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Inter-regional differences in the labor law enforcement and performance of regional labor markets in Russia

2006

The goal of this research is to estimate the interregional differences in the efficiency of the labor law enforcement and analyze its impact on performance of regional labor markets.

Actual performance of the Russian labor market (labor turnover, wage flexibility, the use of non-standard forms of employment) demonstrates a remarkable degree of flexibility. Under existing institutional conditions this is only possible if regulatory norms are extensively violated.

The efficiency of the labor market depends, among other things, on the design of its institutions, and the employment protection legislation (EPL) rules play a special role here. These regulations introduce a specific tax on firings, shifting the labor demand curve downwards. Though all EPL-related tentative effects seem quite straightforward, existing empirical arguments supporting these claims have thus far been quite ambiguous. Regression coefficients for indexes reflecting EPL stringency are often insignificant or even have an unexpected sign. There are multiple reasons for this: various measurement problems, potential wage flexibility, the fact that inflows into employment and outflows from it may mutually offset each other, relatively little variation in the EPL indicators across countries and over time, etc. However, one of the key issues emerging in this context is to what degree the adopted regulations are actually enforced. Even very strict formal rules have little or no effect at all if they are widely circumvented or ignored. Most of the studies exploring EPL effects on labor market performance implicitly assume that EPL compliance is near to complete and, therefore, all firms bear full adjustment costs incurred by the acting regulations. This seems to be a very strong assumption for any country, but sounds especially strong and hardly plausible in the case of developing or transition economies, which are notorious for weak institutions and poor law enforcement. But if enforcement is far from being complete and the degree of compliance varies widely across regions/cities or segments of firms, then this variation in enforcement/compliance emerges as a factor ultimately causing variation in performance. In such a setting, the degree of actual enforcement can become more important in shaping labor market performance than any formal stringency of legislation, which exists only on paper.

This approach is novel  not only for Russia but for international academic community as well. Even though selectivity in labor law enforcement and its effects are intuitively obvious, this field is an emerging area of research in different countries.

Existing literature has advanced a lot in developing general theoretical concepts and estimation techniques but empirical papers on the EPL enforcement are scarce. This study contributes to the literature by making the first attempt to examine rigorously the EPL effects in a transition country.

The report consists of two parts:

1. Analysis of inter-regional differences in the EPL enforcement and working time regulation.

2. Estimating the impact of regional  differences in the EPL enforcement on the main indicators of regional labor markets. This part of the study seeks to determine what fraction of interregional variation of employment and unemployment rates is determined by variation in law enforcement indicators.

In this study we  construct a unique dataset on Russian regions compiling data from three different sources:

  • First, official statistical data. For each Russian region we constructed a time series for the period 2000-2005 that included the following indicators routinely collected by Rosstat (Russia’s Federal Statistics Service): the employment rate, the fraction of workers employed in large and medium firms; the employment share of the informal sector; the unemployment rate (by the ILO definition); the rate of registered unemployment ; labor turnover, working time.
  • Second, the State Labor Inspectorate, the Supreme Court and trade union associations provided the data containing unique qualitative indicators characterizing the state of labor law enforcement in different regions.

The reports of the State Labor Inspectorate were used to build time series for the following indicators: the number of inspectors, the number of control missions and violations detected, the number of people reinstated in their job as a result of state labor inspector intervention etc. From judicial statistics, we constructed the following indicators: the number of labor disputes on reinstatement in work, on wages, on unlawful strikes, etc.

Until recently these objective indicators characterizing the state of labor law enforcement in different regions of Russia have never been used in academic studies.

  • The third dataset was not readily available. We initiated a special survey of experts in each Russian region. We developed a number of questionnaires focusing on the issues of labor law enforcement – one for each group of experts: trade unions, employers association (separately for large and small firms), regional offices of the State Labor Inspection, regional offices of the State Employment Service, judges dealing with labor disputes).

Analysis of these data reveals considerable variation in the efficiency of enforcement across Russian regions. Moreover, there are large differences in intensity of enforcement conducted by these three institutions.  Moreover, there are significant intra-regional differences across the segments of the labor market (for instance, large and small firms).


 

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