Employment Protection Legislation Index Research Articles

Club convergence of labor market institutions in the European Union

This paper analyzes the convergence of labor market institutions in the European Union (EU) to test for the economic integration of EU countries from 1993 to 2018. The convergence is measured by using a flexible approach of the log-t regression for five indicators of labor market institutions: employment protection legislation index (EPL), tax wedge, unemployment benefits, active labor market policies, and minimum wages. The results suggest no convergence in labor market institutions between the EU member states. The differences between the institutions are still substantial, and the labor market institutions are changing too slowly to converge. The empirical analysis also considers the possibility of club convergence, differentiating between the endogenous clubs based on clustering algorithm, and the exogenous clubs based on geographical proximity and similarities of labor market institutions. Convergence is present only in endogenous clubs that are determined by different demographic, competitiveness, and economic factors. Since labor market institutions are the fundamental determinants of employment and unemployment, the differences found in the labor market institutions suggest that employment and unemployment levels in the EU will hardly converge, implying weak labor market integration.

Worlds of Labour: Introducing the Standard-Setting, Privileging and Equalising Typology as a Measure of Legal Segmentation in Labour Law

Abstract The Standard Employment Relationship (SER) in industrialised countries is associated with strong protection for employees who fulfil its criteria but tends to neglect those who do not. Although the theoretical concept of SER has had repercussions around the world, its global empirical incidence and the variation of regulatory patterns associated with it have not been scrutinised so far. Comparative quantitative research in labour law has mainly focused on the overall level of employment protection in the countries of the Northern Hemisphere. Against this background, we ask how legal segmentation in labour law, that is, the exclusion from and gradation in employment protection which seems to be connected with the SER, can be conceptualised and measured in a global perspective. Drawing on leximetrics, a method to measure and quantify norms, we make use of and extend existing data sets such as the Centre for Business Research Labour Regulation Index (CBR-LRI) and Employment Protection Legislation Index (EPLex) in order to grasp the nature of legal segmentation. We identify three main functions of individual employment law in the protection/segmentation context: the standard-setting (S), the privileging (P) and the equalising (E) functions. We develop the SPE-employment law model on the assumption that the three functions are mutually independent in normative terms. The SPE typology offers a genuinely new perspective for comparative labour regulation research, making it possible to see the differentiation of patterns of legal segmentation and their path dependencies in 115 countries. First findings on a global scale show that in 2013 no fundamental difference between the levels of regulation in the Global South and North can be found. Moreover, familiar patterns can be observed such as a tendency to stable and low protection levels in liberal welfare states, and a tendency to universalist types of regulation in former socialist countries.

Unemployment Impact of Product and Labor Market Regulation: Evidence from European Countries

Abstract This paper provides robust estimates of the impact of both product and labor market regulations on unemployment using data from 24 European countries over the period 1998–2013. Controlling for country fixed effects, endogeneity, and a large set of covariates, results show that product market deregulation overall reduces the unemployment rate. This finding is robust across all specifications and in line with theoretical predictions. However, not all types of reforms have the same effect: deregulation of state controls and in particular involvement in business operations tend to push up the unemployment rate. Labor market deregulation, proxied by the employment protection legislation index, is detrimental to unemployment in the short run, while a positive impact (i.e., a reduction in the unemployment rate) occurs only in the long run. Analysis by sub-indicators shows that reducing protection against collective dismissals helps in reducing the unemployment rate. The unemployment rate equation is also estimated for different categories of workers. Although men and women are equally affected by product and labor market deregulations, workers distinguished by age and educational attainment are affected differently. In terms of employment protection, young workers are almost twice as strongly affected as older workers. Regarding product market deregulation, highly educated individuals are less impacted than low- and middle-educated workers.

Critiquing the OECD’s Employment Protection Legislation Index for individual dismissals: The importance of procedural requirements

Key EU agencies have successfully urged member states to scale back employment protection legislation as a solution to unemployment. The economic arguments for this reform are mixed, with recent empirical evidence largely unsupportive. Critics have also raised doubts about the accuracy of the OECD’s Employment Protection Legislation Index, which is the principal method EU agencies use to target so-called high-protection regimes. This article supplements existing criticisms of the OECD index by arguing that it fails to account for procedural requirements in assessing the difficulties and costs of carrying out individual dismissals. Evidence from New Zealand, ostensibly a low-protection country, demonstrates procedural requirements can pose the main impediments to carrying out individual dismissals. This suggests the need for revision of the OECD Employment Protection Legislation Index or the use of other indices instead.

The Unemployment Impact of Product and Labour Market Regulation: Evidence from European Countries

This paper provides robust estimates of the impact of both product and labour market regulations on unemployment using data for 24 European countries over the period 1998-2013. Controlling for country-fixed effects, endogeneity and a large set of covariates, results show that product market deregulation overall reduces the unemployment rate. This finding is robust across all specifications and in line with theoretical predictions. However, not all types of reforms have the same effect: deregulation of state controls and in particular involvement in business operations tends to push up the unemployment rate. Labour market deregulation, proxied by the employment protection legislation index, is detrimental to unemployment in the short run while a positive impact (i.e. a reduction of the unemployment rate) occurs only in the long run. Analysis by sub-indicators shows that reducing protection against collective dismissals helps in reducing the unemployment rate. The unemployment rate equation is also estimated for different categories of workers. While men and women are equally affected by product and labour market deregulations, workers distinguished by age and by educational attainment are affected differently. In terms of employment protection, young workers are almost twice as strongly affected as older workers. Regarding product market deregulation, highly-educated individuals are less impacted than low- and middle-educated workers.

Structural labour market reforms, GDP growth and the functional distribution of income

The view that “structural reforms” designed to deregulate the labour market would be able to increase employment and income is questioned by controversial empirical results, while the likelihood that these reforms accentuate inequalities seems to be supported by recent evidence. The wide literature on this issue, however, lacks studies on the specific implications of “structural labour-market reforms” on growth and functional distribution of income. The purpose of this study is to fill this gap by proposing two new empirical analyses aimed at verifying the existence of statistical relationships between changes in the Employment protection legislation index (EPL) on one side and variations of real GDP growth and wage share on the other side. Results indicate that EPL reductions have no significant links with real GDP growth whereas they are significantly correlated with wage share reductions. These results contradict some features of the neoclassical theories of growth and distribution.

Hidden in Plain Sight? Does Stricter Employment Protection Legislation Lead to an Increased Risk of Hidden Unemployment in Later Life?

This article examines the influence of national employment protection legislation (EPL) on the likelihood of older workers in Europe being forced into retirement. Data are drawn from 4 waves of the Survey of Health, Ageing and Retirement in Europe (SHARE) covering the period from 2004 to 2013. The sample is restricted to those who were aged between 50 and 80 and exited from paid work during the study period (N = 3,446). EPL was measured using the OECD indicators of employment protection concerning regulations for individual dismissals. Exits from work were defined as forced or unforced based on the respondent’s description of the reason for leaving work. Our cross-national study shows considerable variety in the prevalence of forced career exit across 13 European countries. Furthermore, the results show that career exit through retirement is less likely to have been forced as compared to career exit through non-retirement routes. However, the results also show that with every unit increase in the EPL index, the probability of forced career exit through retirement becomes more likely. Apparently in countries with high levels of employment protection, retirement is a more attractive route to lay off older workers than in countries with low EPL. By forcing older adults to leave their jobs through retirement, these employers are shedding workers who would have preferred to continue their working lives.

Uses and Abuses of the OECD's Employment Protection Legislation Index in Research and EU Policy Making

This paper provides a critical assessment of the OECD's Employment Protection Legislation (EPL). This indicator is designed to measure and compare employment protection legislation across countries and has dominated much of recent labour market policy making in the EU. The authors of this paper demonstrate that the construction of this instrument involves simplifications, estimations and omissions that make it highly suspect as an indicator of employees' protection. Empirical tests do not confirm the predicted negative effects of laws to protect employment. EU policy documents tacitly acknowledged this, but continue to give policy recommendations based on unproven claims. The paper also asks whether this instrument can be improved or should be abolished and what could be more useful alternatives.

Analýza příčin a důsledků nezaměstnanosti mladých v Evropské unii

The EU labour markets show a number of long-term imbalances and asymmetries, which are refl ected in a persisting high unemployment rate. A group that is particularly affected by the high unemployment rate are young people. The aim of the paper is to analyse causes and consequences of the youth unemployment in the EU and compare them with the measures. We test 894 POLITICKÁ EKONOMIE, 7, 2015 following hypothesis: "The high rigidity of the labour markets in the EU increases the rate of youth unemployment." Further, we analyse the correlation between the rigidity of the EU labour markets and youth unemployment rate. There is some evidence that Employment Protection Legislation index (EPL) is one of the key factors infl uencing youth unemployment. However, the results have differed significantly the according to the various regions (socio-economics models) of the EU. In the end of the paper the research leads to the conclusion that if the education systÊm allows a smooth transition between school and work, a higher rate of EPL doesn't increase youth unemployment. In order to reflect high complexity of the problem is the examination of the systems approach.

Employment Protection Legislation, Labour Market Dualism, and Inequality in Europe

This article deals with the relation between labour market regulation and the dynamics of overall employment and unemployment in continental Europe. We investigate the impact of the reforms of employment protection systems and activating welfare policies and test the integrative power of marginal labour market deregulation, assessing occupational outcomes of changing workforce exposure to unemployment and fixed-term contracts. Thus, particular attention is paid to the possible effect of ‘institutionally driven’ labour market segmentation, mirrored by the national discrepancy in employment protections of workers with distinct contractual arrangements and by the ratio of expenses on GDP in active versus passive labour market policies. We use pseudo-panel data based on European Labour Force Survey (EU-LFS) (1992–2008) and apply linear fixed effect (FE) models with lagged independent variables. The deregulation measure—the insider–outsider differentials—is based on the OECD employment protection legislation index (EPL 2013). The overall findings indicate a detrimental effect of unbalanced passive and active labour market policies, a negative trend of permanent employment, and a ‘honeymoon effect’ of partial and targeted deregulation measures whose effectiveness on overall employment, if any, appears to be progressively weakened over time. The responsiveness of employment conditions to marginal EPL variations as well as to previous ‘unstable employment situations’ is significantly higher in Southern Europe. Temporary employment, if compared with unemployment, may still play a role in reducing individual subsequent unemployment risks, but its ‘integrative effect’ is hardly confirmed if we view fixed-term contracts as a stepping stone towards stable insertion into the primary labour market.

Fiscal Stimulus and Labor Market Flexibility

This paper investigates whether a fiscal stimulus implies a different impact for flexible and rigid labour markets. The analysis is done for 11 advanced OECD economies. Using quarterly data from 1999 to 2013, I estimate a panel threshold structural VAR model in which regime switches are determined by OECD’s employment protection legislation index. My empirical results indicate significant differences between rigid and flexible labour markets regarding the impact of the fiscal stimulus on output and unemployment. While the impulse response of real GDP to a government spending shock is positive and more effective in flexible labour markets, it has less impact in the rigid ones. Moreover, it is found that a fiscal stimulus leads to higher overall unemployment in highly regulated countries.

The Evolution of the Regulation of Labour in the USSR, the CIS and the Baltic States, 1985–2009

This article is a first systematic study of employment protection legislation in the 15 successor states of the USSR over the last two and a half decades. The analysis is based on new and unique data assembled using OECD methodology. We find that the dynamics of employment protection in the region resemble an inverted U-shaped pattern with the peak of labour market rigidity occurring in the mid-1990s in CIS countries and a decade later in the Baltic states. By now, the former Soviet states as a group are similar to the EU-15 and OECD countries in terms of the overall employment protection legislation index, although they differ in terms of contributions to the overall employment protection legislation of its three major components, namely, regulation of permanent contracts, temporary contracts and collective dismissals.

Fiscal Stimulus and Labor Market Flexibility

This paper investigates whether a fiscal stimulus implies a different impact for flexible and rigid labour markets. The analysis is done for 11 advanced OECD economies. Using quarterly data from 1999 to 2013, I estimate a panel threshold structural VAR model in which regime switches are determined by OECD's employment protection legislation index. My empirical results indicate significant differences between rigid and flexible labour markets regarding the impact of the fiscal stimulus on output and unemployment. While the impulse response of real GDP to a government spending shock is positive and more effective in flexible labour markets, it has less impact in the rigid ones. Moreover, it is found that a fiscal stimulus leads to higher overall unemployment in highly regulated countries.

Natural Rate of Unemployment and the Flexibility of the Labor Markets

In this paper I investigate how the natural rate of unemployment is affected from various institutions of the labor market. I find that union density, benefit replacement rate, expenditure on active labor market policies per unemployed person, and employment protection legislation play a significant role in explaining the differences in long-term unemployment rates across the OECD countries. Besides that, I also look at whether the vacancy rate and the participation rate are affected from the structure of the labor markets. An increase in the employment protection legislation index and union density generate a decline in the vacancy rate. As far as the participation rate is concerned, an increase in the employment protection legislation index and benet replacement rate increase the inactivity rate, whereas an increase in expenditure on active labor market policies causes an increase in the participation rate.

Evolution of Employment Protection Legislation in the USSR, CIS and Baltic States, 1985-2009

This paper presents and discusses new data on employment protection legislation (EPL) in the successor states of the former USSR – the CIS and Baltic states – over 25 years from 1985 to 2009. We use the OECD methodology (OECD EPL, version II) for assessing the strictness of national labor laws with respect to employers’ firing costs. In addition to the overall OECD EPL index, we present detailed statistics for 18(22) sub-indicators used for its computation. The new data allow us to make several important observations. In particular, the data do not support the widely held view that labor regulations in the former USSR with respect to firing costs were extremely rigid and were subsequently liberalized by the 15 successor states over the course of transition to a market economy. Rather, the dynamics of the EPL index in the region resembles an inverted U-shaped pattern with the peak of labor market rigidity occurring in the mid-1990s in the CIS countries and a decade later in the Baltic States. In terms of major sub-indicators, we observe a rather unusual pattern: gradual liberalization of permanent contracts on the background of increasing regulation of temporary contracts and collective dismissals. This is in sharp contrast with the OECD economies, where liberalization of temporary contracts has been the major trend in the recent decades. By now, the ex-USSR states as a group do not differ that much from the EU-15 and OECD countries in terms of the overall EPL index, although they differ considerably in terms of contributions to the overall EPL of its thee major components, namely, regulation of permanent contracts, temporary contracts, and collective dismissals. We also show that our EPL data are correlated with a number of variables characterizing economic development, progress in market-oriented reforms, and political regimes prevailing in the countries studied, which suggests potential of using the new dataset in further politico-economic research.