Does employment protection affect wages, inequality, and unemployment? Theory and evidence

This article examines the influence of national employment protection legislation (EPL) on the likelihood of older workers in Europe being forced into retirement. Data are drawn from 4 waves of the Survey of Health, Ageing and Retirement in Europe (SHARE) covering the period from 2004 to 2013. The sample is restricted to those who were aged between 50 and 80 and exited from paid work during the study period (N = 3,446). EPL was measured using the OECD indicators of employment protection concerning regulations for individual dismissals. Exits from work were defined as forced or unforced based on the respondent’s description of the reason for leaving work. Our cross-national study shows considerable variety in the prevalence of forced career exit across 13 European countries. Furthermore, the results show that career exit through retirement is less likely to have been forced as compared to career exit through non-retirement routes. However, the results also show that with every unit increase in the EPL index, the probability of forced career exit through retirement becomes more likely. Apparently in countries with high levels of employment protection, retirement is a more attractive route to lay off older workers than in countries with low EPL. By forcing older adults to leave their jobs through retirement, these employers are shedding workers who would have preferred to continue their working lives.

Evolution of Employment Protection Legislation in the USSR, CIS and Baltic States, 1985-2009

Abstract. This paper uses the OECD’s methodology to build an Employment Protection Legislation index (EPL) for the Moroccan economy. In this framework, the main objective is to assess the impact of the new Labor Code’s provisions on the degree of flexicurity in the labor market. The paper also investigates the approximate influence of the EPL changes as regards to some employment-related variables. Our results show that after the 2004 Labor Code reform, the labor market’s flexibility level went down from 75 percent to 44 percent, as EPL became significantly stricter. Furthermore, our analysis suggests that the new legislation, although it brought relatively strict restrictions on hiring and firing, generated a significant increase in dismissals during the three first years of its implementation. And unlike the buckle of conventional literature and several empirical findings, the unemployment rate actually dropped, allegedly backed-up by a solid GDP growth during the 2000’s. Keywords. Labor Market, Flexicurity, Employment Protection. JEL. K31, E24, J81 .

This article is a first systematic study of employment protection legislation in the 15 successor states of the USSR over the last two and a half decades. The analysis is based on new and unique data assembled using OECD methodology. We find that the dynamics of employment protection in the region resemble an inverted U-shaped pattern with the peak of labour market rigidity occurring in the mid-1990s in CIS countries and a decade later in the Baltic states. By now, the former Soviet states as a group are similar to the EU-15 and OECD countries in terms of the overall employment protection legislation index, although they differ in terms of contributions to the overall employment protection legislation of its three major components, namely, regulation of permanent contracts, temporary contracts and collective dismissals.

Employment protection legislation in Croatia is among the most strict in Europe. Firing is difficult and costly, and flexible forms of employment are limited. Is this apparent rigidity reflected-as one would expect based on standard economic theory-in low labor market dynamics? Is job creation low and hiring limited? Is the job security of insiders achieved at the cost of outsiders not being able to enter thelabor market? The author attempts to answer these questions by examining job flows. If the employment protection legislation is binding, then job and worker turnover should be low. He shows that this is indeed the case. Hiring is limited and the average job tenure is very long in Croatia. Job destruction is low, however job creation is still lower. The result is accumulation of unemployment, in large part due to new labor market entrants not being able to find a job. The high degree of job protection also seems to strengthen the bargaining position of insiders and results in relatively high wages. So, wages in Croatia are higher than among its competitors, even after adjusting for productivity. These high labor costs are likely to contribute to limited job creation in existing firms, but also are likely to discourage the entry of-and thus job creation in-new firms. The author presents evidence that firm growth has been indeed limited in Croatia, contributing to the low employment level. The author examines other potential causes of high unemployment in Croatia (the unemployment benefit system, labor taxation, the wage structure, and skill and spatial mismatches). He argues that they do not play a substantial part in accounting for poor labor market outcomes in Croatia. The author concludes that the stringent employment protection legislation is the key labor market institution behind low job creation and high unemployment. Based on this he recommends specific measures aimed at liberalizing the labor market to foster job creation and employment.

Employment protection legislation in Croatia is among the most strict in Europe. Firing is difficult and costly, and flexible forms of employment are limited. Is this apparent rigidity reflected-as one would expect based on standard economic theory-in low labor market dynamics? Is job creation low and hiring limited? Is the job security of insiders achieved at the cost of outsiders not being able to enter the labor market? The author attempts to answer these questions by examining job flows. If the employment protection legislation is binding, then job and worker turnover should be low. He shows that this is indeed the case. Hiring is limited and the average job tenure is very long in Croatia. Job destruction is low, however job creation is still lower. The result is accumulation of unemployment, in large part due to new labor market entrants not being able to find a job. The high degree of job protection also seems to strengthen the bargaining position of insiders and results in relatively high wages. So, wages in Croatia are higher than among its competitors, even after adjusting for productivity. These high labor costs are likely to contribute to limited job creation in existing firms, but also are likely to discourage the entry of-and thus job creation in-new firms. The author presents evidence that firm growth has been indeed limited in Croatia, contributing to the low employment level. The author examines other potential causes of high unemployment in Croatia (the unemployment benefit system, labor taxation, the wage structure, and skill and spatial mismatches). He argues that they do not play a substantial part in accounting for poor labor market outcomes in Croatia. The author concludes that the stringent employment protection legislation is the key labor market institution behind low job creation and high unemployment. Based on this he recommends specific measures aimed at liberalizing the labor market to foster job creation and employment.

Key EU agencies have successfully urged member states to scale back employment protection legislation as a solution to unemployment. The economic arguments for this reform are mixed, with recent empirical evidence largely unsupportive. Critics have also raised doubts about the accuracy of the OECD’s Employment Protection Legislation Index, which is the principal method EU agencies use to target so-called high-protection regimes. This article supplements existing criticisms of the OECD index by arguing that it fails to account for procedural requirements in assessing the difficulties and costs of carrying out individual dismissals. Evidence from New Zealand, ostensibly a low-protection country, demonstrates procedural requirements can pose the main impediments to carrying out individual dismissals. This suggests the need for revision of the OECD Employment Protection Legislation Index or the use of other indices instead.

In this paper I investigate how the natural rate of unemployment is affected from various institutions of the labor market. I find that union density, benefit replacement rate, expenditure on active labor market policies per unemployed person, and employment protection legislation play a significant role in explaining the differences in long-term unemployment rates across the OECD countries. Besides that, I also look at whether the vacancy rate and the participation rate are affected from the structure of the labor markets. An increase in the employment protection legislation index and union density generate a decline in the vacancy rate. As far as the participation rate is concerned, an increase in the employment protection legislation index and benet replacement rate increase the inactivity rate, whereas an increase in expenditure on active labor market policies causes an increase in the participation rate.

This article deals with the relation between labour market regulation and the dynamics of overall employment and unemployment in continental Europe. We investigate the impact of the reforms of employment protection systems and activating welfare policies and test the integrative power of marginal labour market deregulation, assessing occupational outcomes of changing workforce exposure to unemployment and fixed-term contracts. Thus, particular attention is paid to the possible effect of ‘institutionally driven’ labour market segmentation, mirrored by the national discrepancy in employment protections of workers with distinct contractual arrangements and by the ratio of expenses on GDP in active versus passive labour market policies. We use pseudo-panel data based on European Labour Force Survey (EU-LFS) (1992–2008) and apply linear fixed effect (FE) models with lagged independent variables. The deregulation measure—the insider–outsider differentials—is based on the OECD employment protection legislation index (EPL 2013). The overall findings indicate a detrimental effect of unbalanced passive and active labour market policies, a negative trend of permanent employment, and a ‘honeymoon effect’ of partial and targeted deregulation measures whose effectiveness on overall employment, if any, appears to be progressively weakened over time. The responsiveness of employment conditions to marginal EPL variations as well as to previous ‘unstable employment situations’ is significantly higher in Southern Europe. Temporary employment, if compared with unemployment, may still play a role in reducing individual subsequent unemployment risks, but its ‘integrative effect’ is hardly confirmed if we view fixed-term contracts as a stepping stone towards stable insertion into the primary labour market.

Uses and Abuses of the OECD's Employment Protection Legislation Index in Research and EU Policy Making

In the this paper, I analyze the effect of Employment Protection Legislation (EPL) on investments in physical capital and labor productivity by exploiting the fact that small establishments in Germany below a given size threshold are exempted from certain parts of EPL. I do this by means of an Regression Discontinuity Design (RDD) and using establishment-level data for the period 1994-2012. Following the implications of the theoretical literature, I also analyze whether or not EPL affects the employment margin and conduct an implicit test for the possibility of a negative impact of EPL on investments due to hold-up by using linked employer-employee data. I do not find a statistically significant threshold effect on any of these outcomes– also not when analyzing the effect of EPL by industry. The results of EPL on investments and labor productivity are consistent with the predictions of the literature that states if EPL does not affect the employment margin, it should also not impact any other margin of non-labor adjustment.

Old captains at the helm: Chairman age and firm performance Urs Waelchli and Jonas Zeller December, 2012 This paper examines whether the chairmen of the board (COBs) impose their life-cycles on the firms over which they preside. Using a large sample of unlisted firms we find a robust negative relation between COB age and firm performance. COBs age much like ‘ordinary’ people. Their cognitive abilities deteriorate and they experience significant shifts in motivation. Deteriorating cognitive abilities are the main driver of the performance effect that we observe. The results imply that succession planning problems in unlisted firms are real. Mandatory retirement age clauses cannot solve these problems. Corporate Aging around the World Jonas Zeller January, 2014 This paper examines whether firms internationally age as US firms do (Loderer, Stulz, and Walchli, 2013). Using a large panel, I find that Tobin’s Q monotonically falls with firm Age across all nineteen countries in the sample. The decrease varies across countries but is generally extremely robust and economically significant. ROA, sales growth, and market share decrease over a firm’s lifetime in most countries as well. Furthermore, older firms reduce their capital expenditures and R&D outlays. Instead, they distribute more cash to their shareholders. Overall, the results suggest that corporate aging is not confined to the US but is a genuine phenomenon that affects listed firms worldwide. This evidence supports the hypothesis that corporate aging is driven by managers who optimally focus on managing their assets in place and neglect the development of growth opportunities. I finally ask whether the managers’ choice and with it the magnitude of the decline in Tobin’s Q is a function of country-level institutional settings. I find that most notably firms age faster in countries where employees are relatively well protected by labor regulation. Is employment protection the fountain of corporate youth? Claudio Loderer, Urs Walchli, Jonas Zeller* September 2014 Acharya, Baghai, and Subramanian (2012, 2013) find that employment protection legislation (EPL) encourages innovation. We argue that this effect should be particularly strong in mature firms. We would therefore also expect EPL to boost growth opportunities. Using the natural Experiment created by the staggered passage of changes in EPL across seventeen countries, we find evidence that employment protection legislation does indeed stimulate Innovation efforts, especially in mature firms. The effect is stronger in countries in which patents are owned by the firm and in the context of regular contracts. Consistent with that, EPL encourages risk taking. Overall, however, there is Little evidence that the effect of EPL on innovation effort translates into higher firm value, not even in mature firms. EPL does motivate employees in those firms to put in a greater effort, as evidenced by stronger sales growth. Yet it also increases costs, reduces profitability, and depresses Tobin’s Q ratios in all firms, especially the mature ones, possibly because of the rigidities that characterize these firms [Loderer, Stulz, and Waelchli (2014)].

The previous chapters in the book studied the role of employment protection in the context of temporary contract and in the case of job destruction. We learnt two key messages. First, employment protection biases the firm choice toward temporary contract. Second, employment protection reduces job destruction and increases labour hoarding. Yet, when job creation is also explicitly considered, employment protection also depresses job creation. While these are indeed the key messages in the literature of employment protection legislation, other important issues need to be considered. In real life labour markets, employment protection legislation is a multidimensional institution. Its provisions are often very complex, and the legislation not only forces the firm to pay specific sums of money to the dismissed worker, but it also forces the firm to follow specific procedures, which inevitably involve deadweight losses to both parties. In other words, employment protection legislation involves both transfer inside the firm–worker pair as well as taxes paid outside the match. Section 12.2 documents that the largest part of the legislation refers to transfer.

How does employment protection legislation affect labor investment inefficiencies?

Cet article s’intéresse aux effets de la protection de l’emploi sur le niveau d’activité domestique dans un contexte de concurrence internationale oligopolistique. Les firmes se font concurrence en quantités et choisissent leur localisation en arbitrant entre d’une part, l’avantage informationnel lié à la flexibilité permise par la localisation dans le pays à faible protection de l’emploi, et, d’autre part, l’avantage stratégique de l’engagement en quantité que crédibilise la localisation dans le pays à protection de l’emploi stricte. Bien que le cadre d’analyse adopté soit très favorable à la flexibilité, celle-ci étant non coûteuse, le pays à protection de l’emploi stricte peut attirer des firmes même pour des niveaux assez élevés d’incertitude. En outre, lorsque l’équilibre de dispersion émerge, le niveau d’activité (et donc d’emploi) est – en moyenne – plus élevé dans le pays à protection de l’emploi stricte. Enfin, et contrairement à ce qu’on pourrait attendre, si les firmes se livraient une concurrence en prix plutôt qu’en quantités, elles ne s’aggloméreraient jamais dans le pays à faible protection de l’emploi.