Do Labor Market Regulations Affect Labor Earnings in Ecuador?

Abstract

The authors use the 1994 Living Standards Measurement Survey to show that the impact of labor market regulations, namely mandated benefits, is mitigated by reducing the base earnings on which they are calculated. Therefore, market regulation neither accounts for labor market segmentation nor for slow growth and increased inequality alone. Ecuador's regulations do raise take-home pay, but less than the vast number of benefits would suggest. The increase in labor costs induced by compliance is even smaller than the corresponding increase in take-home pay, because mandated benefits are not subject to social security contributions or payroll taxes. Despite mandated benefits, wage differentials between industries are comparable to those in Bolivia, a country otherwise similar to Ecuador, yet known to haveflexiblelabor markets. Compliance with these regulations is associated with significantly higher take-home pay only in the public sector and where trade unions are active -and it is unclear that merely changing the labor code would bring wages down in those two areas. The most dramatic earnings gap, the one between jobs in agriculture and the rest of the economy, appearsto be largely independent of either unions or labor laws. The authors conclude, therefore, that drastically streamlining the cumbersome labor laws, although welcome, would only produce moderate change.