_L. Fox and A.M. Oviedo_ _Institutions and Labor Market Outcomes in Africa_ We include the firm level controls used in the second specification of Table 13, as we know that they are significantly related to employment growth. We estimate three alternative specifications. The first only uses the overall DB score, the second only uses the labor DB score, and the last one uses both. We do not include the legal origin dummy in this exercise. As before, we estimate this equation using short term employment growth, and average growth over the firm’s lifetime.

# INSERT TABLE 14

Table 14 shows the results of the estimations. Our results in general are not very different from those in Table 13, except for a few points. Our DB scores are not significant for short term employment growth when these scores stand alone (in columns 1 and 2 of Table 14). When we combine both DB scores we actually find that more overall regulation is (weakly) associated with less employment growth, while the opposite is true for labor regulation, which is puzzling.

For long-run employment growth results seem stronger, and consistent with our findings presented in Table 13. We find that both overall DB and labor scores have negative and significant coefficients, however only the overall score remains significant when we include both in the regression. The coefficient of GDP growth trend over the period 1996-2005 is negative, which is confusing. It may suggest that in some countries GDP growth was driven by technological progress or increases in capital intensity (e.g. the growth of mining activities), which are not necessarily beneficial for job creation.

In our econometric analysis we do not attempt to establish a causal relationship between regulation and employment growth. One explanation is that countries with more stringent regulation, and more generally countries with a civil law tradition, tend to have firms that grow less over their lifetime, even after controlling for firm characteristics and industry composition. But an alternative explanation could be that in civil law countries employment is less volatile (but not necessary lower). However, if this were the case, we would also expect firms in more regulated countries to grow more slowly in the short term, as they would have more difficulties to adjust their labor force, but we do not find this to be the case.

One possible explanation for this is that DB indicators, as well as the legal origin, do not accurately capture some elements of regulation that are important for firms in the short run. As noted earlier, this is one of the main criticisms raised by the evaluation of DB indicators by the World Bank’s Independent Evaluation Group (World Bank, 2008(b)).<sup>28</sup> For example, Ahsan and Pagés (2007) find that in India (which has a common law system), specific laws pertaining to conflict resolution have a much larger impact on labor market outcomes than laws typically measured in the DB scores (severance pay, etc.). These laws would be left out of a DB-type index, and in a cross-country set up, legal origin alone would not be able to capture the heterogeneity of labor regulations. Finally, it is well established that regulation, governance, and the legal origin of a country are closely correlated, especially product market regulations (and to a lesser extent, labor and fiscal regulations).<sup>29</sup> Therefore, the significant relationship between the

> 28 The report notes that “DB is not intended to, and cannot, capture country nuances. Firms’ investment decisions also depend on variables not measured by the DB indicators, such as the cost and access to finance and infrastructure, labor skills, and corruption. Different aspects of regulation have varying degrees of economic importance depending on countries’ income levels, legal regimes, and other characteristics.” See World Bank (2008(b)).

> 29 See for instance, Loayza _et al._ (2005).

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