Employment Protection Laws and Privatization

Abstract

Do employment protection laws hinder privatization? Using privatization deals in fourteen European countries from 1977-2003 and within-country variation in employment protection laws, we find that stringent employment protection laws significantly deter privatization. The fear of job cuts apparently leads organized labor in the state-owned enterprises to vehemently oppose privatization. We find that stringent employment protection laws inhibit privatization disproportionately more in industries that are less productive and require lower level of job skill, consistent with the fear of retrenchment being greater in the less-productive and low-skilled sectors. We also find that stringent employment protection laws inhibit privatization disproportionately more in unionized industries, consistent with the fact that workers in these industries exert considerable political pressure. To obtain these results exploiting inter-industry differences, we use industry-level measures for the United States as an instrument to alleviate potential endogeneity concerns. We employ panel regressions that include fixed effects to control for unobserved factors at the country, industry and year levels. We also examine specifications including country-specific and industry-specific trends to account for spurious correlations stemming from such trends in privatization and in enacting employment protection laws. Our results are also robust to controlling for endogenous changes in employment protection laws due to: (i) changes in a country’s government, specifically adopting or rejecting a left-of-center political stance; (ii) trade liberalization; and (iii) country-level economic growth.