This paper analyzes the potentialeconomic impact of changes to the labor laws proposed in2006. The economic logic behind these reforms is reviewed,and the conditions under which the reforms could be expectedto have the maximum impact on employment are isolated. Next,the experiences of selected developing countries which haveundertaken similar reforms are reviewed, which showed theimportance of initial conditions and economic trends outsideof the labor market in ensuring a successful reform. Third,the main provisions of the proposed reforms are explained.The analysis concludes that given Mozambique s initialconditions, including strong demand from private sectoremployers for change, the scope of proposed reforms, and thepotential for continued economic growth, the reforms shouldincrease firms' profit margins, and as a result, apositive employment effect is possible in the medium term.The analysis also shows that although the reforms are deepcompared with the starting point, even if reforms areenacted, Mozambique's labor market would still beclassified as rigid by international benchmarks. The reportconcludes with a discussion of the possible social andpoverty effect. In the short run, there is a danger oflayoffs in some of the larger firms which had previouslyreported being overstaffed. If this happens, the povertyeffect would certainly be negative in the short run. Theconcluding section notes that other countries have avoidedthese types of layoffs by introducing transition arrangements.
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