Journal of Development Studies,
Vol. 45, No. 9, 1513–1525, October 2009
Privatised Firms and Labour Outcomes in
Emerging Markets
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ALBERTO CHONG* & GIANMARCO LEON**
*Inter-American Development Bank, Washington DC, USA, **University of California, USA
Final version received October 2008
ABSTRACT A recent large firm-level dataset is analysed to compare labour indicators of
privatised, private, and public firms around the world, in particular differences relating to wages,
benefits, labour composition, education and training, unionisation, and quality of management.
We find that labour productivity and the ratio of permanent to temporary workers increase after
privatisation.
I. Introduction
Empirical evidence suggests that labour productivity tends to rise following
privatisation, but the reasons for this are unclear. Critics of privatisation argue
that employment reductions are the crucial means of driving up productivity, and
thus, profitability. While the scant available evidence indicates that labour cost
reductions are a source of the gains after privatisation, these savings explain less
than half of the higher observed profitability (La Porta and López-de-Silanes,
1999). Increasing labour productivity may not necessarily involve job cuts
exclusively, and even when it does there may be other productivity enhancing
measures to be taken also, as labour cost reductions may also come from lower
wages and benefits.1
Whereas most of the literature on the impact of privatisation focuses on firm
performance (Megginson and Netter, 2001; Chong and López-de-Silanes, 2005;
Cook and Uchida, 2008) there is practically no research on the link between
privatisation and labour outcomes, in particular, from a cross-country perspective.
In fact, while most of the very few existing studies on labour outcomes after
privatisation focus on wages and the quality of the managers there are several critical
issues that remain unanswered. For example, the rise in the average wage depends on
the composition of the dismissed workers. If the dismissed workers were those with
Correspondence Address: Alberto Chong, Research Department, Inter-American Development Bank, 1300
New York Ave., NW, Washington, DC 20577, USA. Email: [email protected]
An Online Appendix is available for this article which can be accessed via the online version of the journal
available at www.informaworld.com/fjds
ISSN 0022-0388 Print/1743-9140 Online/09/091513-13 ª 2009 Taylor & Francis
DOI: 10.1080/00220380902935899
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1514 A. Chong & G. Leon
fewer qualifications, and lower wages, the average wage will go up. However, if
skilled workers are more likely to be dismissed average wages (for this reason) should
fall. Blue-collar workers actually appear to fare better than their white-collar
counterparts; some recent evidence indicates that it cannot be concluded that
unskilled workers fared worse than skilled labour as a result of privatisation (Chong
and López-de-Silanes, 2006). Thus, this paper offers a more detailed analysis on
labour effects of privatisation not only in terms of composition, but also in regards
to education and training, and unionisation.
The implications of labour effects for profits are not clear-cut. The fraction of
profitability changes that may be attributed to labour cost savings encompasses the
lower costs stemming from layoffs and the higher costs from wage increases for the
remaining workers. There is evidence that pay differentials tend to increase, partly in
response to labour market conditions and especially to attract and provide incentives
in the recruitment and retention of both experienced and skilled professionals and
managers (World Bank, 2005). At the same time, it is said that privatisation tends to
produce ‘flatter’ organisations, removing layers of middle management as labour
contracts tend to be simplified, and often allowing managers to deploy workers in
more flexible ways. Workers and unions are generally concerned that a focus on
profit and financial performance by the private operator, following privatisation, will
lead to deterioration of working conditions because of unwarranted intensification
of work following privatisation, which may be expected in the context of increasing
productivity. Thus, the impact on working hours may involve increasing them
(World Bank, 2005). Additionally, there may be an erosion of national level
collective bargaining, with a shift to enterprise level bargaining or individual pay
determination, a trend intensified by the increased use of sub-contractors. Finally,
pay systems may change after privatisation, as new managers will seek to relate
earnings more directly to productivity performance. Privatisation may have
compositional effects on the labour force and hurt unskilled workers disproportionately (World Bank, 2005).
In this paper we focus on a broad set of labour outcomes in privatised
firms for a very large cross-section of firms mostly from emerging markets around
the world, and analyse the differences between private, public and privatised
firms. In particular, we study whether differences, if any, are structural and
whether convergence occurs (that is, do privatised firms converge to the
outcomes observed in private firms). The specific focus is on wages, benefits,
labour composition, education and training, unionisation, and quality of
management.2
While there is some theoretical work on the link between privatisation and labour
outcomes (Haskel and Szymansky, 1992) to our knowledge this is the first crosssection paper at the firm level that deals with this issue that provides empirical
evidence in a systematic manner.3 Furthermore, the country-specific empirical
evidence available is limited and focuses almost exclusively on the impact on
employment and wages of specific sectors. For instance, Monteiro (2003) argues that
wages of the workers in the Portuguese banking sector follow a non-monotonic
pattern after privatisation: at first wages decrease, but later they recover and
converge to the private sector level. Similarly, Chong et al. (2008) find that in Peru
initially there is a negative effect of privatisation on wages, but later they recover to
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Privatised Firms and Labour Outcomes 1515
private sector levels. They also find that various measures of quality of the work
environment converge toward the standards of the private sector.4
Djankov and Murrell (2002) argue that the literature on the effects of changes in
managers suffers from endogeneity with respect to privatisation as new owners pick
new managers, and the effect of management change is confounded with ownership
change, especially when the new owners themselves are the new managers. For
example, the retail shops studied in Barberis et al. (1996) are in many cases
manager-owned. Even for midsize and larger enterprises, managers may be also
owners (Kuznetsov et al., 2002) and hence lose their jobs when there is ownership
change. According to Classens and Djankov (1999) the privatisation process in the
Czech Republic prevented incumbent managers from obtaining ownership. Thus,
management changes were separated from ownership change. Labour productivity
growth increases by 4.2 per cent with the appointment of a new manager in
privatised enterprises. The appointment of new managers in state-owned
enterprises yields a 3.5 per cent increase in labour productivity growth. Similarly,
Frydman et al. (1999) use a sample of state-owned and newly privatised enterprises
in the Czech Republic, Hungary, and Poland to study management turnover and
its effect on the annual rate of revenue growth during the period 1991 to 1993.
They show that the turnover rate was high as almost two thirds of managers left.
In state-owned enterprises, management turnover is statistically insignificant but in
privatised enterprises the effect is large at about 18 per cent. For the case of
Ukraine, Warzynski (2001) finds that management turnover does not affect the
change in productivity in state-owned enterprises, but has a small positive effect in
privatised enterprises. Djankov and Murrell (2002) find that manager incentives
and turnover, considered together, are an important determinant of restructuring.
Separately, manager turnover and manager incentives also have significant effects
on restructuring.
There is also relevant literature at the country level for transition economies on the
role of managers on productivity changes during privatisation. Groves et al. (1995)
use a sample of Chinese state-owned enterprises (SOEs) to investigate the link
between manager turnover and productivity growth, and find that the economic
benefit of replacing bad managers is high as new managers bring about a 16 per cent
increase in labour productivity.5 Although these were public sector firms, the
Communist Party exercised control over pay and promotion so incentives for
managers were imposed (by the Party rather than the market), even if Party members
were more likely to get jobs and received a pay premium. Although China has not
implemented privatisation as conventionally defined, since the time of the study there
has been considerable reform: the private sector has increased and SOEs are more
market-oriented, so that managers have greater autonomy for example. Nevertheless, the wage premium from Communist Party membership has increased,
especially for less skilled workers, in line with a general increase in pay differentials
(Appleton et al., 2009). The tendency for pay differentials to increase can weaken any
link between privatisation and labour productivity.
The paper is organised as follows. The next section describes the data employed,
namely recently released firm data from the World Bank for a large number of
countries. The third section provides our empirical analysis. The fourth section
studies convergence patterns between privatised and private firms. The fifth section
1516 A. Chong & G. Leon
focuses on the role of institutions. Finally, the sixth section summarises and
concludes.
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II. Data
Our main data source is the Productivity and Investment Climate survey from World
Bank (2006). This comprehensive firm-level survey covers several thousand business
establishments in about 75 countries around the world; the main objective of this
survey was to provide governments and private sector agents with quantitative data to
allow an adequate assessment of the business environment and firm performance in an
internationally comparable data set. The main focus of the survey is on the
microeconomic and structural dimensions of the business environment in a country.
Thus, the surveys provide considerable detail on factors related to the effective
functioning of product markets, financial and non-financial factor markets, and
infrastructure services, including weaknesses in the legal, regulatory, and institutional
frameworks. The data also include questions on the characteristics of the business and
the investment climate in which it operates including: general information about the
firm, such as ownership, activities, location, sales and supplies, investment climate
constraints; infrastructure and services. With respect to labour relations the survey
includes wages, compensations, the skills of workers, the status and training;
availability of skills; unionisation, business–government relations and several others.
Our most complete sample includes 35,262 firms for 75 countries, with many
African, Latin American and Eastern European countries (see Table 1), which
comprise the regions where privatisation was pursued more actively.6 Some five per
cent of the interviewed firms were involved in a privatisation process (about the same
percentage are state owned firms). While some countries have privatised much more
Table 1. Distribution of firms in sample by ownership status, industrial sector, and region
Private
Industrial sector
Manufacturing
Services
Agro industry
Construction
Other
Total
Region
Africa
East Asia Pacific
Europe and Central Asia
Latin America and the
Caribbean
Middle East and North Africa
South Asia
Total
Privatised
Government
Total
%
No.
%
No.
%
No.
%
No.
91.2
83.5
86.3
81.7
69.1
89.0
23292
6237
466
1292
96
31383
4.4
5.8
5.0
9.4
19.4
5.0
1124
432
27
148
27
1758
4.4
10.7
8.7
8.9
11.5
6.0
1120
797
47
141
16
2121
72.4
21.2
1.5
4.5
0.4
100.0
25536
7466
540
1581
139
35262
89.4
84.8
82.0
99.0
2450
6291
9796
4933
5.5
2.2
10.8
0.6
152
165
1291
31
5.0
12.9
7.2
0.4
138
960
857
19
7.8
21.0
33.9
14.1
2740
7416
11944
4983
96.8
96.7
89.0
3039
4874
31383
0.8
1.9
5.0
25
94
1758
2.4
1.4
6.0
76
71
2121
8.9
14.3
100.0
3140
5039
35262
Privatised Firms and Labour Outcomes 1517
than others, the overall numbers are consistent with the percentages of privatised
firms around the world when using other sources (World Bank, 2006). The Online
Appendix provides further detail, including a full definition of variables, mean values
and correlation measures among the variables employed.
III. Empirical Approach
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In order to study the possible effect of privatisation on a relatively wide variety of
labour outcomes our empirical analysis is based on a parsimonious but reasonably
comprehensive approach. We estimate an empirical specification of the form:
yijkt ¼ aijkt þ b1 privijkt þ b2 privatijkt þ b2 salesijkt þ uj þ nk þ eijkt
ð1Þ
where yijkt is an outcome variable of firm i, belonging to industry k, in country j,
interviewed in year t. In this context, privijkt (private) and privatijkt (privatised) are
our variables of interest. The former is defined as a dummy variable which takes the
value of one when the firm’s largest shareholder is an individual, family, domestic
company, foreign company, bank, investment fund, the managers, or the employees
of the firm. On the other hand, a privatised firm is defined as one that used to be
owned by the government at some point but that at the time of the survey the largest
shareholder was a private firm, where such a firm is defined as above. Governmentowned enterprises are used as the base category. The variable salesijkt is the natural
logarithm of the total sales during the last fiscal year in real thousand dollars, to
control for the effects of the size of the firm on labour outcomes.7 We also include
country, industry, and year fixed effects, which are represented by the terms uj, vk
and mt, respectively, and eijkt is an error term. Unlike other firm-level surveys, the
Investment Climate dataset includes an industry categorisation based on the threedigit ISIC codes.8 As mentioned above, this allows us to control for effects due to
particular industry structures or productivity differences across industries. The case
of the natural monopolies in public services provides a good example of the need to
control for particular industry effects. As is well known, when private firms take care
of public utilities, regulatory issues are crucial as the lack of competitors and the
regulatory burden may have an impact on prices and the make up on the contractual
arrangements of the factors of production, in particular, human capital.
Furthermore, the performance of privatised utilities tends to differ from privatised
firms in other sectors (Cook and Uchida, 2008).
It may be argued that endogeneity poses a problem in the empirical approach of
this paper. For example, the existence of any labour streamlining activity may signal
that the firm is in bad shape. The privatisation decision of a firm that is being
streamlined may be linked not to the streamlining activities themselves, but because
such reform is pursued precisely when firms are inefficient and unprofitable in the
first place. If this effect is not controlled for, an incorrect inference that labourrestructuring ‘causes’ (or ‘precedes’) privatisation could be drawn. A particular
example is when governments try to restructure the labour force of state-owned
enterprises before sale in order to raise the privatisation price. The resulting sign on
privatisation may be a reflection that firms in bad shape are downsizing labour. For
instance, if the unobservable characteristics of a firm are positively correlated with
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1518 A. Chong & G. Leon
the presence of strong unions and frequent strikes, the government may be
particularly interested in reducing union power.
Such endogeneity does not appear to be of great concern in this paper for
several reasons. In most cases in our sample, privatisation occurred more than 10
years before the firm was surveyed (the average number of years after privatisation
that the survey was taken is 9.7 years, see Online Appendix Table A2).
Furthermore, privatisation processes are typically embedded in the context of a
much larger reform process; the decision to privatise may not depend on particular
characteristics of a firm, but rather on a country-level political decision. In this
context, it is reasonable to believe that labour outcomes, or workers’ characteristics, will not affect the decision to pursue privatisation. This is particularly true in
emerging markets where most of the privatisation processes pursued by
governments have been at a broad national level and, essentially in all cases, the
decision to privatise has come from an overriding political decision in the context
of structural reforms (Chong and López-de-Silanes, 2005). Given the fact that our
sample size consists of mostly emerging markets we believe the argument above is
reasonably solid.9 Even under the assumption that the endogeneity concern raised
above is relevant, most of the labour variables employed as dependent variables
are very unlikely to be affected.
IV. Findings
Table 2 shows results when using our benchmark specification (1) for a broad set of
labour outcomes. In the first column we show the set of labour outcomes used as
dependent variables, while the remaining columns report the estimated coefficients of
the independent variables. Our variables of interest are the dummies for both private
and privatised firms, with government-owned enterprises as the base (omitted)
category.
In line with the recent literature surveys (Megginson and Netter, 2001; Djankov
and Murrell, 2002; Chong and López-de-Silanes, 2005), we find evidence of
improved performance in both private and privatised firms in terms of productivity,
which is significantly higher than that of state-owned firms. Interestingly, when
testing the differences in labour productivity, as measured by the ratio of total wages
and compensations to total gross sales, we find a statistically significant difference
between firms. Interestingly, labour productivity of permanent workers differs by
type of firm, whereas the productivity of temporary workers is similar across firms.
That is, for a given level of wages and compensations to permanent workers, total
sales and benefits are higher in both private and privatised firms, when compared to
the state-owned enterprises. Notice that the productivity of permanent workers
appears to be higher in private firms than in privatised ones, which confirms previous
findings in the literature.
However, this result does not hold in the case of temporary workers. The
liberalisation of labour markets and the simplification of contracts in developing
countries provided incentives for firms to attract the most experienced and skilled
workers, while the low skilled tasks were – in most cases – performed by temporary
workers. The difference in the incentive schemes in private and privatised firms for
temporary and permanent workers may explain our findings.
(0.102)
(0.049)
(0.091)
(0.113)
70.992 (1.231)
0.412 (0.770)
0.498 (71.312)
1.139 (1.933)
71.971 (1.970)
0.081 (0.028)***
0.043
0.043
0.098
0.132
70.078 (0.018)***
70.008 (0.016)
Private
(0.120)
(0.102)
(0.105)***
(0.155)
2.111 (1.161)*
5.588 (0.930)***
75.481 (1.210)***
71.204 (1.556)
73.329 (1.485)**
0.064 (0.024)**
0.034
70.063
0.308
0.082
70.032 (0.014)**
0.001 (0.015)
Privatised
(0.017)***
(0.018)***
(0.017)***
(0.018)***
0.345 (0.073)***
70.801 (0.189)***
0.968 (0.204)***
2.732 (0.471)***
1.783 (0.314)***
70.004 (0.002)**
0.061
0.107
0.159
0.068
70.034 (0.005)***
70.010 (0.002)***
Log(Sales)
17839
34751
24779
15518
11233
24196
2619
9873
6955
3939
15595
4021
Obs.
0.02
0.33
0.13
0.03
0.02
0.08
0.32
0.58
0.42
0.79
0.27
0.09
R2
Note: The dependent variables are shown in the first column, as the control and interest variables are shown in the next columns. All results come
from country fixed effects regressions using industry and year dummies. We also control for the log of total sales in the previous fiscal year.
Heteroskedasticy robust standard errors are corrected for clusters at the industry and country levels in all cases (shown in parentheses).
*significant at 10 per cent; **significant at 5 per cent; ***significant at 1 per cent.
Productivity
Total wages and comp. (perm. workers)/Total sales
Total wages and comp. (temp. workers)/Total sales
Average wages
Log(Average wages and compensations temp. workers)
Log(Average wages perm. workers)
Log(Average wages perm. workers (managers))
Log(Average wages perm. workers (prod. workers))
Composition of the workforce
Temp. workers/Perm. workers
Training
% perm. skilled emp. received training
% perm. unskilled emp. who received training
Education of the workforce
% of workforce with fewer than 12 yrs. educ.
% of workforce with more than 12 yrs. educ.
Quality of the top manager
Years of exp. of the top manager in the field
Dependent variables
Independent variables
Table 2. Does privatisation make a difference in labour outcomes?
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Privatised Firms and Labour Outcomes 1519
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1520 A. Chong & G. Leon
Somewhat surprisingly, the observed difference in labour productivity between
permanent workers is not reflected in average wages. In fact, when focusing our
analysis on the wage structure, it is clear that, on average, privatised firms tend to
pay higher wages to their managerial staff than government owned and private firms,
whereas there are no significant differences in the average wages to unskilled or
production workers. It is believed that pay differentials tend to increase when
privatisation processes take place, partly in response to labour market conditions
and especially because privatised firms try to attract and provide incentives in the
recruitment and retention of both experienced and skilled professionals and
managers (Kikeri, 1999; World Bank, 2005). First, the pay-scale constraints imposed
by public sector employment laws are relaxed; and second, privatised firms tend to
invest more widely in the managerial sector, in order to restructure the firm and
catch up with organisational structures of the private sector.10
It is argued by critics that privatisation brings a significant reduction in the
number of workers, as well as job security (Feffer, 2005). The main argument is that
the new jobs in privatised firms are offered mostly through temporary contracts, and
this would be particularly true in the case of unskilled workers. This type of contract
tends to be more flexible in terms of firing and hiring, but also implies a significantly
lower burden for the firm in terms of social protection and effective compensations
to workers. We further analyse this issue by using the ratio of temporary to total
workers as a dependent variable. The results in Table 2 show that both private and
privatised firms take more advantage of labour liberalisation than the public sector,
hiring significantly more temporary workers as a proportion of total employment.
However, privatised firms are constrained in their hiring processes to the extent that
they inherit labour contracts from the public companies (changing these would be
difficult and/or slow). This restriction is illustrated by the magnitude of the
coefficients found, which show that private firms have, on average, a higher
proportion of temporary workers.
There are also some slight differences in the proportion of permanent skilled and
unskilled workers who receive job training. While we don’t find any differences in the
proportion of skilled workers who receive job training, privatised and private firms
train a smaller proportion of their unskilled workers when compared with stateowned enterprises. It has been claimed that private companies groom skilled workers
for managerial positions, while lower skilled tasks tend to be left to temporary
workers (Chong and López-de-Silanes, 2005), for whom training is assumed by the
workers themselves or non existent.
As expected, government-owned firms have much higher unionisation rates than
private and privatised firms (in the case of privatised firms the coefficients are
statistically insignificant). This may be explained by the fact that in most cases
privatised firms still have to honour some contracts and labour structures from the
time they were state-owned. Even though unionisation rates differ among types of
firms, there are no noticeable effects for the number of days of production lost due to
strikes or civil unrest. These results are explained mostly by the political trends in
developing countries, where labour liberalisation drove down unionisation rates and
labour protests were addressed through official channels, rather than in the streets.11
When it comes to the educational level of the labour force, we find some
substantial differences among type of firm. Although the workforce composition
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Privatised Firms and Labour Outcomes 1521
within privatised firms is skewed towards workers with a lower educational level we
also find that the top managers in privatised firms have significantly more work
experience. This reinforces the conventional wisdom that privatised firms attract the
most capable managerial staff in order to enhance the production processes and be
able to compete with the private sector.
The results presented in this section are robust to the inclusion of some labour law
proxies that may affect the particular environment of certain firms. Even though we
control for country and industry fixed effects, certain labour laws may have firmspecific effects (such as more frequent visits of inspectors). Online Appendix Tables
C1 and C2 include two additional variables to allow for this; the degree to which
firms perceive that labour law represents a constraint to business, and whether the
labour inspector or social security inspector has required illegal payments. The
results in Table 2 hold even after the inclusion of these variables; moreover, they are
almost never statistically significant, suggesting that most of the variation in labour
laws is captured by the country and industry level fixed effects.
V. Convergence Between Private and Privatised Firms
Why are there any differences between privatised and private firms if they both
produce under the same set of rules and incentives? A plausible explanation is that
time matters. Privatised firms cannot be transformed from one day to the next. There
may be an adjustment period after which full convergence occurs (Chong et al.,
2008). To test for this in our benchmark specification in (1), we replace the dummy
for privatised firms by another explanatory variable that captures the number of
years since the state-owned enterprise became private.12 Results are shown in Table
3. The interpretation of the coefficients is straightforward. If we obtain the same sign
for both the coefficient on the private firm dummy and the number of years since
privatisation occurred a convergence pattern is present. If both are positive, private
firms have a higher value than SOEs and the value for privatised firms increases with
years since privatisation (presumably to eventually converge with private firms). A
similar argument applies if both are negative.
We do not find evidence of convergence for labour productivity of permanent or
temporary workers. For wage composition, we find no statistically significant
differences between private, privatised or state-owned firms in terms of wages and
compensations to permanent and temporary workers. A similar finding holds for
managerial pay, so there is no evidence of convergence.
In the case of the ratio of the number of temporary to permanent workers, we find
convergence; the coefficients on private firms and years since privatisation are positive
and significant. This is consistent with the argument stated above that most of the
differences in labour outcomes are observed because privatised firms still may have to
comply with labour contracts inherited from the time when the firm was state owned.
As time goes by and these workers leave the firm, the workforce composition of
privatised firms will tend to converge towards the one observed in the private sector.
We also find that privatised firms offer less training to their unskilled workers,
compared to both state-owned and private sector firms. Interestingly, this gap tends
to increase with years since privatisation. This result may give credence to the
commonly held view that, at least in this aspect, privatisation tends to be less
1522 A. Chong & G. Leon
Table 3. Do privatised firms converge with the firms in the private sector?
Independent variables
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Dependent variables
Productivity
Total wages and comp.
(perm. workers)/Total sales
Total wages and comp.
(temp. workers)/Total sales
Average wages
Log(Average wages and
compensations temp. workers)
Log(Average wages perm. workers)
Log(Average wages perm.
workers (managers))
Log(Average wages perm.
workers (prod. workers))
Composition of the workforce
Temp. workers/Perm. workers
Training
% perm. skilled emp.
received training
% perm. unskilled emp.
who received training
Education of the workforce
% of workforce with fewer
than 12 yrs. educ.
% of workforce with more
than 12 yrs. educ.
Quality of the top manager
Years of exp. of the top
manager in the field
Private
Time since
privatisation
Obs.
R2
70.062 (0.014)*** 70.001 (0.001)
12427 0.26
70.007 (0.013)
0.000 (0.001)
4008
0.09
0.023 (0.074)
0.005 (0.006)
2611
0.32
0.054 (0.047)
70.018 (0.114)
70.004 (0.008)
0.005 (0.009)
9861
6950
0.58
0.42
0.085 (0.101)
0.003 (0.009)
3933
0.79
0.005 (0.002)**
24160 0.08
0.07 (0.028)**
1.258 (1.980)
71.496 (1.966)
70.806 (0.850)
2.031 (1.180)*
71.723 (1.129)
70.113 (0.160)
15494 0.03
70.289 (0.169)*
11211 0.02
0.361 (0.086)*** 34685 0.33
70.361 (0.095)*** 24746 0.13
0.034 (0.072)
17810 0.02
Notes: The dependent variables are shown in the first column, as the control and interest
variables are shown in the next columns. All results come from country fixed effects
regressions using industry and year dummies, we also control for the log of total sales in the
previous fiscal year. Heteroskedasticy robust standard errors are corrected for clusters at the
industry and country levels in all cases (shown in parentheses).
*significant at 10 per cent; **significant at 5 per cent; ***significant at 1 per cent.
beneficial to the more vulnerable workers, as typically they are unskilled. However, it
is unclear if this is actually the case, as we do not have information on workers that
move from a temporary to permanent status.
Finally, in terms of the educational levels of the workforce employed, we find
divergence rather than convergence. Privatised firms tend to have more
uneducated workers and fewer employees with more than 12 years of formal
education, while private firms seem to concentrate on relatively highly educated
workers. The divergence may occur because of technological differences between
types of firms. Human capital requirements may be different for newly privatised
firms as machinery and equipment for such firms are typically less capital
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Privatised Firms and Labour Outcomes 1523
intensive, due to the low levels of investment in technology in the public sector,
thus the changes in the demand for skilled workers may still be gradual. This is
consistent with some previous findings for Latin America (Chong and López-deSilanes, 2005).
Presumably, privatised and private firms competing in the same market will have
similar production technologies, and face a similar demand. Hence, according to
standard economic theory, they should behave in a similar way, or in any case
converge to the same production behaviour in the long run. Nevertheless, we still
observe that there are some areas where private and privatised firms still seem to
differ systematically, or even diverge in time. These divergences can only be
explained by factors that limit or restrict the behaviour of privatised firms relative to
private firms, such as differences in the regulatory or institutional environment in the
country. Appendix D (online) reports estimates including a measure of ‘Rule of law’
to capture the institutional environment; there is some evidence that labour markets
are more flexible, and convergence more likely, in countries that score higher for the
quality of the institutional environment.
VI. Summary and Conclusions
In this paper we study the link between privatisation and a broad set of labour
outcomes in a cross-section of firms for several emerging markets around the
world. While some studies have focused on the impact of privatisation on
employment, and to a much lesser extent wages, these tend to focus on one specific
country and in several cases yield somewhat contradictory results that stress the
need for further empirical work on a largely unexplored question. We focus on
observed labour differences between private, public and privatised firms for a very
large number of firms in many countries, and consider whether privatised firms
converge towards the levels in private firms (with tentative results on how the
institutional environment may affect convergence). The particular focus is on
wages, benefits, labour composition, education and training, unionisation and
quality of management.
We find that while labour productivity increases after privatisation, the ratio of
permanent workers to temporary workers decreases, and that convergence toward
the average labour outcome depends in some degree on the quality of the
institutions, namely, the Rule of law. This is particularly true in the case of the
ratio of temporary workers to permanent workers, the education of the workforce,
and the average wages and compensations of temporary workers.
Overall our results show that privatisation does not necessarily benefit particular
groups in the society, as critics argue. Yet, the patterns followed by privatised firms
do show that the incentive schemes provided to the private sector, along with labour
deregulation, mostly hurt unskilled workers, who receive less compensation and
training, as they end up being hired as temporary workers. This suggests that the
gains in productivity due to privatisation should be redistributed, especially trying to
provide technical training to the workforce. Finally, improvements in the
institutional framework, especially in areas related to securing property rights,
may enhance the convergence between private and privatised firms. Clearly, more
research is needed on this.
1524 A. Chong & G. Leon
Acknowledgement
Cesar Calderon, Hugo Ñopo, Anna Serrichio, Máximo Torero, and Luisa Zanforlin,
provided valuable comments and suggestions. The findings and interpretations in
this paper are those of the authors and do not necessarily represent the views of the
Inter-American Development Bank or its corresponding executive directors. The
standard disclaimer applies.
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Notes
1. Chong and López-de-Silanes (2006) provide evidence that for some Latin American countries real and
industry-adjusted wages of workers in privatised firms increased after privatisation. Both real and
industry-adjusted wages for the median firm increased by about 100 per cent in Mexico and Peru;
Bolivia enjoyed real wage increases of almost 110 per cent, while in Argentina the industry-adjusted
increase was about 70 per cent. Colombia shows the smallest increase, but even in this case workers in
privatised firms increased their wages more than others in the private sector.
2. We are not able to make a rigorous impact evaluation of workers after privatisation, as we do not
have pre- and post-privatisation data but only information on workers who stayed in firms after
privatisation.
3. Haskel and Szymansky (1992) develop a theoretical model in which the objective function of the
privatised firm focuses on profit maximisation and the minimisation of the union’s bargaining
power. Their model predicts convergence between the wages in the privatised firms and other private
firms.
4. Other relevant studies on wages and employment are Tansel (1998) who uses retrospective data for
Turkey; Galiani and Sturzenegger (2008) who focus on one single firm in Argentina; Haskel and
Syzmansky (1993) on the United Kingdom, and Brown et al. (2006) on Ukraine.
5. Poorly performing firms are more likely to have a new manager selected by ‘auction’ and such
managers are required to post a higher security deposit and are subject to more frequent performance
reviews. The incidence of turnover during the sample period of 1980 to 1989 is very high as only 11 per
cent of managers in place in 1980 remained managers by the end of the period, and almost half of
managers were appointed after 1985.
6. The complete list of countries, and the number of firms interviewed in each country are detailed in the
Online Appendix.
7. In alternative specifications we normalised this variable using number of workers. The results are very
similar and are available from the authors upon request.
8. Overall, our sample includes observations for the following industries (the number of firms in the
industry in parentheses): Textiles (2886), Leather (843), Garments (4342), Agro industry (499), Food
(3474), Beverages (837), Metals and machinery (3497), Electronics (1414), Chemicals and
pharmaceutics (2043), Construction (1523), Wood and furniture (2169), Non-metallic and plastic
materials (1679), Paper (590), Sport goods (44), IT services (670), Other manufacturing (490),
Telecommunications (164), Accounting and finance (230), Advertising and marketing (690), Other
services (933), Retail and wholesale trade (2654), Hotels and restaurants (761), Transport (720), Real
estate and rental services (433), Mining and quarrying (114), Auto and auto components (945), Other
transport equipment (76), Other unclassified (31).
9. When excluding the four countries that are not emerging market economies (Spain, Portugal, Korea,
and Ireland) and replicating all the exercises performed in this paper, the results do not change.
10. This finding is partly consistent with the conventional wisdom that the less qualified workers tend to
be losers in privatisation processes. For a number of reasons (for example, political) state-owned
enterprises tend to pay wages and benefits in excess of marginal productivity. In fact, this is
particularly true for unskilled workers (Kikeri, 1999). Privatisation may be simply adjusting payment
with marginal productivity.
11. These results are not shown in the tables for space reasons, but are available upon request to the
authors.
12. In our sample we do not have privatised firms that become state-owned firms again.
Privatised Firms and Labour Outcomes 1525
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