Making regulation work better for workers

Around the world, governments are trying to spark job creation, boost productivity, and make labor markets more inclusive. Thereby, regulatory frameworks play an important role as they clearly shape markets and the welfare of workers.

However, much of today’s policy debate still assumes there is a universal and unchanging “correct” model of regulation—often one centered largely on rules that affect workers directly. Yet creating more and better jobs isn’t only about adjusting labor laws. Labor and product markets constantly influence one another, countries differ enormously in how their economies function, and labor markets themselves are evolving quickly.

Designing regulation that works with markets, not against them

In this context, solutions that tackle regulation only from one margin, that are not tailored to local contexts, or are unable to adapt to changing environments often fall short. The point is not whether to regulate but how to design regulations that match the complexity of the economies they aim to shape.

A modern approach to regulation starts from one simple idea: Regulatory frameworks must work with market forces rather than against them—so that more people can access better jobs. This blog lays out how to design a regulatory framework that keeps pace with economic realities, one that recognizes labor and product markets are interconnected, fits country conditions, and adjusts as the economy changes.

Coordinated: It takes two markets to make good jobs

Policies like minimum wages or hiring and dismissal rules matter. But if we only focus on labor rules alone, we overlook the market forces that determine whether firms grow in the first place. We miss half the story. Regulations that shape competition, govern the behavior of incumbents, or determine who can enter a market, influence whether businesses innovate, whether productive firms expand, and whether low-productivity firms exit. When firm dynamism stalls, job creation stalls with it.

Because labor and product markets constantly interact, tweaking one without the other often leads to disappointing results. Take a reform that opens product markets to more competition and makes it easier to start a business. Over time, that usually means more innovation, more growth, and more jobs. But in the short run, it can also disrupt existing firms and displace workers. Pairing such reform with labor policies that help people navigate the transition—through training, job matching, or temporary income support—can make the overall benefits larger, more inclusive, and more politically sustainable.

Successful reform recognizes this interplay—designing policies across both markets so they reinforce rather than undermine each other.

Contextualized: One size doesn’t fit all—and never has

Thinking holistically is essential, but it is not enough. Regulations must also reflect the structural and institutional realities of each country.

A policy that boosts jobs in a wealthy country can fall flat in a low-income one, where most people aren’t employed by large firms but by tiny shops, family businesses, or informal work. Traditional labor regulations—like minimum wages, limits on working hours, or dismissal protections—simply don’t reach many of these workers. And even when strong rules exist on paper, weak enforcement often means they make little difference in practice.

In highly informal economies, regulations may operate more as signals than enforceable protections. This helps explain why copying models from high-income countries often fails: Institutional capacity, labor market structures, and political dynamics vary too widely.

Dynamic: Rules must evolve—because economies do

Labor markets are also changing quickly. Technology, climate pressures, demographic shifts, and shocks like COVID-19 have reshaped the world of work—from the kinds of jobs available to the way people carry them out. Static regulatory frameworks—those that remain unchanged despite shifts in the economic environment—risk locking economies into low productivity, slow reallocation, and stagnant wages.

Dynamic regulation means routinely checking whether rules still achieve their goals and recalibrating them when they don’t. Just as central banks adjust interest rates when economic conditions shift, governments should periodically review minimum wages, dismissal rules, and competition policies. These are not “set-and-forget” decisions.

Dynamic systems also learn. They absorb new evidence, adapt to political and economic changes, and correct course when needed. This does not mean an endless cycle of reforms. It means building the institutional agility to act at the right moment — making regulation responsive rather than reactive.

Better data, better policy: What once was hard is now within reach

Coordinated, contextualized, and dynamic regulatory packages may seem demanding, but they can dramatically improve policy effectiveness and reduce unintended consequences. What once seemed administratively out of reach is now increasingly possible: Governments can fine-tune regulations with far better information about how labor markets are changing.

That’s where labor market observatories come in as a new way of aggregating and tracking key evolutions like firms’ vacancies, workers’ skill compositions, and seasonal fluctuations in employment levels.  Advances in administrative data systems, digital labor platforms, and real-time analytics now give policymakers stronger insights into labor market trends and the ability to respond with greater precision and confidence.

The most effective observatories monitor trends, flag risks, and guide timely adjustments to regulations. By tracking employment, firm behavior, and wage developments across sectors, they help identify where labor demand is rising, where disruptions are emerging, and where policies may be misaligned. They also reveal how different groups—such as youth, women, or informal workers—are affected, enabling more targeted and inclusive responses. Spain’s – SEPE Employment and Occupations Observatory or Ireland’s Skills & Labour Market Research Unit (SLMRU) are good examples. Indonesia’s labor market information and skills system also stands out as an emerging good practice example from a middle-income country.

When grounded in real-time data, strong institutions, and clear policy priorities, regulation can play a powerful role in making labor markets more resilient, more inclusive, and better prepared for the future.

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This blog is the second in our series on labor and product market regulation and draws on a recent discussion paper published as Carranza, Eliana; Packard, Truman; Saliola, Federica. Regulating Markets So More People Find Better Jobs.  Social Protection & Jobs Discussion Paper; No. 2502. © World Bank. http://hdl.handle.net/10986/42833. The first blog in the series summarized findings from a review of 199 studies on labor and product market regulation.