Are rigid labor regulations driving greater computer usage?

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A handful of studies that address this question have answered in the affirmative. In theoretical work, Alesina and Zeira (2006) and Blanchard and Philippon (2006) argue that rigid labor laws may encourage firms to substitute labor with computers. One implication is that we should find greater computer usage in countries or regions that have more rigid labor laws (other implications discussed below).

Amin (2009) tests this hypothesis on 1,948 retail stores in India using data from Enterprise Surveys, a regular World Bank survey on firm performance, firm characteristics and the business climate. These data are ideally suited for answering the question at hand. The study finds that the percentage of retail stores that use computers rises by 6.2 percentage points as we move from the state with the least to the median level of rigid labor laws. This is a large effect given that only 19% of the stores in the sample use computers. The theoretical predictions mentioned above are therefore confirmed.

Why is this relationship between computers and labor regulation important? One can think of at least three reasons. First, the negative effect of labor laws on employment found in a number of studies could be magnified if firms are easily able to substitute labor with computers (Card et al. 1999). Second, it is easier to substitute labor with computers in jobs that can be automated. These are the relatively low paying and unskilled jobs. Thus, stricter labor laws may lead to a more perverse distribution of income when cheap computers are at hand.

And third, if stricter labor laws are driving greater computer usage then the predicted relationship between efficiency and computer usage (subject of much debate) may not hold in the aggregate. That is, to properly understand the computers/productivity relationship one needs to distinguish between the motive of saving labor because of labor regulations and the motive of enhancing efficiency through computer usage. To what extent these effects hold remains to be empirically ascertained - an important task given that the use of computers and other modern devices is fast spreading across the globe.


Mohammad Amin

Private Sector Development Specialist

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