Labor market regulation is a contentious area of public policy debate in many developing countries. To inform this debate, this paper reviews the evidence on the impacts of two important types of labor market regulation: minimum wages and employment protection legislation (EPL). This paper aims to make two contributions to the existing literature. First, particular attention is paid to research findings in the context of developing countries; less is known about these countries than is known about developed countries. Second, this review attempts to bridge two segmented bodies of literature, one based on competitive labor market models and the other based on the role of institutions, that have dominated research and policy debate in this field.

Labor market regulations determine _inter alia_ what types of employment contracts are permissible, set boundaries for wages and benefits, hours, and working conditions, proscribe certain employment practices, and can provide social protection for workers. The rationale for these regulations can be attributed to various labor market imperfections: imperfect information, uneven market power (between employers and workers), discrimination, and inadequacies of the market to provide insurance for employment-related risks. Societies almost always introduce labor market regulations to protect workers or to redistribute income to them. However, there may be efficiency considerations because institutions can affect the functioning of the labor market and the productivity of firms.

Regulations constitute an important part of the institutional framework around the labor market, which can also include rules for trade unions and collective bargaining, unemployment insurance, active labor market programs, and equity legislation. In the three decades following World War II, a “modern” institutional framework was completed in developed countries, although approaches differed significantly, especially between Anglo-Saxon countries and continental Europe. Developing countries introduced similar institutions that were often patterned after their colonizers’ laws and traditions (Botero et al. 2004). By the 1980s, debates over labor market regulations and other institutions began to intensify as employment performance began to diverge across developed countries. In particular, the strong record of job creation and low unemployment in the United States relative to much of Europe raised questions about whether Europe’s more stringent labor regulations, more powerful unions, more extensive collective bargaining, and more generous unemployment insurance regimes might be contributing factors.

Since then, accelerating globalization and technological change have exposed countries at all stages of development to greater competition and more structural change and have raised the stakes for identifying the optimal institutional framework for the labor market (Hayter 2011). Throughout this period, the body of empirical evidence on the impacts of labor market institutions has continued to grow. Research in the 1990s, which was largely based on crosscountry regressions in the developed world, typically found that strong protective legislation and generous unemployment insurance slowed job growth and increased unemployment. These conclusions motivated the influential OECD (1994) Jobs Study, which took a largely deregulation stance, recommending flexible rules for protecting employment and setting wages and hours as well as unemployment and welfare systems that minimized work disincentives. A parallel body of evidence did not yet exist for developing countries, but the dominant policy message was similar: although institutions might be introduced with good intentions and theoretically had a role in addressing market failures, in practice, they often had unintended 2