Does Labor Market Rigidity Matter for Economic Performance? Evidence from the Four Asian Tigers

With the increments of labor market institutions, the potential problem caused by labor market rigidity is emerging within the four Asian tigers, namely, Hong Kong, South Korea, Singapore and Taiwan. This study emphasizes the impact of labor market rigidity on economic performance in the four Asian tigers over the 1980-2010 period. Through the estimation of the aggregate production function, we find that labor market rigidity has a negative impact on output and economic growth. On the other hand, without imposing any labor market institutional adjustment that would lower the standard of labor conditions, the rises in country's competitiveness can serve as a balancing force to mitigate the negative impacts of labor market rigidity. A crucial insight for policymakers is to determine the most efficient method for giving labor effective protection without hurting economic performance.