Youth Employment Programs - Independent Evaluation Group

Labor Market RegulationsLabor market regulations mainly protect formal sector “insider” workers,and can make it more difficult for youth to enter the market. In developingcountries with small formal sectors, most workers are outside of any labormarket regulations. In middle-income countries, limited evidence existson the impact of regulations on youth employment and earnings, such asincreases in the minimum wage and tighter job security. Analysis of jobsecurity regulation in Latin America suggests that the unemployment effectof stricter regulations is almost two times larger for youth than for adultworkers (Heckman and others 2000).A minimum wage may lead to a flatter wage profile over time, and a possibleunemployment effect on youth can be reduced by adopting a youth subminimumwage. Based on data from 17 OECD countries, Neumark and Wascher(2004) found that minimum wages reduce employment among youth;however, this negative employment effect can be reduced by a sub-minimumwage for youth. Portugal increased the youth minimum wage for teenagers inthe late 1980s. Two wage effects were observed in the long run; first, a wagepremium, consistent with an upgrading of the quality of jobs offered by thefirm; and second, a flatter wage profile over time as firms would compensate ahigher initial wage with a slower wage progression (Cardoso 2009).A higher minimum wage does not necessarily increase poverty because itwould lead to higher unemployment rates. The conditions for a minimumwage increase to affect poverty include the distance of the wage to thepoverty line, the elasticity of labor demand, the extent of income sharingwithin and across households, and the sensitivity of the poverty measureto the depth of poverty (Fields and Kanbur 2007). These factors vary acrosscountries.A change in payroll taxes has different impacts on employment and wages.When Chile privatized social security, payroll taxes decreased but there wasno employment effect because wages adjusted to the change in non-wagecosts (Gruber 1997). Colombia introduced legislation in the 1990s to reduceseverance payments for dismissal. The reform requires employers to deposita monthly contribution to the formal sector employees’ severance paymentsavings account, which is accessible upon separation. The severance paymentreform in Colombia made the labor market more dynamic by increasing theexit rates into and out of unemployment, and younger workers were moreaffected. The increased flexibility led to higher unemployment duringrecessions and higher employment rates during expansion (Kugler 2005).In middle-income countries, the Bank promoted reforms to make laborregulations more conducive to youth employment. In Bulgaria, the Banksupported legal amendments to increase the flexibility of working time andfixed-term and part-time contracts. It also supported a monthly bonus forunemployed recipients of social assistance who find employment on their owninitiative. The employment rate of younger workers (ages 15–24) increased138 Youth Employment Programs