Conditions of Work and Employment Series No. 47

Deregulating labour markets: how robust is the analysis of recent IMF working papers?

In a series of recent IMF papers, Bernal-Verdugo, Furceri and Guillaume (2012a,2012b), Crivelli, Furceri and Toujas-Bernaté (2012), and Furceri (2012) report finding strong evidence that more flexible labour markets are negatively associated with unemployment and positively associated with employment elasticities, and that large-scale reforms of labour market institutions towards flexibility may help reduce unemployment.

This paper examines the reliability of the data and of the methodology used in these papers. It reports serious flaws both in the data and in the way they are used, such as employing the suspended World Bank Employing Workers Indicators, or interpreting methodological breaks in series as reform processes. When these breaks in series are accounted for, the majority of reforms identified in Bernal-Verdugo, Furceri and Guillaume (2012a) cannot be replicated. Moreover, the methodology of identifying reforms from the data employed in the latter paper does not capture actual reform processes and ignores the scope and the size of the reforms. Taken together, our findings call into question most of the empirical results of these papers and policy advice based on them.