Enforcement Matters: The Effective Regulation of Labor

Abstract

This paper provides, to our knowledge for the first time, cross‐country measures of key ingredients of enforcement of labor law across almost every country in the world (i.e., labor inspections, penalties and the performance of the judiciary). The distinction between de jure and de facto regulation is well understood in theory, but almost never implemented in cross‐country empirical work because of lack of data. As a result, influential papers, which have shaped the policy debate by finding strong negative consequences of labor regulation on labor market outcomes, are based entirely on measures of de jure stringency of regulations. We show that this neglect of regulation enforcement matters. There is, on average, a negative correlation between the stringency of labor regulation and the intensity of its enforcement. Previous strong results on the consequences of labor regulation, and the legal origin theory of regulation stringency, no longer hold for effective labor regulation.