Balancing Regulations To Promote Jobs


  • Labor regulations can correct imperfections in labor markets resulting from inadequate information, uneven bargaining power, limited ability to enforce long-term commitments, or insufficient insurance mechanisms against employment related risks. Thus, labor regulations can, if well designed, avoid inefficient and inequitable labor market outcomes and have an important role to play in any country.
  • The challenge is to establish a balance between workers’ protection and flexibility in the management of human resources at the firm level, that is, avoiding both over- or under-regulation. Between these two extremes, there is a ‘plateau’ where appropriately designed regulations can alleviate (labor) market failures, offer adequate protection to workers, and contribute to shared prosperity without imposing unreasonable costs on firms.

This report provides general principles for the design and implementation of labor regulations in four areas:

  • employment contracts
  • minimum wages
  • dismissal procedures, and 
  • severance pay and unemployment benefits. 
This selection of topics resulted from internal consultations, ongoing dialogue with client countries, as well as the importance of these topics for labor markets. The report summarizes the main findings from the literature and discusses country experiences and policy implications. It targets task team leaders involved in policy dialog on labor regulations, as well as policymakers.

The report suggests that there are general principles that can guide the design of labor regulations.  Beyond some of these general principles, however, there is no overall blueprint to design or adapt labor regulations. Rather, there are different reform paths that depend on country characteristics and are shaped by social, political, economic, and historical circumstances combined with different legal traditions.  A recommendation is to reform labor regulations in a systematic and comprehensive manner. In the past, several countries narrowly focused on selected labor regulations without considering the complexity of effects on the labor market.

It is necessary to recognize, however, that there are limits to what labor laws and policies can accomplish. In particular, labor regulations primarily benefit employees in the formal sector. According to recent estimations, over 60 percent of jobs in middle- and low-income countries are in the informal sector; these include farmers, the majority of own-account workers and informal wage employees, or close to 1.5 billion workers Also, in many countries, employment laws are often ineffective because of evasion and weak enforcement, even for workers with formal employment.