statistically significant.<sup>45</sup> This finding further provides evidence of adverse selection. On the other hand, voluntary skill-biased downsizing yields the expected, negative sign, as before but in this case the corresponding coefficients are statistically non-significant. Similarly, Table 16 shows that compulsory age-biased downsizing does imply a higher probability of re-hiring as the corresponding signs are positive and statistically significant at 5 percent or better regardless of the specification. When labor downsizing was done according to age and in a compulsory manner, the probability of being re-hired will increase between 19 and 22 percent after privatization. Similarly, compulsory skill-biased downsizing prior to privatization appears to lower the probability of re-hiring after privatization. The results in this case are, however, not very clean as the skill-biased measure becomes barely significant when including labor costs (Heckmnan-Pages measure) or not significant at all (ILO conventions case).

In summary, our findings with respect to rehiring policies are consistent with the adverse selection hypothesis in labor restructuring by the government before privatization. What governments do before privatization does have a direct bearing on how firms behave after privatization. Voluntary downsizing is associated with a 13-15 percent higher probability of re-hiring workers that were previously fired prior to privatization. Agebiased downsizing yields a higher probability of re-hiring workers, which in the case of voluntary age-biased downsizing reaches around 20 percent, and in the case of compulsory age-biased downsizing reaches around 22 percent, sometimes re-hiring workers even in the same exact departments. The one exception to these results is skillbased downsizing which in some specifications leads to significantly lower rehiring rates by private firms.

# **6. Conclusions**

Despite its importance, labor has probably been the single least addressed issue in privatization (Megginson and Netter, 2001). There is ambivalence with respect to the optimal policy approach to labor restructuring in privatization processes as reflected by the recommendations of development agencies around the world. In fact, such institutions have had a difficult time taking a position on whether or not it is a good idea to restructure a firm and, in particular, how to deal with labor force changes prior to privatization. Early advice called for labor restructuring prior to privatization under the premise that governments are better able to cushion any financial blow to displaced workers mainly through safety nets (Nellis and Kikeri 1989). Subsequent recommendations called for a less meddlesome approach by discriminating between large firms and smaller ones. It was suggested that smaller firms with relatively little overstaffing were sold with essentially no labor restructuring, under the logic that such a decision should be left to the new owners who would be in better position to choose which workers they would like to retain or dismiss (Kikeri, Nellis, and Shirley 1992). A final view came later when prior

> 45. However, statistical significance using the Heckman-Pages labor firing costs reaches only 10 percent.

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