The main objective of this paper is to explore how changes in regulations have affected total factor productivity (TFP) in the Chilean economy. The authors consider that Chile’s effective macroeconomic policies have been responsible for its aggregate productivity growth. However evidence suggests that some microeconomic factors, for example labor regulations, have slowed down TFP recently. Therefore this study aims to identify the effect of labor regulations, specifically reforms regarding the minimum wage, on productivity. In order to accomplish this the empirical methodology used by the authors consists of a plant-level productivity econometric model based on information for Chilean manufacturing plants covering the period 1992-2005.
The paper is organized as follows. After a brief introduction, section two makes a brief review of the literature that connects productivity and labor institutions. Then section three revises the main policy changes in the Chilean economy, while section four explains the methodology to identify the effect of these regulations on productivity. Later section five describes the data set. Afterwards, section six analyzes the regression results for the effect of regulations on TFP. Finally, section seven concludes.
The authors conclude that:
- the effect of labor market institutions on total factor productivity is rather vague
- high minimum wages relative to unskilled worker wages reduce productivity when adjustment costs, such as firing costs, exist
- continuous reduction in trade restrictions internally or through free trade agreements has enhanced productivity
- despite of the results presented, no clear explanation for the TFP decline in the past ten years was found
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