The impact of labour laws on the labour share of national income, productivity, unemployment and employment : first results from the 2023 update of the CBR Labour Regulation Index

This paper reports first results from the extension of the CBR Labour Regulation Index (CBR-LRI) to include changes in labour laws around the world over the last decade. The index, which previously went up to 2013, now codes for labour laws in 117 countries, equivalent to 95% of world GDP, for the period 1970 to 2022. The data show that the steady and incremental improvement of worker protections over time which was previously reported in studies of the index has been maintained. Findings specific to the 2023 update include data on the impact of Covid-19 and the rise of gig work. The Covid-19 emergency led numerous countries to impose controls over dismissals, some of which were temporary, while others have persisted. Efforts to normalize gig or platform work, by extending certain labour law protections to cover the new forms of employment associated with the platform economy, are also identified in the 2023 update. Taking advantage of the new dataset and its extensive year and country coverage, we conduct a time series analysis which aims to understand the dynamic interaction of labour laws with the labour share of national income, productivity, unemployment and employment at country level. In virtually all of the countries we analyse, worker-protective changes in labour laws are positively correlated with increases in the labour share, and in a majority of them they are also positively correlated with productivity. The positive productivity effect is evidence that labour laws have efficiency implications: by redressing asymmetries of information and resources between labour and capital, they help overcome barriers to coordination and promote cooperation, enabling the sharing of knowledge and risk between workers and employers. However, we also find that productivity improvements do not always translate into higher employment or reduced unemployment. Productivity is inversely related with employment in some systems, mostly liberal market and common law countries. In others, mostly coordinated market and civil law countries, productivity and employment are positively related, suggesting that firm-level improvements in efficiency have beneficial second-order effects, leading to employment gains and unemployment reductions. Our results suggest that labour law rules promoting distributional fairness and worker voice may need to operate alongside complementary institutions in capital markets and training systems if firm-level efficiencies are to translate into employment growth.