Does an employment protection law lead to unemployment? A panel data analysis of OECD countries, 1990-2008

Abstract

This article examines the unemployment consequences of an employment protection law (EPL) on the basis of OECD EPL indicators for 23 OECD countries over the period 1990–2008. Using the alternative dynamic panel data models and panel causality tests, it examines the validity of the neo-liberal argument that strictness of employment protection hurts labour through increased long-term and youth unemployment rates. Although it finds little empirical basis for this orthodox standpoint, the article observes that the unemployment problem dampens aggregate production, which in turn aggravates the long-term unemployment problem. The policy prescription suggested is employment generation by other means than neo-liberal ‘hire and fire’ labour regulations.