From the World Bank blog by Kaushik Basu:
Jobs have been at the center of my life since I took up my own new job as World Bank Chief Economist on October 1. This began within hours of my joining the Bank, when I participated in the press launch of the World Development Report 2013 on Jobs. Following that, my interactions at the Tokyo Annual Meetings of the World Bank and IMF also brought the jobs issue into high relief, with ministers and policymakers from around the world reacting to the WDR, especially in some of my corridor conversations with them.
I have a longstanding interest in labor-related issues, the role of labor laws, and on the impact of privatization on jobs. So I was pleased by the clairvoyance of the World Bank in choosing jobs as the topic for the 2013 World Development Report, much before the Bank knew that it would choose me to be the Chief Economist.
One intriguing concept in the WDR is the plateau idea, which runs counter to what many would expect. The WDR says that, when it comes to regulatory control of labor through laws, there is a plateau. As with plateaus, in the middle, it doesn’t matter much what you do, but on the edges [or extremities] it can have a large consequence. If you are under-regulated or if you are over-regulated, you are close to the two edges of the plateau; and there the action you take can have a sharp effect on the economy [by either restricting new job creation or by violating basic worker rights and fostering instability by going to the other extreme]. One kind of reaction to this finding, which I think reflects a misunderstanding, is to say that, by implication, the WDR is asserting that such laws and regulations don’t matter.
The WDR finding is important, but as anyone who does research knows that, from physics through chemistry to economics, there is no such thing as an ultimate finding. With the WDR we’ve amassed an impressive body of research and if that’s the latest, you run along with it until we get something else. But as with all research, you must always be on the lookout for more and the next round.
Let me show one bit of enriching that you can do with the plateau idea. There are many dimensions to labor regulation. You can, for instance, measure it along hiring and firing laws; and you can measure it along the extent of right to do collective bargaining. If the plateau idea is right this will mean a three-dimensional plateau, the way real plateaus are. Now think of a nation’s position in this policy matrix. It is a like a person standing on the plateau. It is entirely possible that photographed from one side this person will appear to be on the edge of the plateau and photographed from another side she will be in the middle. This immediately enriches the concept developed in the WDR, showing that different nations may find that on some dimensions regulation is of no consequence and on other dimensions they are of large consequence. In India, through the Industrial Disputes Act, hiring and firing of workers for firms that have over 50 workers is stringent (and it’s even stricter for companies of 100 people or larger). But in other areas India is flexible. So it’s possible that on some dimensions India is close to the edge and any further tightening would be damaging, but there may be other dimensions over which the country was not close to the cliff and the regulation does not have an effect on development.