More Jobs Through Less Employment Protection? Evidence for West Germany

Abstract

ABSTRACT: In reaction to growing criticism of the allegedly negative employment effects of job protection regulations (lay‐off and dismissal restraints), the West German government in 1985 introduced new legislation facilitating the conclusion of temporary (i.e. fixed‐term) work contracts in order to stimulate employment growth (‘Employment Promotion Act 1985‘AZPA).The research unit ‘Labour Market and Employment‘ at the WZB has evaluated the employment and labour market impact of the new legislation for the period 1985‐1988, and apart from providing a detailed analysis of the socio‐economic and institutional diversity of job arrangements covered by the category of temporary (i.e. fixed‐term) employment, the project‘s focus has been on the impact of minor changes in the institutional frame‐ work as effected by the EPA on firms‘ employment policies, as well as on the overall level of employment.Results show that like in most other European countries the temporary work force in Germany has considerably grown over the past years in both absolute and relative terms, this increase, however, being largely due to cyclical factors as well as medium‐term structural changes on the supply and demand side of the labour market rather than to changes in the regulatory framework as effected by the EPA.The impact of the new regulations on firms‘ hiring decisions and on the overall number of hirings in the total economy have to be regarded as rather modest, in fact amounting to not more than an estimated 25,000 additional hires per year or roughly 0.5|X% of all employment contracts concluded in the private sector. This marginal positive impact on firms‘ employment decisions, however, is counterbalanced by unintended substitution effects and an increase in involuntary quits arising from them when labour demand declines. Even under the overall positive employment development given in the period under investigation the net employment effects of the EPA temporary work legislation thus are shown to be at best marginal. In case of a deterioration of the overall economic situation, however, the increase in temporary job arrangements supported by the new legislation is likely to lead to accelerated workforce adjustments by firms and thus over time to result in a depression of the overall level of employment. From a theoretical point of view, the findings suggest that measures aiming at de‐regulating labour relations such as the EPA largely fail to modify essential behavioral parameters of economic actors in economic environments which for decades have adjusted to a relatively high level of welfare state regulation, as has been the case in Western Germany.