Employment protection and labor market results in Europe

Abstract

Since the 1980s, many European countries have reformed their labor markets, enhancing their flexibility in an attempt to reduce high unemployment rates. However, the empirical evidence on the effectiveness of these reforms is not conclusive. Our paper analyzes the influence of employment protection legislation and changes in economic activity on the evolution of employment and unemployment rates registered in European Union countries from 1999 to 2012. Furthermore, we analyze whether the impact of economic activity and employment protection has changed during the economic crisis following the onset of the Global Financial Crisis. Our results show that the existence of a significant impact of employment protection on employment and unemployment depends on the selection made of the sample of countries and years analyzed and on the economic variables representing economic activity (Gross Domestic Product vs Gross Fixed Capital Formation). Furthermore, when a significant impact is obtained, the direction of this impact is contrary to what is argued in mainstream analysis because a higher protection of permanent and temporary workers has a positive impact on the evolution of employment and unemployment.