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Privatization and labor force restructuring around the world, Volume 1
Author:Chong, Alberto; Lopez-de-Silanes, Florencio; Date Stored:2002/10/12
Document Date:2002/09/30Document Type:Policy Research Working Paper
SubTopics:Environmental Economics & Policies; Financial Crisis Management & Restructuring; Banks & Banking Reform; Labor Policies; Municipal Financial Management; Health Economics & FinanceLanguage:English
Report Number:WPS2884Sub Sectors:General public administration sector
Collection Title:Policy, Research working papers ; no. WPS 2884Volume No:1

Summary: Some critics of privatization argue that poor labor force restructuring is a key concern and that governments should establish better retrenchment programs. Using new data from a sample of 400 companies in the world, Chong and Lopez-de-Silanes test competing theories about the wisdom of retrenchment programs and their effect on prices paid by buyers, and rehiring policies by private owners after privatization. The results show that adverse selection plagues retrenchment programs carried out by governments before privatization. Controlling for endogeneity, several labor retrenchment policies yield a negative impact on net privatization prices. In confirmation of the adverse selection argument, various types of voluntary downsizing lead to a higher frequency of rehiring of the same workers by the new private owners. Compulsory skill-based programs are the only type of program that is marginally associated with higher prices and lower rehiring rates after privatization, but the political and economic costs of this policy may make it somewhat impractical. While a qualified non-intervention policy appears to be the safest bet in labor retrenchment before privatization, another one might be to set up a social safety net or labor reallocation program before privatization, and then let the new private owners decide who is redundant and who is not. Setting up the program before privatization may help with the political viability of the process and letting the new owners manage the retrenchment may help avoid adverse selection.

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