Privatization and Labor: What Happens to Workers When Governments Divest?

Abstract

Many developing countries have launched ambitious privatization programs to improve. A universal concern in this process is that privatization will cause major job losses as new owners of privatized firms shed excess labor to improve efficiency and as divesting governments cut the workforce to prepare for privatization. Drawing on the experiences of mixed economies, this paper examines the effects privatization has on labor. It also attempts to find out the mechanisms that governments can use to minimize the political and social costs of labor adjustments and the conditions they work best. The paper finds that in cases where efficiency improvements require large scale labor force adjustments, privatization can proceed smoothly if governments take early steps to inform and involve labor unions and workers in the reform process, develop a menu of restructuring options, help workers on a targeted basis to reintegrate into the labor market, and eliminate obstacles to private job creation. The paper concludes with a brief review of World Bank support for labor adjustment in the context of enterprise restructuring and privatization.

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