Showing papers in "The World Bank Economic Review in 1999"

Determinants of commercial bank interest margins and profitability : some international evidence

Abstract: Using bank-level data for 80 countries in the year's 1988-95, this article shows that differences in interest margins and bank profitability reflect a variety of determinants: bank characteristics, macroeconomic conditions, explicit and implicit bank taxation, deposit insurance regulation, overall financial structure, and underlying legal and institutional indicators. A larger ratio of bank assets to gross domestic product and a lower market concentration ratio lead to lower margins and profits, controlling for differences in bank activity, leverage, and the macroeconomic environment. Foreign banks have higher margins and profits than domestic banks in developing countries, while the opposite holds in industrial countries. Also, there is evidence that the corporate tax burden is fully passed onto bank customers, while higher reserve requirements are not, especially in developing countries.

A new database on financial development and structure

Abstract: The authors introduce a new database of indicators of financial development and structure across countries and over time. This database is unique in that it unites a variety of indicators that measure the size, activity, and efficiency of financial intermediaries and markets. It improves on previous efforts by presenting data on the public share of commercial banks, by introducing indicators of the size and activity of non bank financial institutions, and by presenting measures of the size of bond and primary equity markets. The compiled data permit the construction of financial structure indicators to measure whether, for example, a country's banks are larger, more active, and more efficient than its stock markets. These indicators can then be used to investigate the empirical link between the legal, regulatory, and policy environment and indicators of financial structure. They can also be used to analyze the implications of financial structure for economic growth. The authors describe the sources and construction of, and the intuition behind, different indicators and present descriptive statistics.

Where has all the education gone

Abstract: Cross-national data show no association between increases in human capital attributable to the rising educational attainment of the labor force and the rate of growth of output per worker. This implies that the association of educational capital growth with conventional measures of total factor production is large, strongly statistically significant, and negative. These are 'on average' results, derived from imposing a constant coefficient. However, the development impact of education varied widely across countries and has fallen short of expectations for three possible reasons. First, the institutional/governance environment could have been sufficiently perverse that the accumulation of educational capital lowered economic growth. Second, marginal returns to education could have fallen rapidly as the supply of educated labor expanded while demand remained stagnant. Third, educational quality could have been so low that years of schooling created no human capital. The extent and mix of these three phenomena vary from country to country in explaining the actual economic impact of education, or the lack thereof.

Genuine Savings Rates in Developing Countries

Abstract: In this paper, genuine savings rates in developing countries, a formal model of green national accounting demonstrates that 'genuine' saving, net saving less the value of resource depletion and environmental degradation, is a useful indicator of sustainability. Country-level and regional calculations of genuine savings are presented for the period 1970-1993. Sub-Saharan Africa stands out as the region where the greatest dissipation of wealth is occurring. After developing the basic theory of genuine savings, this paper presents empirical estimates for developing countries. These calculations account for resource depletion and carbon dioxide emissions, using consistent time series data for the period 1970-93. The paper concludes with a discussion of the policy issues raised by greener national accounting.

Foreign investment and productivity growth in Czech enterprises

Abstract: This article uses firm-level data for the Czech Republic to show that during 1992-96 foreign investment had the predicted positive impact on total factor productivity growth of recipient firms. This result is robust to corrections for the sample bias that arises because foreign companies tend to invest in firms whose initial productivity is above average. Together, joint ventures and foreign direct investment appear to have a negative spillover effect on firms that do not have foreign partnerships. However, with foreign direct investment alone, the magnitude of the spillover becomes much smaller and loses significance. This result, in conjunction with the fact that joint ventures and foreign direct investment account for a significant share of total output in many industries, suggests that further research is required to determine the extent of knowledge diffusion from firms that have foreign links to those that do not.

Circumstance and Choice: The Role of Initial Conditions and Policies in Transition Economies

Abstract: The experience of countries in transition from a planned to a market-oriented economy has varied greatly. The clearest differences are between the East Asian countries, China and Vietnam, and the countries of Central and Eastern Europe (CEE) and the former Soviet Union (FSU). China and Vietnam have contained inflation and benefited from continued high growth in GDP since the beginning of their reforms, while all CEE and FSU countries have experienced large declines in output, and most have experienced hyperinflation. But even in CEE and the FSU, differences are marked. Some countries have lost over half of their GDP, and growth performance in a number of countries is still poor, while others are growing strongly. Some are still suffering from high inflation while others have successfully reduced annual inflation. What determines this divergence of outcomes across transition countries? No study so far has analyzed the interaction of all factors, including initial conditions, political change, and reforms, in a unified framework including CEE, the FSU, China, and Vietnam. The authors examine these broader interactions, but focus first on the role of initial conditions, such as initial macroeconomic distortions and differences in economic structure and institutions, which have been emphasized less in the literature. They find that initial conditions and economic policy jointly determine the large differences in economic performance among the 28 transition economies in the sample. Initial conditions dominate in explaining inflation, but economic liberalization is the most important factor determining differences in growth. But reform policy choices are not exogenous. They depend, in turn, on both initial conditions and political reform, with political reform the most important determinant of the speed and comprehensiveness of economic liberalization. Other findings provide additional insight into these relationships. Results show that liberalization has a negative contemporaneous impact, but a stronger positive effect on performance over time. The results also show that macroeconomic and structural distortions are negatively related to both policy and performance. Regarding the former, unfavorable initial conditions discourage policy reforms but do not diminish their effectiveness once they are implemented. The authors find some evidence that the influence of initial conditions diminishes over time. This is in part because many of the initial conditions are themselves modified in the course of transition. Monetary overhangs are dissipated through inflation, industrial overhang is eroded as plants shut down, and market memory returns through experience.

Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico

Abstract: This article offers an alternative to the traditional dualistic view of the relationship between formal and informal labor markets. For many workers inefficiencies in formal sector protections and low levels of labor productivity may make informal sector employment a desirable alternative to formal sector employment. The analysis offers the first study of worker transitions between sectors using detailed panel data from Mexico and finds little evidence in favor of the dualistic view. Traditional earnings differentials cannot prove or disprove segmentation in the developing-country context. The patterns of worker mobility do not suggest a rigid labor market or one segmented along the formal and informal division.

Household Income and Child Schooling in Vietnam

Abstract: The stronger are the associations between household income and child schooling, the lower is intergenerational social mobility and the less equal is opportunity. This study estimates the associations between household income and children's school success in Vietnam. The estimates indicate that these associations are considerable. This article also investigates some ways in which policies relate to household incomes. School fees are progressive, but school fees are only about one-third of what households pay directly to schools and are a much smaller proportion of a household's total school-related expenditures. Total household expenditures paid directly to schools increase with household income less proportionately than do school fees alone, so the overall structure of such payments is less progressive than is the structure of school fees. Because school enrollment is positively related to household income, moreover, the structure of school fees is less progressive for the entire population than for the selected subset that has children enrolled in school. Further, the two school quality measures that have the strongest positive association with children's school success are much more available to higher-income households, meaning that higher-income households have greater school expenditures in part because they are obtaining higher-quality schooling and not because charges for the same quality schooling are progressive across income classes.

How trade patterns and technology flows affect productivity growth

Abstract: Earlier studies of spillovers from international research and development (RD often both are present. Third, in the author's sample of industrial countries, international trade contributes about 20 percent of the total effect on productivity from foreign R&D investments. The author conjectures that this effect could be higher for less industrialized countries importing from OECD countries, but stresses that alternative mechanisms (such as foreign direct investment) should be included when estimating the effects of international trade in the international diffusion of technology.

Do Community-Managed Schools Work? An Evaluation of El Salvador's EDUCO Program

Abstract: This article examines how decentralizing educational responsibility to communities and schools affects student outcomes It uses the example of El Salvador's Community-Managed Schools Program (Education con Participation de la Comunidad, EDUCO), which was designed to expand rural education rapidly following El Salvador's civil war Achievement on standardized tests and attendance are compared for students in EDUCO schools and students in traditional schools The analysis controls for student characteristics, school and classroom inputs, and endogeneity, using the proportion of EDUCO schools and traditional schools in a municipality as identifying instrumental variables The article finds that enhanced community and parental involvement in EDUCO schools has improved students' language skills and diminished student absences, which may have long-term effects on achievement

Benefit Incidence, Public Spending Reforms, and the Timing of Program Capture

Abstract: Assessments of the distributional effects of public spending reforms have generally been based on average rates of program participation by income or expenditure group. This practice can be deceptive because the socioeconomic composition of participants can change as a social program expands or contracts. The geographic variation found in 1993-94 household survey data for rural India is used to estimate the marginal odds of participating in schooling and antipoverty programs. The results suggest early capture of these programs by the non-poor. It is shown that conventional methods for assessing benefit incidence underestimate the gains to the poor from higher public outlays and underestimate the losses from cuts.

Flight Capital as a Portfolio Choice

Abstract: The authors examine flight capital in the context of portfolio choice. They estimate the stock of flight capital held abroad and compare it with the stock of real (nonfinancial) capital held within each country. For 51 countries they construct estimates (as of 1990) of private domestic capital and flight capital - which combined add up to domestic wealth. There are large regional differences in the proportion of private wealth that is held abroad, ranging from 3 percent in South Asia to 39 percent in Africa. They explain differences in portfolio choice in terms of the capital to labor ratio, indebtedness, exchange rate distortions, and risk ratings - all proxies for differences in the risk-adjusted rate of return on capital. They then apply the results to four policy questions in which private portfolio choices are potentially important: the effect of the East Asian crisis on domestic capital outflows; spillovers; the effect of HIPC debt relief on capital repatriation; and why Africa has so much of its private wealth outside the continent. Their conclusions: 1) The four most severely affected East Asian countries will eventually lose about $250 billion in domestic wealth as a result of the deterioration in risk between March 1997 and September 1998. 2) They found some support for a spillover model. 3) The effect of the HIPC debt relief initiative on capital repatriation will vary massively between HIPC-eligible countries. 4) Africa has by far the lowest capital per worker, which makes massive capital flight from Africa all the more distinctive. Three variables explain capital flight in Africa: exchange rate overvaluation, adverse investor risk ratings, and high indebtedness.

Emerging Markets Instability : Do Sovereign Ratings Affect Country Risk and Stock Returns?

Abstract: Financial market instability has been the focus of attention of both academic and policy circles. Rating agencies have been under particular scrutiny lately as promoters of financial excesses, upgrading countries in good times and downgrading them in bad times. Using a panel of emerging economies, this paper examines whether sovereign ratings affect financial markets. The authors find that changes in sovereign ratings have an impact on country risk and stock returns. They also find that these changes are transmitted across countries, with neighbor-country effects being more significant. Rating upgrades (downgrades) tend to occur following market rallies (downturns). Countries with more vulnerable economies, as measured by low ratings, are more sensitive to changes in U.S. interest rates.

Winners and Losers from the Privatization and Regulation of Utilities: Lessons from a General Equilibrium Model of Argentina

Abstract: A computable general equilibrium (CQE) model is used to estimate the macroeconomic and distributional effects of the privatization and regulation of utilities in Argentina, begun in 1989. Based on data available after the privatization that indicate different kinds of efficiency gains in electricity, gas, water, and telecommunications, both the privatization and effective regulation are estimated to yield significant macroeconomic benefits. Gains from the privatization accrue mainly to high-income classes, while gains from the effective regulation of newly privatized utilities accrue mainly to low-income classes. Computable General Equilibrium (CGE) estimates of overall employment effects suggest that privatization was not a major contributor to the dramatic rise in unemployment in Argentina between 1993 and 1995. This rise was more likely due to the 'tequila effect' of an interest rate shock.

Measuring the Dynamics Gains from Trade

Abstract: This article investigates the links between trade policy and economic growth in a panel of 57 countries between 1970 and 1989. It develops a new measure of trade policy openness based on the policy component of trade shares, using it in a simultaneous equations system to identify the effect of trade policy on several determinants of growth. The result suggests a positive impact of openness on economic growth, with the accelerated accumulation of physical capital accounting for more than half the total effect; for smaller effects. This decomposition is robust with respect to alternative specifications and time periods. The article also successfully tests whether the model exhaustively captures the effects of trade policy on growth.

Eliminating Excessive Tariffs on Exports of Least Developed Countries

Abstract: Although average OECD tariffs on imports from the least developed countries are very low; tariffs above 15 percent (peaks) have a disproportional effect on their exports. Products subject to tariff peaks tend to be heavily concentrated in agriculture and food products and labor-intensive sectors, such as apparel and footwear. Although the least developed countries benefit from preferential access, preferences tend to be smallest for tariff peak products. A major exception is the European Union, so that the recent European initiative to grant full duty-free and quota-free access for the least developed countries (the so-called Everything But Arms initiative) will result in only a small increase in their exports of tariff peak items (less than 1 percent of total exports). However, as preferences are less significant in other major OECD countries, a more general emulation of the European Union initiative would increase the least developed countries' total exports of peak products by US$2.5 billion (11 percen...

Public sector downsizing : an introduction

Abstract: Authorities throughout the developing world are turning to downsizing in an effort to reduce budget deficits and address the inefficiencies engendered by state-led development strategies. Because large-scale involuntary dismissals are often politically difficult, a voluntary approach to reductions in public sector employment is increasingly popular among developing-country governments, multilateral organizations, and donor countries. This article (and, more generally, the research project on public sector retrenchment) attempts to sketch a protocol for public sector downsizing that takes into account the costs and benefits for the workers and the economy. After reviewing the international experience with downsizing, the article addresses five questions: how to identify the redundant workers, how to predict their losses from separation, how to design compensation and assistance packages, how to assess the financial and economic returns to downsizing, and how to deal with downsizing in one-company towns. Based on the answers to these questions, a decision tree is proposed.

Can Private School Subsidies Increase Enrollment for the Poor? The Quetta Urban Fellowship Program

Abstract: This study evaluates a program designed to stimulate girls' schooling through the creation of private girls' schools in poor urban neighborhoods of Quetta, Pakistan. Enrollment growth in these randomly selected neighborhoods is compared to enrollment growth in otherwise similar neighborhoods that were randomly assigned to a control group. The analysis indicates that the program increased girls' enrollment around 33 percentage points. Boys' enrollment rose as well, partly because boys were allowed to attend the new schools and partly because parents would not send their girls to school without also educating their boys. This outcome suggests that programs targeted at girls can also induce parents to invest more in their boys. The success of the program varied across neighborhoods, although success was not clearly related to the relative wealth of a neighborhood or to parents' level of education. Thus the program offers tremendous promise for increasing enrollment rates in other poor urban areas.

Tax incidence in Madagascar : an analysis using household data

Abstract: This article discusses tax incidence in Madagascar and asks who pays the taxes that finance government spending. Its main concern is to identify the progressivity of different taxes levied in Madagascar, based on the consumption and income patterns found in the 1994 Enquete Permanente aupres des Menages, a nationally representative survey. The results suggest that most taxes are progressive, meaning that wealthy households pay proportionately more of these taxes relative to their expenditures than do poor households. Two notable exceptions are taxes on kerosene and export duties on vanilla, both of which are regressive. These results are consistent with those of a study of Ghana, the only other comparable research on tax incidence in Africa. That study found taxes on kerosene and cocoa exports to be the most regressive taxes in Ghana. Making firm policy recommendations for tax reform would require an analysis of the economic efficiency and administrative efficacy of different taxes to complement this article's work on their equity implications. Nevertheless, the results suggest that the movement away from trade taxes, especially export duties, and toward broadly based value added or income taxes would be more equitable and more economically efficient. The only legitimate impediment to such reforms in Madagascar is administrative, that is, the government's ability to collect different taxes effectively. Although administrative efficiency may be a problem for value added or income taxes, taxes on petroleum products (except kerosene) are highly progressive and provide a good tax handle.

Central mandates and local incentives : the Colombia education voucher program

Abstract: In decentralized education systems programs that promote central mandates may have to be devolved to local governments, communities, and providers. When participation by local governments and providers is voluntary rather than compulsory, the determinants of program placement are important in predicting potential benefits to individuals. This article analyzes incentives for municipalities and private schools to participate in Colombia's voucher program. It finds that the demand for secondary education relative to the capacity of public schools and the availability of spaces in private schools in the municipality were key predictors of municipal participation, whereas the number of underserved students had a nonlinear effect on participation. Schools whose educational quality was moderate and charged moderate tuition fees were the most likely to participate; the program was less attractive to schools whose quality and fees were high and to schools whose quality and fees were low.

Student Outcomes in Philippine Elementary Schools: An Evaluation of Four Experiments

Abstract: Policymakers in most developing countries are concerned about high dropout rates and poor student learning in primary education. The government of the Philippines initiated the dropout intervention program in 1990-92 as part of its effort to address these issues. Under this program, four experimental interventions were randomly assigned to 20 schools in selected low-income areas. Pre and post-intervention data were collected from these schools, as well as from 10 control schools, in order to evaluate the program's impact on dropout behavior and student learning. The economic justification for replication appears to be strongest for the interventions that provided teachers with learning materials, which helped them to pace lessons according to students' differing abilities, and that initiated parent-teacher partnerships, which involved parents in the schooling of their children. The justification was weakest for the school feeding intervention. In addition to the results specific to the Philippines, this research demonstrates the feasibility of monitoring and evaluating interventions in the education sector in other developing countries, including the use of randomized control designs.

Cross-Country Evidence on Public Sector Retrenchment

Abstract: This article reports the results from a survey of public sector employment retrenchment episodes across a wide variety of developing and transition economies. The information collected and analyzed is primarily from internal the World Bank documents and in-depth interviews with World Bank staff having operational information about experiences in specific countries. Using the information collected on 41 retrenchment programs across 37 countries, the article analyzes the relationships between the factors leading to retrenchment, the scope and nature of retrenchment, and the methods used to accomplish the retrenchment. The discussion of methods includes an analysis of the mix of involuntary and voluntary employment reduction programs, the compensation schemes offered, and the extent of targeting of specific types of workers. Although relevant quantitative information is limited, the article also attempts to evaluate the outcome of the programs on several dimensions. The most striking findings relate to analysis of the factors leading a significant fraction of programs to rehire workers separated from the public sector (thereby defeating the programs' objective). In addition, the article relates program characteristics to calculated summary financial payback indicators and to the nature of the labor market adjustment.

Mutual fund investment in emerging markets - an overview

Abstract: International mutual funds are one of the main channels for capital flows to emerging economies. Although mutual funds have become important contributors to financial market integration, little is known about their investment allocation, and strategies. The authors provide an overview of mutual fund activity in emerging markets. First, they describe international mutual funds' relative size, asset allocation, and country allocation. Second, they focus on fund behavior during crises, by analyzing data at the level of both investors, and fund managers. Among their findings: Equity investment in emerging markets has grown rapidly in the 1990s, much of it flowing through mutual funds. Collectively, these funds hold a sizable share of market capitalization in emerging economies. Asian, and Latin American funds achieved the fastest growth, but are smaller than domestic U.S. funds and world funds. When investigating abroad, U.S. mutual funds invest more in equity than in bonds. World funds invest mainly in developed nations (Canada, Europe, Japan, and the United States). Ten percent of their investment is in Asia, and Latin America. Mutual funds usually invest in a few countries within each region. Mutual fund investment was very responsive to the crises of the 1990s. Withdrawals from emerging markets during recent crises were large, which squares with existing evidence of financial contagion. Investments in Asian, and Latin American mutual funds are volatile. Because redemptions, and injections are large, relative to total funds under management, fund's flows are not stable. The cash held by managers during injections, and redemptions does not fluctuate significantly, so investors' actions are typically reflected in emerging market inflows, and outflows.

Calm after the storms : income distribution and welfare in Chile, 1987-94

Abstract: After rising during most, but not all, of the 1960-85 period, inequality in Chile seems to have stabilized since around 1987. Following the stormy period of economic and political reforms of the 1970s and 1980s, no statistically significant Lorenz dominance results could be detected since 1987. Scalar measures of inequality confirm this picture of stability, but suggest a slight change in the shape of the density function, with some compression at the bottom being 'compensated for' by a stretching at the top. As inequality remained broadly stable, sustained economic growth led to substantial welfare improvements and poverty reduction, according to a range of measures and with respect to three different poverty lines. Poverty mixed stochastic dominance tests confirm this result. All of these findings are robust to different choices of equivalence scales.

Monitoring Targeting Performance When Decentralized Allocations to the Poor Are Unobserved

Abstract: How can a central government monitor the performance of a decentralized poverty program when the incidence of the program's benefits is unobserved at the local level? This article shows that, using a poverty map and the corresponding spending allocation across geographic areas, one can identify the latent differences in mean program allocations to the poor and the non-poor. The national measure of targeting performance can also be decomposed into subgroups. An application to an antipoverty program in Argentina is used to assess the program's performance before and after reforms. Increases in funding and changes in program design brought large gains to the poor, although performance differed across provinces.

The efficient mechanism for downsizing the public sector

Abstract: This article analyzes the efficient mechanism for downsizing the public sector, focusing on adverse selection in productive efficiency. Each worker is assumed to have two type-dependent reservation utilities: the status quo utility in the public sector before downsizing and the utility that the worker expects to obtain by entering the private sector. The efficient mechanism consists of a menu of probability (of remaining in the public sector) and transfer pairs that induces self-selection. A worker's full cost is defined by the sum of production cost in the public sector and reservation utility in the private sector. It is optimal to start by laying off the agents with higher full cost. When the public sector before downsizing is discriminating as the differential of private information about productive efficiency suggests, there are countervailing incentives. This makes the size of downsizing smaller under asymmetric information than under complete information.

Earnings and Welfare after Downsizing: Central Bank Employees in Ecuador

Abstract: This article measures the earnings and welfare losses experienced by displaced employees of the Central Bank of Ecuador. It links these losses to individual characteristics such as gender, education, seniority, and salary in the public sector. Data are from a survey of displaced employees that included subjective evaluations of well-being in addition to information on activity and earnings. The welfare losses of separated employees are not highly correlated with their earnings losses, partly because some of them (especially women) withdrew from the labor force after separation. Earnings and welfare losses also vary depending on the nature of displacement, which was voluntary for roughly half the employees and involuntary for the rest. Overall, the losses were larger for employees with less education and more seniority, but not necessarily larger for employees with higher salaries. However, compensation for displacement was based on a rule of thumb that involved only salary and seniority and was applied across-the board. For those employees who left voluntarily, the resulting compensation package was, on average, about 20 percent higher than the welfare loss. The article derives the implications of these findings for the design of assistance programs for displaced workers and, more specifically, for the tailoring of compensation packages to their individual characteristics.

Changes in the Perception of the Poverty Line During the Depression in Russia, 1993-96

Abstract: Economic transition in Russia was accompanied by a precipitous decline in real income for most of the population. This article analyzes how the decline affected people's perception of the minimum level of income needed to make ends meet. Individual-level data collected from repeated surveys between March 1993 and September 1996 reveal that the elasticity of subjective minimum income with respect to actual median income was 1.5 or that people's subjective estimate of the minimum income for an adult Russian fell about 1.7 percent each month. This sharp reduction in the face of a decrease in real income meant that the percentage of the population who felt that they were poor declined, even though poverty remained at a very high level (more than 60 percent of the population) throughout the period. This self-perception is in marked contrast to an 'objective' measure of poverty: the percentage of the population whose income was less than a given real poverty line rose.

Matching Severance Payments with Worker Losses in the Egyptian Public Sector

Abstract: Severance pay programs can reduce political opposition and minimize the social costs of labor redundancies. In Egypt, only voluntary programs are feasible because legal limitations preclude layoffs and strong organized labor groups oppose any weakening of job security protections. A common problem with voluntary severance programs, however, is that they tend to overpay workers relative to the welfare losses they experience from displacement. This article estimates the losses that public sector workers would incur if they were displaced from their jobs and simulates several voluntary severance schemes to determine how well the schemes match compensation payments to these estimated losses. It provides a fairly strong argument for looking at the structure of opportunity costs and wage profiles when designing severance programs. It shows that significant overpayment can be avoided by matching compensation payments to the expected losses of workers. It also provides a method for estimating these losses from standard labor force surveys that are available in most countries.

Labor Earnings in One-Company Towns: Theory and Evidence from Kazakhstan

Abstract: One-company towns, characterized by the presence of a large employer in a local labor market, are a frequent legacy of state-led development strategies. How will downsizing or closing unprofitable state-owned enterprises affect these towns? This article develops a simple model combining monopsony power in the labor market with a Keynesian closure of the product market and uses it to interpret the findings of previous studies. The article evaluates the impact of the company's employment level on the town's labor earnings in Kazakhstan, where one-company towns are still prevalent. The evaluation is based on data from the 1996 living standards measurement survey. The results show that labor earnings in the town decrease roughly 1.5 percent when the share of its population working for the company decreases 1 percent. The results are robust to changes in the definition of labor earnings and to the inclusion of a variety of other community characteristics in the analysis. These results and the theoretical model are combined to evaluate the welfare impact of company downsizing and, consequently, to derive the optimal extent of labor retrenchment.