In 2009, when millions of workers were losing their jobs at the height of the Great Recession, Bank management decided to suspend an earlier Doing Business indicator on labor flexibility because of one-sided assertions about the benefits of labor market deregulation. (the World Bank continues to compile data on labor regulations and presents it in an annex to the report, but the data are not included in Doing Business scores or rankings.)
Since then, the Bank has made efforts to gain a deeper understanding of labor and employment issues and in 2013 devoted its annual World Development Report to the theme of “Jobs.” That report included an extensive review of economic research on the supposed negative impact of labor regulations on job creation that Doing Business repeatedly alleged. The World Development Report 2013 concluded that “most estimates of the impacts [of labor regulations] on employment levels tend to be insignificant or modest.”
Doing Business 2018 studiously ignores this finding and instead repeats the myth about the benefits of labor market deregulation. The labor regulation annex cites one study in support of its claim that “more flexible labor regulation could increase employment” — a ten-year-old World Bank staff paper titled “Are Labor Regulations Driving Computer Usage in India’s Retail Stores.”
The World Development Report on jobs also found that several labor regulations played a role in reducing income inequality. Research in several institutions is showing that deregulation has been an important factor in explaining increased inequality in many countries. Ongoing research at the Bank’s sister institution, the International Monetary Fund, is expected to conclude that labor market deregulation was a significant driver of declining labor shares in the national incomes, and thus increased income inequality, in several economies in recent decades.
Additionally, Doing Business has given penalty points to countries whose total tax rate exceeds a certain threshold. They include in this measure taxes on profit, dividends, property, capital gains, and financial transactions, as well as labor taxes and government contributions to pensions, health and safety, parental leave, etc… This year’s threshold is 26.1 percent of corporate profits. The incentive to keep taxes and social contributions from companies at modest levels, by giving better scores to low-tax venues, is in clear contradiction with the World Bank’s stated objective of giving governments the means to provide essential public services, especially to the poor, and reducing inequality.
The shoddiness and inconsistency of Doing Business would be almost laughable if the influence of the report were not so far-reaching. It is the World Bank’s highest-circulation publication and both the Bank and the International Monetary Fund have used the report’s indicators to pressure countries to reduce regulations, sometimes through loan conditions.