to that in other countries (see, for example, Botero _et al._ , 2004). But Africa specific studies of the effect of EPL on labor market outcomes have not been done – the evidence for SSA comes from cross-country analysis. Available evidence suggest that the effect of EPL on employment in the low income countries of SSA may be of a lesser magnitude than in Latin America or the OECD, at least at this point in their economic development. For instance, in their comprehensive discussion on the reasons for Africa’s sluggish job creation performance, Fox and Gaal (2008) point out that, despite the lack of studies of EPL similar to those done for OECD countries, available evidence based on firm perceptions emphasizes skill shortages as one of the main constraints to job creation, as well as overall low investment in labor–intensive manufacturing.<sup>4</sup> Firms report that the generally poor investment climate raises operating costs for businesses, making SSA less competitive when compared to other emerging economies.

Evidence of skill shortages is found in studies of wage determination in Africa, as well as evidence that in SSA wage determination is not competitive. Fox and Oviedo (2008), Alby (2007), and others have found evidence of rent-sharing between firms and unions, as well as with older workers. Despite the potential selection bias (if union members or older workers are more productive), in their production function estimation Fox and Oviedo do not find that

> 1 This is particularly true for countries that have civil law systems.

> 2 Since the 1990s, the World Bank has collected firm-level data in a large number of countries. The Enterprise Surveys contain detailed questions on the firm’s production and sales, but their main objective is to measure how the investment climate of the country affects the firm’s operations and decision-making process. These surveys have been extensively used to study a number of issues over the years (see for instance, WDR 2005). However, few of these have looked specifically at labor market institutions.

> 3 Unfortunately, the number of African countries in their sample is rather small (around 2-3).

> 4 See also Figure 2 below.

3