Effects Of Employment Protection Legislation Research Articles

Employment protection and corporate risk-taking

This paper examines how employment protection laws affect corporate risk-taking. Using a sample of 19,335 firms from 27 OECD countries over the period 2002–2018, we find that strong employment protection legislation reduces corporate risk-taking. Moreover, the effect of employment protection legislation on corporate risk-taking is stronger in countries of high uncertainty avoidance culture and weaker in countries of high power distance culture.

Institutions, Labor Market Insecurity, and Well-Being in Europe

We examined the differences among seventeen European countries regarding the extent to which several key institutional and labor market characteristics affect the degrees of insecurity that people feel about their jobs and employment prospects, as well as their well-being (economic security and subjective well-being). We estimate how macrostructural factors affect well-being by fitting random-intercept multi-level models and decomposing the variance across national and individual levels, using data from the 2004 and 2010 European Social Surveys. We find that there is substantial country-level variation in labor market insecurity, economic security and subjective well-being. Active labor market policies, the generosity of unemployment benefits, and collective bargaining coverage explain a considerable portion of the identified differences among countries in labor market insecurity and well-being. The effects of employment protection legislation vary depending on whether the worker has a permanent or temporary contract. We did not find substantial differences between 2004 and 2010, suggesting that the effects of institutions and worker power on labor market insecurity and well-being reflect longer-term structural changes associated with the transformation of employment relations.

Employment protection and firm-provided training in dual labour markets

In this paper we leverage a labour market reform (Fornero Law) which reduced firing restrictions for open-ended contracts in the case of firms with more than 15 employees in Italy. The results from a Difference in Regression Discontinuities design demonstrate that after the reform, the number of trained workers increased in firms just above the threshold by approximately 1.5 additional workers. We show that this effect can be explained by the reduction in worker turnover and a higher use of permanent contracts. Our study highlights the potentially adverse effects of employment protection legislation on training in dual labour markets.

Employment Protection, Corporate Governance, and Labor Productivity around the World

Consistent with the existing evidence from a single country study, our differences-in-differences estimation finds a negative effect of employment protection legislation (EPL) provisions on labor productivity in a sample of OECD countries. Our study is distinct, however, in that we provide empirical evidence on why EPL reduces labor productivity, which has different practical implications. While the negative effect is more pronounced among firms domiciled in countries with weaker investor protection, less developed takeover markets, and weaker employee incentives to work hard, in industries with less intense competition, and in firms suffering from more severe agency problems and firms with lower pay-for-performance sensitives, our results suggest that the firm-employee agency conflict is the channel through which employment protection legislation hurts labor productivity.

Does employment protection affect unemployment? A meta-analysis

Abstract Despite extensive research efforts, the magnitude of the effect of employment protection legislation (EPL) on unemployment remains unclear. This article applies meta-analysis and meta-regression methods to a unique data set consisting of 881 observations on the effect of EPL on unemployment from 75 studies. Once we control for publication selection bias, we cannot reject the hypothesis that the average effect of EPL on unemployment is zero. The meta-regression analysis, however, reveals that the choice of the EPL variable matters: estimates that build on survey-based EPL variables report a significantly stronger unemployment-increasing impact of EPL than estimates developed using EPL indices based on the OECD’s methodology, where the latter relies on coding information from legal provisions. Furthermore, using multi-year averages of the underlying data tends to dampen the reported unemployment effects of EPL, and product market regulation serves as a significant moderator variable.

The effect of employment protection legislation on international trade

Analyzing the impact of domestic labor regulations on international trade is relevant, in part, because (i) trade negotiations may increasingly constrain countries' ability to implement trade policies and (ii) concerns over international competition driving countries towards a ‘race to the bottom’ in labor standards are rampant. Accordingly, utilizing data from roughly 30 countries across 21 manufacturing sectors over 2001–2009, we examine the impact of employment protection legislation on industry-level trade. Moreover, we attend to concerns over the endogeneity of labor regulations by employing an instrumental variables approach. By using disaggregated data along with the strategies aimed at addressing the endogeneity of labor regulations, we provide a novel contribution to the literature examining the trade and foreign investment implications of employment protection legislation. Overall, such legislation is witnessed to significantly encourage imports in relatively labor-intensive industries.

Employment protection reforms and labour market outcomes in the aftermath of the recession: Evidence from Croatia

This paper examines the effects of employment protection legislation (EPL) reforms on employment outcomes in Croatia, testing the available theoretical predictions of partial labour market reforms from the literature. Using Labour Force Survey (LFS) data in the period 2007-2017 and applying the event study method in combination with probit regressions, the main results suggest that EPL reforms from 2013 and 2014 induced a rise in temporary employment, while the effects on overall employment are clearly visible only in the case of the second reform. Moreover, probit regression estimations show that specific groups of the population – females, youths, foreigners, the low-skilled and singles from rural areas – have a higher probability of ending up with temporary contracts, suggesting there is a segmentation on the Croatian labour market.

Employment Protection Legislation Impacts on Capital and Skills Composition

The article investigates the effects of Employment Protection Legislation (EPL) on capital and skills according to the intensity of international competition. Grounded on a panel data sample for 14 OECD countries and 18 industries from 1988 to 2007, and a difference-in-difference approach, we find that strengthening EPL : (i) leads to a capital-labour substitution in favour of non ICT non RD (ii) lowers ICT capital and, even more severely, RD and (iii) works at the relative disadvantage of low-skilled workers. Strengthening EPL can therefore be an impediment to organizational and so technological change and risk taking on globalized markets. An illustrative simulation suggests that structural reforms weakening EPL could have a significant favorable impact on firms’ ICT and R&D investment and on hiring low-skilled workers.

Employment Protection and Firm-Provided Training: Quasi-Experimental Evidence from a Labour Market Reform

In 2012, a labour market reform in Italy known as the Fornero Law substantially reduced firing restrictions for open-ended contracts in the case of firms with more than 15 employees. The results from a difference in regression discontinuities design that compares firms below versus those above the cut-off before and after the reform demonstrate that after the Fornero Law was introduced, the number of trained workers increased in firms just above the threshold, with an order of magnitude of approximately 1.5 additional workers in our preferred empirical specification. We show that this effect might be partly explained by the reduction in worker turnover and a lower use of temporary contracts at the threshold after the reform. Our study highlights the potentially adverse effects of employment protection legislation (EPL) on training in dual labour markets due to larger firms seeking to avoid the higher costs of EPL via temporary contracts.

Self-employment as a vehicle for labour market integration of immigrants and natives

PurposeThe purpose of this paper is to investigate the effect of employment protection legislation (EPL) on self-employment in a comparative analysis between immigrants and natives. Specifically, it investigates whether, as a result of more stringent regulations, self-employment becomes a vehicle for better labour market integration for immigrants and natives, and for better matching between the supply and demand of labour and skills.Design/methodology/approachThe authors use OECD indicators on the strictness of EPL, self-employment rates calculated for natives and immigrants from the EU Labour Force Survey and a range of control variables, in a longitudinal study covering 18 European countries over the period 1995–2013. The analysis employs a panel regression with random effects as the baseline model, with country and time fixed effects models serving for robustness checks.FindingsThe results indicate that EPL of regular contracts affects native self-employment positively, with some evidence of a negative effect for immigrants. On the other hand, EPL of temporary contracts positively affects immigrants’ self-employment. These results indicate that a stricter EPL crowds out incumbent native workers from the prime employment segment of regular contracts into self-employment, whereas a similar effect exists for immigrant workers in the segment of temporary contracts. This is consistent with the hypothesis of segmentation of labour market opportunities between insiders and outsiders, with implications for immigration, employment and entrepreneurship policies.Originality/valueThis is the first study to systematically study the effect of EPL on immigrant and native self-employment in a comparative framework. It elucidates to what extent self-employment serves as an alternative channel of labour market integration in response to less and more strict regulation of regular and temporary employment contracts. Distinguishing immigrant and native workers helps us understand how these effects may differ for outsiders and insiders in the labour market, as represented by the two groups.

Does unemployment matter? Economic insecurity, labour market policies and the far-right vote in Europe

What is the impact of unemployment on far-right party support? This article develops a framework that links unemployment to far-right party support, while taking into account both the heterogeneity of the workforce and the role of labour market policies. More specifically, we focus on unemployment as a driver of economic insecurity and examine its effect on outsider and insider labour market groups. We identify the extent to which two labour market policies—unemployment benefits and Employment Protection Legislation (EPL)—mediate the effect of unemployment on economic insecurity, thus limiting the impact of unemployment on far-right party support. We carry out a large N analysis on a sample of 14 Western and 10 Eastern European countries between 1991 and 2013. We find that unemployment only leads to higher far-right support when unemployment benefits replacement rates are low. The results with regard to the mediating effect of EPL are more complex as EPL only mediates the impact of unemployment when we take into account the share of foreign-born population in the country.

Employment Protection, Temporary Contracts and Firm-Provided Training: Evidence from Italy

In this study, we leverage on Italy's size-contingent firing restrictions 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 incentives for firms to invest in workers' training. The number of trained workers falls by about 1.5-1.9 units at the threshold: this is not a negligible effect, corresponding to a 16-20% reduction in the number of trained workers.The results are robust to several sensitivity checks and controls for potential confounding factors (e.g. work councils). The effect of EPL on training is not mediated by different levels of investment in physical capital or propensities to innovate, while it is mostly accounted for by higher worker turnover and more use of temporary contracts, which entail less training, in firms with higher firing costs. Our study highlights the potential adverse effects of EPL on worker training in dual labour markets, owing to larger firms seeking to avoid the higher costs of EPL by means of temporary contracts.

Does Job Security Hamper Employment Prospects?

We use a reform in the Swedish employment protection legislation (EPL) that decreased dismissal costs for small firms only, to investigate the effect of EPL on the propensity to hire workers who we ...

Rent Creation and Sharing: New Measures and Impacts on TFP

This analysis proposes new measures of rent creation or (notional) mark-up and workers’ share of rents on cross-country-industry panel data. While the usual measures of mark-up rate implicitly assume perfect labor markets, our approach relaxes this assumption, and takes into account that part of firms’ rent created in an industry is shared with workers to an extent which can vary with their skills. Our results are based on a cross-country-industry panel covering 14 OECD countries and 19 industries over the 1985-2005 period. In a first part of our analysis we draw on OECD indicators of product and labor market (anticompetitive) regulations to test how they are related to our new measures of mark-up and rent-sharing. We find that anti-competitive Non-Manufacturing Regulations (NMR) affect mark-up rates positively, and hence firms’ rent creation and workers’ share of rent, whereas Employment Protection Legislation (EPL) has no impact on rent creation, but boosts workers’ wages per hour. However, we observe that these wage increases are offset by a negative impact from EPL on hours worked per output unit, leading to a non-significant impact of EPL on workers’ share of rents. The effects of EPL for low-skilled workers appear to be more pronounced than those for medium-skilled workers, both being much greater than for highly-skilled workers. In the second part of our analysis, we estimate the impacts of our new measures on Total Factor Productivity (TFP) in the framework of a straightforward regression model. We use the OECD regulations indicators as relevant instrument to take care of endogeneity and to make sure that the resulting estimates assess the proper regulation impacts of rent creation and sharing without being biased by other confounding effects. We find that less competition in the product and labor markets as assessed by our measures of mark-up and workers’ share of rents have both substantial negative impacts on TFP.

Firm dynamics and employment protection: Evidence from sectoral data

We analyze the impact of employment protection legislation (EPL) on firms’ entry and exit rates in a set of industries in thirteen OECD countries from the most recent version of the OECD Structural and Business Statistics Database. Using a difference-in-differences identification strategy, we find that more stringent EPL is associated to both lower entry and exit in industries characterized by higher worker reallocation intensity. We decompose the overall effect of EPL and find that both collective and individual dismissal regulations reduce the entry and exit rates. The negative effects of EPL are stronger for small firms. An extensive robustness analysis confirms our main findings.

Employment protection legislation and SME performance

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.

Turning Pink Slips into Red Tape: The Unintended Effects of Employment Protection Legislation

This paper presents evidence on the link between employment protection legislation (EPL) and the rate of unemployment in a cross-country panel data set of OECD countries from 1985-2013. We use both a traditional panel specification with lags of the policy variable, and also a unique structural panel vector autoregression (PVAR) method to determine the long-run dynamic interaction between employment protection legislation and unemployment. We confirm that more restrictive EPL for permanently employed workers causes a significant and persistent increase in unemployment, but the effect is only apparent at long lag lengths, some 2-5 years after the law has been implemented.

Does Employment Protection Raise Stress? A Cross-Country and Cross-Province Analysis

This paper investigates the effects of employment protection legislation (EPL) on workers’ stress and well-being. EPL increases job security, but it may also have adverse effects on workers, even in partial equilibrium: costly separations may induce firms to exert pressure on workers or raise the intensity of monitoring. Using several individual surveys, we obtain positive and significant effects of EPL on stress in high-turnover sectors relative to low-turnover sectors, with causal interpretation. As to the net effect of EPL, it raises workers’ stress in high-turnover sectors while it generally reduces it in lower-turnover sectors.

Firm Dynamics and Employment Protection: Evidence from Sectoral Data

In this paper we analyse the impact of employment protection legislation (EPL) on firms' entry and exit rates for a large sample of industries of thirteen countries selected from the most recent version of the OECD Structural and Business Statistics Database. Using a differences-in-differences identification strategy, we find that more stringent EPL is associated to lower entry and exit rates, particularly in industries characterized by higher job reallocation intensity. We also find that both collective and individual dismissal regulations reduce firms' entry and exit rates. Interestingly, our results suggest that the negative effects of EPL is stronger in the case of firms between one and nine employees while, in the case of larger ones, results are not clear-cut. An extensive sensitivity analysis confirm the robustness of our findings.

Employment Protection Legislation and the Youth Labour Market

This study analyses the effect of employment protection legislation (EPL) on youth unemployment and employment rates in Western Europe. It differentiates between two components of EPL: job security provisions and regulations on temporary contracts. While deregulating job security provisions is expected to lower youth unemployment, the impact of deregulating temporary contracts is ambiguous, but should depend on the strictness of job security provisions. A literature review and replication of prior research demonstrate that much prior evidence linking EPL to higher youth unemployment is not robust to important or minor specification checks. The empirical analysis uses aggregate data from 16 Western European countries and the United States for the period from 1980 to 2008 ( N = 461) and fixed effects and differences-in-differences estimation. While effects of job security provisions are inconsistent across specifications, there is suggestive evidence that deregulating temporary contracts at high levels of job security provisions has significantly increased youth unemployment rates and lowered youth employment rates.