Regulation, Enforcement and Corruption

Abstract: This paper investigates how employment regulations affect firms ’ use of more flexible employment arrangements. Using firm level data from 27 countries in Eastern Europe and Central Asia the paper not only looks at variations in the formal, de jure restrictions on labor practices across countries, but explores variations in their enforcement to analyze the impact of regulations on labor flexibility as experienced by firms. It finds that greater regulatory burdens are associated with more firms using flexible labor arrangements. However, the extent to which they are used declines with increased regulatory burdens. Thus, while greater regulations may make flexibility more attractive, they may also curtail the share of workers under these arrangements. Methodologically, this underscores the importance of allowing for separate effects between the decisions to participate in these arrangements with the share of workers to be covered by them. The paper then looks to see whether differences in enforcement – due to discretion on the part of officials, the prevalence of more general corruption, as well as specific payments to labor officials – serve to relax the effect of regulations on firms. The results confirm that greater discretion and general corruption do serve to increase the extent of flexible labor arrangements, although the costs of paying bribes to labor officials themselves has less of this offsetting effect. * World Bank and * * University of Michigan. The authors thank Jeffrey Smith for his suggestions and Giovanni Tanzillo for his assistance in assembling the dataset. The views expressed here are those of the authors and do not reflect the views of the World Bank or its Board of Executive Directors.