Better business regulations create jobs

The World Bank’s annual Doing Business assessment was released today with some important claims regarding the impact of regulatory reform on job creation. There has been much debate over the years about the significance of the link between good business regulation and economic growth, and this year’s report is a further contribution.

This year’s report, Doing Business in 2018; Reforming to Create Jobs, describes a strong and direct link between good business regulation and job creation.

While a range of other factors affecting this relationship are acknowledged, including limitations to the evidence on the causality of this association, the authors suggest ‘there is a significant positive association’ between employment growth and regulatory improvement. The closer an economy gets to best the performing indicators, in what Doing Business calls the ‘frontier’ of regulatory reform, the greater the jobs: economies with better business regulation tend to be the economies that are creating more job opportunities.

Doing Business in 2018 is the 15th in a series of annual reports measuring the regulations that enhance business activity and those that constrain it. It presents quantitative indicators on business regulations and the protection of property rights that can be compared across 190 economies over time.

Doing Business measures regulations affecting 11 areas of the life of a business. Ten of these areas are included in this year’s ranking on the ease of doing business:

  1. Starting a business
  2. Dealing with construction permits
  3. Getting electricity
  4. Registering property
  5. Getting credit
  6. Protecting minority investors
  7. Paying taxes
  8. Trading across borders
  9. Enforcing contracts
  10. Resolving insolvency.

The indicators (which are current as of June 1, 2017) are used to analyse economic outcomes and identify what business regulation reforms have worked, where and why. Some 3,180 regulatory reforms are recorded.

When describing the positive associations between better business regulations and job creation, the authors also report that economies with poorer, ‘less streamlined business regulation’ are also associated with higher levels of unemployment on average. In fact, a one-point improvement in the ‘distance to the frontiers’ core is associated with a 0.02 percentage point decline in unemployment growth rate.

Furthermore, the report presents data showing a strong association between inequality, poverty and business regulation: economies with better business regulation have lower levels of poverty on average. A ten-percentage point improvement in the distance to frontier is associated with a two-percentage point reduction in poverty.

This is somewhat consistent with debates surrounding the link between business regulation and economic growth. In their 2006 paper Regulation and Growth, Djankov, McLiesh and Ramalho presented data suggesting that countries should prioritise business regulation reform when designing economic growth policies. While many of the conventional measures used in the growth literature describe the extent of the problems, the Doing Business indicators are ‘directly linked to specific reforms’. They claim that the relationship between more business-friendly regulations and higher growth rates is consistently significant, suggesting that reforms that shift an economy from the worst to the best quartile of business regulations would produce a 2.3 percentage point increase in average annual growth.

Growth does not always translate into jobs, so the links presented in the latest Doing Business report in significant.

Doing Business also measures labour market regulation, but does not include this indicator in its rankings. However, it used to do this. The links between labour market regulation and job creation is particularly contested. In earlier editions, Doing Business argued the case for the deregulation of labour markets, suggesting labour flexibility and reduced costs of employment would improve the ability of firms to hire new staff. However, this was hotly contested (for example, see Berg and Cazes 2008 Policymaking Gone Awry: The Labour Market Regulations of the Doing Business Indicators). These days Doing Business assessments adopt a more nuanced approach and do not include labour market regulation in its rankings.

There is a much larger critique on the Doing Business assessments, some of which I covered a few years ago (also see this and this). However, I remain a supporter. While there are significant limitations to the methodology it employs, Doing Business is a successful instrument for profiling and debating the role a better business environment plays in supporting economic growth and job creation.

Some related posts:

Supporting Local and Regional Business Environment Reforms

Evidence assessments: the impact of business environment reform

Formalising the informal economy

See more about me and my work.

2 comments

  1. But how do you explain China? No economy has made more progress creating absolute jobs and stunning economic growth. But the business environment as rated in Doing Business is very low. Rwanda and Kyrgz Republic rank higher. But do their economic performances really compare to China’s? Something seems amiss.

    1. It’s true, China has experienced very fast growth, without what might be considered a ‘conducive’ business environment in the terms I describe it. I think this suggests that growth is not only based on a good business environment. If only it were so simple. Could a better business environment improve China’s growth? I honestly don’t know. I know the Rwanda case well and while they have improved their business environment significantly (at least in terms of the Doing Business measures), they have not witnessed high levels of growth. Being a small, landlocked economy with a very under-developed private sector has a large part to play in this dynamic. So, I don’t ignore the major role markets play. However, I am sure that Rwanda’s reforms have improved its prospects in the eyes of private investors. I also think these reforms have attuned government more to the needs of the private sector and helped it to respond to these. Overall, I’d highlight that markets drive investment opportunities, but there are a wide range of factors that affect this is done. The kinds of business environment reforms that will help China are likely to be different to those that would help Rwanda. This is not a case of one-size-fits-all. Thanks for your comment!

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