How does employment protection legislation affect labor investment inefficiencies?

FDI location and size: Does employment protection legislation matter?

Political parties are likely to hold differing views about employment protection legislation (EPL). While pro-welfare parties could support EPL, pro-market parties might focus on labour market deregulation. In this paper, we investigate empirically whether partisan politics, especially the government participation of Social democrats and Christian democrats, matter for EPL in 21 established OECD countries from 1985 to 2019. We show that during the golden age of the welfare state, the level of EPL was much higher where Social and Christian democrats dominated the government than elsewhere. After the golden age and under conditions of high unemployment, these unconditional effects mostly disappeared. Instead, the level of unemployment conditions partisan differences. Christian democrats liberalize EPL for regular employment significantly less than other parties under high levels of unemployment. In contrast, Social democrats defend high levels of EPL for regular and temporary employment when unemployment is low. Against expectations, they even liberalize employment protection for labour market insiders more than other parties at very high levels of unemployment.

In recent years the availability of new industry-level data allowed to evaluate the impact of labour market policies more consistently than previous standard cross-country studies. In this paper an industry-level panel is exploited to evaluate the impact of Employment Protection Legislation (EPL) for temporary employment (TE), along with permanent employment (PE), in EU countries. Indeed, the advantage of using industry-level data is manifold. The method exploits both cross-country variation in EPL for PE and TE and variation in the relevance of EPL in different industries deriving from a particular diff-in-diff assumption. Differently from the previous literature we apply this idea of the different binding of EPL only for PE, whereas we implement a different strategy for TE which should imply a more accurate identification of the effect of the use of TE on labour productivity. The theoretical literature has not established a clear prediction on the sign of the effects, existing different convincing reasons for both directions. Thus, the results of the analysis have potentially important policy implications. Our main finding is that the use of temporary contracts has a negative, even if small in magnitude, effect on labour productivity. Furthermore, the analysis confirms that EPL for regular contracts reduce labour productivity growth more in those industries requiring a greater employment reallocation.

PurposeThe purpose of this paper is to empirically investigate the impact of economic policy uncertainty on firms' labor investment decision, which includes labor investment level and efficiency, especially human capital allocation.Design/methodology/approachThis paper uses Economic Policy Uncertainty Index for China and Chinese A-share listed firms in the period 2002–2016 to constructs a sample of 20,779 firm-year observations and applies the methods of pooled OLS regressions to do an empirical study.FindingsThis paper finds that firms' labor investment is negatively correlated with economic policy uncertainty. And firms' labor investment efficiency (and overinvestment in labor) is positively (negatively) correlated with economic policy uncertainty, which is more significant for non-SOEs and firms with less government intervention. Further, the positive relation between economic policy uncertainty and labor investment efficiency is more significant for labor-intensive firms, firms in competitive industry, firms in developed labor market and firms under strong labor law protection. In addition, economic policy uncertainty induces firms to make adjustment on human capital structure and allocate more employees with high human capital, which eventually helps firms achieve higher total factor productivity.Social implicationsThe study of this paper indicates that the government needs to consider economic policies' impact on firms when introducing and changing policies and guide firms to improve human capital allocation under different internal and external conditions to finally realize the optimal allocation of social resources.Originality/valueThis paper studies the influence of external economic policy environment on firms' labor investment decision, which lacks adequate attention in the literature and indicates that under economic policy uncertainty, firms actively decrease labor demand and increase labor investment efficiency by optimizing human capital allocation.

Different Paths Towards Flexibility: Deregulated Employment Protection or Temporary Employment - A Study of Cross-National Variance on Employment Protection Legislation and Temporary Employment in 19 OECD Countries

This study examines whether parity codetermination at German supervisory boards improves labor investment efficiency at firm level. We focus on labor, as it is an important production factor. Labor investment decisions are not easily reversible in the short term, given that hiring and firing costs are usually quite high due to labor regulation in Germany. As labor representatives are legally entitled to 50% voting rights at the supervisory board level (parity codetermination), we expect them to contribute insider knowledge to the supervisory board. As they have access to internal documents, we also expect them to reduce information asymmetry and potential agency conflicts between management on the one hand and outsiders such as investors or capital suppliers on the other. Both smaller information asymmetries and reduced agency conflicts, in turn, ought to increase a firm’s labor investment efficiency. Labor investment proxies for deviations from a firm’s optimal level of investment in labor in the form of over- and underinvestment, defined as hiring fewer employees than required to run profitable projects (underhiring) or retaining employees who are occupied with non-profitable projects (overhiring). We measure labor investment efficiency using such a net hiring optimum for a sample of German listed firms between 1995 and 2015. The results indicate that parity codetermination causes a lower deviation from the net hiring optimum. Our results are interesting for various stakeholders, especially for policymakers, managers, shareholders and employees who may not be aware of the importance of codetermination for firm efficiency, as well as for firms that are considering circumventing German legislation.

Economic literature on the labour market has not found univocal results concerning the effects of employment protection on unemployment (Bentolila and Bertola 1990; Bertola 1990; Lazear 1990). The reason is that employment protection produces two effects that work in opposite directions: on one hand, employment protection prevents firing, while, on the other hand, it discourages firms from hiring workers, because their subsequent dismissal is costly. Unemployment increases only if the second effect dominates the first, but it is not possible to establish priori which of the two will prevail. Recently, Ichino, Polo and Rettore (2001) have shown that judges can be biased by labour market conditions, that is they tend to interpret employment protection legislation in favour of workers when labour market conditions get worse for them. This fact has interesting macroeconomic implications, when studying labour market structure and economic policy. The first point has been already considered in Tilli (2002), where he assumed firing costs as a decreasing function of labour market conditions and he determined their effective level endogenously. The main qualitative result obtained from this is that employment protection legislation which allows the judges a large degree of interpretation, can increase the institutional rigidities of the labour market. In this paper we study the effects of five policy instruments on equilibrium unemployment in a search and matching model with judicial interference. We consider firing costs as an inverse function of labour market conditions so, when labour market conditions worsen for workers, the interpretation activity of judges tends to increase the strictness of employment protection legislation. An interesting feature of the model is that it can potentially produce multiple equilibria, which could reflect different labour market structures in terms of inflows into unemployment and average duration of unemployment. In the case of unique equilibrium, the qualitative analysis shows that some policy instruments could potentially change the direction of the effects on equilibrium unemployment when judicial interference works. The results of a numerical simulation confirm that the effects of some policy instruments may have different impacts on equilibrium unemployment when there is judicial interference. In particular, active labour market policies, such as hiring and wage subsidies, may reduce the strictness of employment protection with positive effects on welfare. Regarding passive policies, judicial interference may limit the increase of the unemployment rate caused by unemployment benefits, but this leads to a lower level of welfare.

This article examines the effect of employment protection legislation (EPL) on small and medium-sized enterprise (SME) performance. Rather than relying on country-specific proxies for EPL, as is common in the literature, we compute firm-specific measures of a firm’s exposure to EPL by using a panel dataset of 13,112 Belgian SMEs for the period between 2000 and 2009. The empirical results show that firms perform better when faced with lower hiring and firing costs through the use of more blue-collar labour contracts. The evidence showing improved performance by firms that attempt to achieve greater flexibility by hiring more temporary workers is limited.

PurposeThis study aims to revisit the relationship between the stringency of employment protection legislation and entrepreneurship at the macro-level using time series data from 28 OECD countries.Design/methodology/approachTo address model uncertainty, a Bayesian model averaging methodology is employed, overcoming issues related to predictor selection. Additionally, the study delves into the interaction between employment protection legislation and the rule of law, considering potential unintended consequences and overlapping effects. Heterogeneity within self-employment is explored, making a distinction between solo self-employment and employer entrepreneurship.FindingsThe findings reveal that the impact of employment protection legislation, both for regular and temporary employment, on aggregate solo self-employment rates is contingent upon the level of practical regulatory compliance. The legislation can either stimulate or hinder entrepreneurship, highlighting the nuanced nature of its influence on macro-level entrepreneurial activities.Practical implicationsThe results of this study provide valuable insights for policymakers and regulators by emphasizing the complexity of the relationships under consideration. Understanding the potential interactions between employment protection legislation, rule of law and practical regulatory compliance is crucial for designing an effective and conducive regulatory environment for entrepreneurship.Originality/valueThis research offers a unique contribution to the literature in three distinct ways: by addressing model uncertainty through Bayesian model averaging, examining the interaction between employment protection legislation and the rule of law and differentiating between solo self-employment and employer entrepreneurship. These distinctive elements enhance the originality and value of the study, providing a more nuanced understanding of the intricate relationship between legal frameworks and macro-level entrepreneurship.

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.

In this study we leverage on Italy’s size-contingent firing restrictions in order to identify the causal effect of employment protection legislation (EPL) on firm-provided training using a regression discontinuity design. Our analysis demonstrates that higher levels of EPL reduce firms’ incentives to invest in workers’ training. The number of trained workers falls by about 1.5-1.9 units at the threshold: this is a non-negligible effect, corresponding to a 16-20 per cent reduction in the number of trained workers. The results are robust to several sensitivity checks and controls for potential confounding factors (e.g., worker councils). The EPL effect on training is not mediated by different levels of investment in physical capital or propensities to innovate, while it is mostly accounted for by larger workers’ turnover and use of temporary contracts, which entail lower training, in firms with higher firing costs. Our study points to potential adverse effects of EPL on workers’ training in dual labor markets, owing to larger firms seeking to avoid higher EPL costs by means of temporary contracts.

Purpose We expect to provide a complete theoretical framework and large sample evidence on the impact of corporate social responsibility (CSR) on the efficiency of labor investment. We also hope to provide micro-evidence based on labor investment behavior for the two-sided impact of corporate CSR behavior. Design/methodology/approach This paper measures labor investment efficiency by estimating the difference between actual and expected net hiring of enterprises. CSR is measured on the basis of the CSR score of Chinese listed companies published by Hexun.com. A regression model is constructed to analyze the relationship between CSR and labor investment efficiency. Possible endogeneity problems are controlled by lagging independent variables, propensity score matching method and difference-in-difference method. Findings Results show that CSR can improve labor investment efficiency by reducing over-hiring and under-hiring in emerging markets. The existence of the mediating effect of agency cost, information disclosure quality and employment fluctuation confirms that CSR improves labor investment efficiency through two mechanisms of corporate governance and labor market friction. The improvement effect of CSR on labor investment efficiency is more significant in non-state-owned, high CEO shareholding ratio and high-average urban wage enterprises. Originality/value In conclusion, our study is an important supplement to the existing research on the factors affecting labor investment efficiency. Our research conclusions will be helpful for enterprises in developing countries or enterprises in labor-intensive industries to improve labor investment inefficiency. The conclusion of the mechanism analysis in this paper provides more complete and reliable microscopic evidence for accurately identifying the specific path of CSR's impact on labor investment efficiency. This paper verifies the positive impact of CSR from the perspective of labor investment efficiency in the context of a developing country, which provides evidence for the theoretical conflicts related to CSR based on the effectiveness of enterprise labor investment decisions.

Research Question/IssueThis study investigates whether and how board reforms affect labor investment efficiency using a difference‐in‐differences analysis of board reforms in 41 countries worldwide as an exogenous shock.Research Findings/InsightsBoard reforms are positively associated with labor investment efficiency because they benefit firms in reducing over‐hiring, under‐firing, under‐hiring, and over‐firing. Further, we show that the positive effect is more pronounced among firms with lower board independence before the reforms, firms with high institutional foreign ownership, firms with higher corporate social responsibility (CSR), and labor‐intensive firms. While countries with rule‐based reforms experience a greater reduction in abnormal net hiring post‐reform, the effects of reforms are similar across civil and common law countries. Further analyses reveal that in countries with higher employment protection legislation, the beneficial relationship between board reforms and labor investment efficiency is weaker.Theoretical/Academic ImplicationsOur study suggests that one of the mechanisms linking board reforms and labor investment efficiency is a reduction in frictions, such as moral hazard and adverse selection, which hamper efficient labor investment. To the best of our knowledge, this is the first international study that explores globally the relationship between board reforms and firm labor policies, in particular, labor investment efficiency.Practitioner/Policy ImplicationsGiven the importance of identifying and confirming the role of corporate governance in human capital investment efficiency, our empirical investigation provides useful insights and policy implications for managers in building efficient labor policies.

This paper explores the quantitative role played by Employment Protection Legislation over employment and on‐the‐job training in the presence of dual labor markets across OECD economies. We extend the search and matching model by introducing formal education and investment decisions in training by firms, and a gap in firing costs between fixed‐term and unlimited contracts. The quantitative analysis shows that the model accounts well for cross‐country variation in employment and reasonably well for productivity, while it captures only a modest share of the dispersion in training and temporary employment. Decomposing the sources of heterogeneity, we find that differences in firing costs explain only 2%–20% of the observed cross‐country dispersion, whereas education accounts for most of the variation in employment and productivity, and also explains part of the cross‐country differences in training.

T HE cyclical behavior of labor markets reveals a number of puzzling features for which there are no truly satisfying explanations. Included among these are (1) occupational differences in the stability of employment and earnings, (2) the uneven incidence of unemployment, (3) the persistence of differential labor turnover rates, and (4) discriminatory hiring and firing policies. I believe that the major impediment to rational explanations for these phenomena lies in the classical treatment of labor as a purely variable factor. In this paper I propose a short-run theory of employment which rests on the premise that labor is a quasi-fixed factor. The fixed employment costs arise from investments by firms in hiring and training activities. The theory of labor as a quasi-fixed factor is developed in Part I. In Part II, the implications of this theory are subjected to various empirical tests. Finally, Part III turns to an examination of alternative theories and an extension of my theory to a theory of occupational wage differentials. The concept of labor as a quasi-fixed factor is, in my opinion, the relevant one for a short-run theory of employment. Its implications are amenable to empirical verification and are, in the main,