Employment Protection Legislation Research Articles

Labour market reforms, institutional complementarity and the insider–outsider wage gap

Abstract This article provides long-term evidence on how wage differentials between permanent and temporary workers are shaped by institutions that play a key role in labour market dualism, i.e. industrial relations, employment protection legislation and unemployment benefits. A two-step multilevel approach with fixed effects is employed using EU-SILC data for 25 European countries spanning up to 17 years (waves 2004–2020, N = 397) to estimate the moderating effects of several institutions and their interactions on the wage gap by contract type and across the whole wage distribution. The results show that more insider-oriented institutions tend to widen wage differentials and that the impact of institutional reforms on the wage gap varies greatly with the given institutional context. Overall, policy trends towards flexibilization risk widening insider–outsider divides due to accumulating labour market risks for temporary workers, thus increasing labour market segmentation by contract type.

A Precarious Path to Partnership? The Moderating Effects of Labour Market Regulations on the Relationship Between Unstable Employment and Union Formation in Europe

Rising employment uncertainty featured by higher risks of being temporarily employed or unemployed is often seen as the driving force behind delayed and declined partnering in Western countries. However, such an employment–partnering relationship is contextualized by labour market institutions and thus could diverge across countries over time. This paper aims to investigate how country-level variations in labour market regulations moderate individual-level effects of unstable employment on union formation, including the transitions into marriage or cohabitation unions. Using comparative panel data for 26 countries from the European Union Statistics on Income and Living Conditions (the years 2010–2019), our multilevel fixed effects models showed that temporary employment and unemployment negatively affected the probability of union formation for single women and men in Europe. Moreover, the negative relationship between unstable employment and union formation was reinforced when labour market reforms were stimulating insider–outsider segregations or decreasing welfare provisions. Specifically, stricter employment protection legislations and higher coverage rates of collective bargaining agreements could reinforce the negative effects of temporary employment and unemployment on union formation, while more generous provisions of unemployment benefits could buffer such negative effects.

Heterogeneous paths to stability

Abstract In this paper, we show that incentives to convert temporary contracts into permanent ones might be less effective when the employment protection legislation associated with temporary contracts is lax. Drawing upon rich administrative data and using a difference-in-differences methodology, we estimate that workers at their first work experience hired on more flexible contracts undergo a reduction in the conversion rate to permanent employment of 6.3 percentage points after the implementation of the incentives (and of 3.2 percentage points over a year), compared to peers hired on more rigid contracts. This reduced conversion rate, which results in a 17% wage penalty even 2 years into their professional journey, points to a significant negative impact of flexible temporary jobs on the future prospects of young workers.

Preferences for Labor Regulation: Endowments vs. Beliefs

Abstract Are preferences for labor regulations driven by individuals’ own endowments or their beliefs? To address this question, we conducted a cross-country survey on people’s opinions on employment protection legislation—an area where reform has proven to be difficult and personal interests are at stake. We find that individuals’ beliefs contribute two to three times more than their own endowments and personal pay-offs. A randomized information treatment confirms that beliefs can explain views about regulations, but beliefs can also change with new information. Our results are robust to several checks, including to alternative estimation techniques and samples.

Employment Protection Legislation and Job Reallocation Across Sectors, Firms and Workers: A Survey

Employment Protection Legislation and Job Reallocation Across Sectors, Firms and Workers: A Survey

Regulating Algorithmic Management at Work in the European Union: Data Protection, Non-discrimination and Collective Rights

In recent years, algorithmic management practices have been widely adopted by employers to monitor remote work, analyse how applicants behave during job interviews, rate worker performance and calculate wage adjustments. As a result, the condition of workers being subjected to the upstream authority of managers has intensified. Employment protection legislation recognizes the importance of curbing the employer’s unilateral discretionary power by deploying several controlling factors. However, the traditional guardrails have now been displaced by the transformative impact of data-driven technologies. As a response to this challenge, several measures implemented by the European Union (EU) could be pragmatically adapted to curtail the expansion of artificial intelligence-based management prerogative. By applying a multidimensional, anticipatory and participatory approach, this paper integrates substantive and procedural rules that contribute to rebalancing informational asymmetries within workplaces and assesses the effectiveness of these rules. Examining case law, administrative decisions and legislative developments, it also discusses the mutually reinforcing relationship between data protection and anti-discrimination measures, which renders automated decisions documentable and contestable. In addition to defensive tactics, this article calls for the involvement of worker representatives in co-designing digital human resource policies. As data are relational, collective bodies are uniquely placed to exchange information, raise awareness and bring claims, with a view to preventing the improper use of algorithms. Employer Powers, Data Protection, Non-Discrimination, Co-Determination, Artificial Intelligence, Management by Algorithm, Right to Explanation, Burden of Proof, EU Law, Digital Transformation

Temporary agency employment: A supplement to regular jobs – under certain circumstances

In countries with strict employment protection legislation, firms may seek to replace regular by atypical jobs in order to cut wages or to become more flexible. In Germany, the number of unprotected temporary jobs is comparatively low. During the past decades, temporary agency employment, however, has increased considerably and the share of agency workers is now above the EU average. Using German establishment data, the analysis draws on longitudinal (generalized method of moments) and cross-sectional (matching and difference in differences) methods to evaluate whether agency workers replaced or supplemented regular workers during and after the Great Recession of 2008/2009. The study finds that hiring (more) agency workers made it possible for user firms among Germany’s core manufacturing industries to employ a larger number of regular workers at the same time. In specific sectors and regions, temp agencies therefore provided an alternative to government-sponsored instruments such as short-time work schemes. Obviously, from the view of workers, many disadvantages remain, even more so as it is rare for temp spells to offer a stepping stone into regular employment.

Trust and employment protection legislation

We examine the role of generalized social trust in substituting for employment protection legislation. Using foreign direct investment from the US to a sample of OECD countries, we find that trust diminishes the importance of formal employment regulations in investment attractiveness.

Employment protection and labour productivity growth in the EU: skill-specific effects during and after the Great Recession

Does employment protection affect sectoral productivity growth differently during crises and recovery periods? This paper sheds light into this question by investigating the relationship between employment protection legislation (EPL hereafter) and sectoral labour productivity growth in the EU in the context of the Great Recession. We consider the crisis and recovery periods, evaluate the relevance of both levels and changes in EPL for productivity growth, and explore the conditioning role played by sectoral differences in terms of cumulativeness of knowledge as well as the skills of the labour force, captured by different levels of education. We find that stricter labour protection reduces labour productivity growth in sectors with a large share of workers with tertiary education, whereas this effect is negligible or positive in sectors where workers with secondary or only primary education are more prevalent (such as agriculture, mining and quarrying). We attribute this to a more intensive labour hoarding in the former, as EPL strengthens labour hoarding in sectors that rely on firm-specific knowledge accumulation and skilled human capital that are difficult to substitute with physical capital. Whereas it is simple to dismiss (and to find later) unskilled employees. They not only can be substituted more easily with capital, but also the costs of their firing are lower, they are overrepresented among workers holding temporary contracts, and they might be unequally informed and able to exercise their rights. This leads to low (if any) labour hoarding and little impact of EPL on labour productivity in such sectors. We also document that the negative effect is prominent only during the crisis, and an increase in the stringency of EPL over an extended period stimulates employers to substitute labour with investments in physical and knowledge capital.

Total factor productivity and structural reforms: Evidence from advanced economies sector‐level data

AbstractThis paper computes a new measure of capacity utilization‐adjusted Total Factor Productivity (TFP) using sector‐level data from a sample of 18 Advanced Economies and 24 industries between 1970 and 2014. We then empirically examine the impact of structural reforms (labor and product market) on TFP by means of the local projection method. Structural reforms follow a narrative‐base construction which have several advantages in our context. Results show that structural reforms positively impact TFP, particularly the liberalization of employment protection legislation for regular workers. The effect of reforms affects both changes in resource misallocation across sectors (the between effect) and within sectors (the within effect). The TFP‐effect of both types of reforms varies depending on the phase of the business cycle prevailing at the time the reform is implemented. Finally, our findings are robust to a wide range sensitivity checks.

Does employment protection legislation affect employment and unemployment?

The article analyses the impact of employment protection legislation (EPL) on labour market outcomes. Despite widespread reforms that have reduced employment protection, the evidence on the effects of such reforms is inconclusive. Using data from sixteen European countries over the period 1985–2019, we analyse the impact of EPL on the dynamics of employment, employees and unemployment rates. In contrast to existing studies, we analyse both the existence of a linear relationship between EPL and labour market outcomes and the existence of a non-linear relationship, as well as interaction effects between EPL and economic growth. Our results show that employment protection does not explain the changes in employment, employees and unemployment rates. Therefore, labour reforms that have reduced employment protection by reducing dismissal costs and facilitating the use of temporary contracts have not had the presumed positive effects on employment and unemployment rates.

How does employment protection legislation affect labor investment inefficiencies?

This paper analyzes how labor investment decisions are affected by the operational risk related to different dimensions of employment legislation (general, regular, and temporary employment protection). Labor investment efficiency is usually described as efficient investing and resource management; employment protection legislation can be regarded as an obstacle that increases hiring and firing costs, representing a source of operational risk and leading to lower output and financial flexibility. This study uses data from 612 companies from 30 countries between 2011 and 2019 (4044 observations) and a dynamic panel data estimator to investigate the relationship between employment protection legislation and labor investment inefficiencies. Our results show that general employment protection legislation reduces inefficiencies, whereas regular and temporary specific employment protection laws increase the incentive to overinvest. Our findings can be explained by the agency theory and the ways in which different aspects of employment protection legislation create operational risk.

Does labour protection influence mental-health responses to employment shocks? Evidence on older workers in Europe

This paper investigates if and how Employment Protection Legislation (EPL) influences mental-health responses to older workers’ job disruptions in Europe. It exploits labour market shocks during the first wave of the COVID-19 pandemic, and it is based on European data from the SHARE survey, in which each country is characterised by a different level of EPL. The analysis controls for workers’ individual characteristics and other contextual factors via propensity score matching. Results show that mental-health distress following job disruptions depends on the level of EPL, with significantly higher distress in countries in which EPL is more binding, especially among individuals with a lower education level. These findings suggest to consider the costs and benefits of mitigating measures for European countries with a high EPL, especially for older citizens with disadvantaged backgrounds.

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

Theoretically, whether a more loosely regulated labour market inhibits or fosters fertility in a society is ambiguous. Empirically, the few studies analysing the relationship between the strictness of employment protection legislation—the norms and procedures regulating labour markets’ hiring and firing processes—and fertility have found mixed evidence. This paper reconciles the ambivalent conclusions of previous studies by analysing the impact of employment protection legislation and labour market dualism on total fertility across 19 European countries between 1990 and 2019. Our results indicate that an increase in employment protection for regular workers positively affects total fertility. Nonetheless, an increasing gap between the regulation of regular and temporary employment—that is, labour market dualism—negatively impacts total fertility. These effects, of small-to-moderate intensity, are relatively homogeneous across age groups and geographical areas and are especially pronounced among the lower educated. We conclude that labour market dualism, rather than a “rigid” employment protection legislation, discourages fertility.

Fear of Labor Rigidities: The Role of Expectations on Employment Growth in Peru

AbstractThe impact of employment protection legislation has been thoroughly analyzed in varied contexts. Most studies highlight the potential harm of the legislation on labor outcomes, although evidence remains inconclusive. However, the literature has focused primarily on ex post impacts, analyzing the regulation’s effect after implementation. This article departs from that analysis to focus on anticipated or ex ante effects of labor regulation. More specifically, we study the role of firms’ expectations in future stricter labor legislation related to employment and income in Peru’s formal and informal labor market. To account for expectations, we used the number of news items related to the approval of a proposed law—the General Labor Law—to increase labor rigidities in Lima’s most important business newspaper. Using the Peruvian labor survey, we find a negative but decreasing relationship between firms’ expectations of a future stricter labor market and employment and average income. We also collect evidence that bigger news items and ones closer to the front page have a negative relationship with formal employment and income.

Measuring macroeconomic uncertainty: A cross-country analysis

This paper constructs internationally consistent measures of macroeconomic uncertainty. Our econometric framework extracts uncertainty from revisions in data obtained from standardized national accounts. Applying our model to post-WWII real-time data, we estimate macroeconomic uncertainty for 39 countries. The cross-country dimension of our uncertainty data allows us to study the impact of uncertainty shocks under varying degrees of employment protection legislation. Our empirical findings suggest that the effects of uncertainty shocks are stronger and more persistent in countries with low employment protection compared to countries with high employment protection. These empirical findings are in line with a theoretical model under varying firing cost.

More Flexible, Less Productive? The Impact of Employment Protection Legislation Reforms in Italy

ABSTRACT Through a meta-analysis of all publicly available research over a span of 25 years, the article assesses the productivity impact of the employment protection legislation reforms that have been introduced in Italy since 1997. European Union institutions and domestic reformers advocated the reforms in order to increase the competitiveness and productivity of the Italian economy. Yet, by incentivising temporary employment, the reforms have favoured competitive strategies that have reduced the productivity of the country’s firms.

Informalization of the formal sector: Evidence from India's manufacturing industries

Abstract The employment structure of India's formal manufacturing sector has undergone substantial changes since the early 2000s with a steep rise in the use of contract workers in place of directly hired workers. Much of the existing literature has attributed the widespread use of contract labour to India's rigid employment protection legislation. The resulting informalisation of the workforce in the organised sector raises concerns about the sustainability of employment growth. Using a 14-year plant-level panel data from the Annual Survey of Industries, we find that in addition to labour market rigidities and the existence of a wage differential between contract and directly hired workers, plants in the organised manufacturing sector have another important incentive to hire contract workers. Plants appear to be using contract workers to their strategic advantage against the directly hired workers to keep their bargaining power and wage demand in check. Importantly, the strength of this bargaining channel varies across plants depending on their capital intensity of production, size and existing contract worker intensity.

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.

The contextual cogs of “migrant jobs”: A comparative study of the institutional determinants of migrant marginalization in European labor markets

Migrants play a significant role in European labor markets and are used as sources of “cheap labor”; often being disproportionately represented in low-wage, poor conditions, or otherwise precarious positions. Past research has suggested that the process of migrants being filtered into these low-end occupations is linked to institutional factors in receiving countries such as immigration policy, the welfare state and employment regulation. This paper calculates the extent of migrant marginalization in 17 European countries and uses qualitative comparative analysis (QCA) and regression modeling to understand how institutional factors operate and interact, leading to migrant marginalization. The QCA showed that when a country with a prominent low skills sector and restrictive immigration policy is combined with either strong employment protection legislation or a developed welfare state, migrants will be more strongly marginalized on the labor market. The results of the statistical analysis largely aligned with the idea that restrictive immigrant policy by itself and in combination with other factors can increase marginalization.