Feature: Employment Protection Legislation

Abstract

Employment protection legislation (EPL) is an important labour market policy whose strictness differs greatly across OECD countries. The collection of articles in this Feature provides new theoretical and empirical results which highlight the impact of EPL on productivity, job and firm turnover, (un) employment and the incidence of temporary contracts. Importantly, the effect of EPL is shown to differ across types of workers and firms. This yields new insights on the incentives for labour market reform. Employment protection legislation (EPL) is a set of mandatory restrictions governing the dismissals and recruitments of employees. The stated purpose of these restrictions is to improve job security. Despite that, there is intense debate about their actual effects. What do we know about the effects of EPL? The predictions of mainstream dynamic labour market models are that EPL reduces both firing and hiring of workers and thus job flows but has an ambiguous effect on unemployment; see Bentolila and Bertola (1990), Ljungqvist (2002), and the overview in Cahuc and Zylberberg (2004, chapter 12). Besides these effects of EPL on aggregate unemployment and job turnover, much less is known about its effect at the firm and worker level, both empirically and theoretically. This is where the first set of articles here contribute to the debate. Autor, Kerr and Kugler, MacLeod and Nakavachara, Messina and Vallanti use worker and firm level data for the US and European countries to measure the effect of EPL on employment changes,job turnover, firm dynamics as well as productivity for skilled and unskilled workers. Koeniger and Prat complement this empirical evidence with a theoretical perspective on the effects of EPL on job and firm turnover in a model with heterogeneous firms. In reality, not all employment contracts are covered by EPL as governments allow firms to adjust their labour demand by hiring workers on temporary contracts. These contracts protect workers much less against job loss; see Booth et al. (2002), Blanchard and Landier (2002) and Cahuc and Postel-Vinay (2002). The second set of articles in this Feature by Kahn, Boeri and Garibaldi and Brfigemann is concerned with the effect of EPL on the incidence of temporary contracts and labour market reform. We now briefly summarise the main results of each article. 1. The Effect of EPL on Productivity, Turnover and Employment The first set of four articles investigates the effects of EPL on productivity, job and firm turnover and employment. Using firm-level data from the Amadeus database for 14 European countries during the 1990s, Messina and Vallanti find that stricter EPL reduces job turnover but this effect is smaller in faster-growing sectors as theory would