Strictness Of Employment Protection Legislation Research Articles

Bridge jobs in Europe

Abstract We study the transitions from career to gradual and permanent retirement by a sample of (Continental) European males aged 55 to 70 in the late 2000s. We find that only 14.6% of the workers in this sample moved from a career to a bridge job by the time of the interview, much less than in the United States, where this share is estimated at close to 60%. We use the cross country and time variation in employment protection legislation and minimum retirement age to study whether recent changes in these labour market institutions have had any effect on the transitions out of career jobs. We find that policies that have increased minimum retirement age and reduced the strictness of employment protection legislation have raised the hazard into gradual retirement in Northern and Central European countries and the permanence in career jobs in Mediterranean countries. JEL codes J26, J11, J21

Youth unemployment

In Belgium youth unemployment is structurally higher than the European (EU27) average, in particular for the low educated. In this study we set a diagnosis of the main structural factors and advance key remedies. We analyze the system of employment protection, education and passive and active labor market policies. A high minimum wage, a strict separation between school and work, and a vertically segmented schooling system with high retention rates and too early tracking are identified as main causal factors. Strict employment protection legislation is only concern for high-skilled youth. Reducing labor costs at low wages and a fundamental schooling reform that aims at dismantling the strict barrier between school and work are proposed as key remedies. In addition, youth should be entitled as of the start of unemployment to a low benefit based on the principle of “mutual obligation”. Very intensive and durable guidance is to be targeted to the low educated.

Are corporatist labour markets different? Labour market regimes and unemployment in OECD countries

Abstract.Empirical studies on the unemployment effects of labour market institutions show contradictory results. One explanation is that these institutions affect unemployment differently depending on the regime in which they operate. Because of good labour relations, institutional complementarities and a trade‐off between external and internal flexibility, they produce distinctive effects in corporatist regimes. Based on empirical evidence from 20 OECD countries over the period 1985–2008, the author finds that, in corporatist labour markets, strict employment protection legislation reduces unemployment, and unemployment benefits have no negative effect. He also shows that high real interest rates, low capital accumulation and restrictive fiscal policy during recessions increase unemployment.

Transformations of Swedish Labour Market Institutions. Effects on Employees’ Turnover Cognitions

The article studies how changes in 2007 in the Swedish unemployment insurance (UI) have influenced employees’ turnover cognitions. It is argued that the combination of a strict employment protection legislation (EPL) and a generous UI in 2006 made employees more inclined to risky transitions. The post-2007 combination of a strict EPL and an ungenerous UI reinforces non-mobility intentions. Analyses of two surveys show a smaller proportion of employees with turnover cognitions in 2010 than in 2006.

The Political Economy of Labour Market Policies in Western and Eastern European Countries

Discussions on how to organize European labour markets are one of the key public policy issues of today. In European policy debates, the most important concepts seem to be ‘flexicurity’ and the ‘transitional labour market’. In this report we examine the cross-country variation in the generosity of unemployment benefits, which is a key element of the flexicurity model. Building on the political economy literature, we test hypotheses on the role of partisan politics, employment relations and employment protection legislation and active labour market policies in unemployment benefit reform. These factors have been extensively studied in the political economy literature, but hardly for Eastern European countries, because of a lack of data. We employ pooled time series cross-section regressions to analyze newly constructed indicators for Western and Eastern European countries. The results indicate that left-wing governments are positively related to unemployment protection for both Western and Eastern European countries, but this linkage is conditional on the economic situation. Coordinated bargaining by strong and centrally organized labour unions has also a positive impact on benefit generosity. Moreover, we find a negative relationship between the strictness of employment protection legislation and the generosity of unemployment benefit schemes, which is in line with the concept of the flexicurity model. Finally, within the EU we find a trend of convergence of unemployment benefit levels in the period 1990-2009. This finding indicates that the new EU member states have caught up. NEUJOBS Working Documents are intended to give an indication of work being conducted within the NEUJOBS research project and to stimulate reactions from other experts in the field. The views expressed in this paper are those of the author and do not necessarily represent any institution with which he is affiliated. See the back page for more information about the NEUJOBS project.

Examining policy configurations as conditions for long-term unemployment and non-standard employment in OECD countries using fuzzy-set analysis

This paper investigates how particular configurations of institutional conditions cause high rate of long-term unemployment and non-standard employment rate for 18 OECD countries during the period of 2001–2008. The paper aims to investigate how employment protection legislation (EPL), unemployment benefit and statutory minimum wages are associated with long-term unemployment and non-standard employment. Using the fuzzy-set analysis, the paper examines how the combination of policies matters in causing long-term unemployment and/or non-standard employment. The result suggests that a low level of statutory minimum wage can lead to high levels of non-standard employment in combination with either strict EPL for permanent workers or weak EPLs for temporary workers. The long-term unemployment rate is suggested to be high when there is strict EPL for temporary workers in combination with high levels of statutory minimum wage. This paper highlights the importance of examining multiple policies as configuration.

Housing market regulation and the social demand for job protection

Controlling for country fixed effects, there is a positive and statistically significant relationship between the degree of housing market regulation (HMR) and the strictness of employment protection legislation (EPL) in OECD countries. We provide a model in which HMR increases foreclosure costs in case of mortgage default, while EPL raises the administrative cost of dismissal. Owing to banks' lending behavior, individuals' demand for job protection increases with the cost of foreclosure. We use the model to discuss social housing and family insurance, the case for mortgage unemployment insurance, the impact of min down-payment policies, regulations on the use of fixed-term contracts, the failure of a 2006 French reform of labor contracts, and feed-back effects from HMR to EPL.

Unemployment in the OECD

This article examines the course of unemployment in OECD countries during the recent recession. The severity of the recession and the strength of macro policy responses varied from country to country. However, even after correcting for these differences, unemployment experiences were various. Unemployment generally rose by less in those countries which had strict employment protection legislation, as it did in those countries with relatively high collective-bargaining coverage. Various forms of work-sharing also helped some countries to dampen the rise in unemployment. So did increasing the generosity of out-of-work benefit arrangements. The latter finding suggests that search theoretic approaches need to be modified. Institutions do matter and not just in the short run. Hysteresis effects could project their influence into the medium term.

LABOR MARKET INSTITUTIONS AND MACROECONOMIC VOLATILITY IN A PANEL OF OECD COUNTRIES

ABSTRACTIn this paper we analyze empirically how labor market institutions influence business cycle volatility in a sample of 20 OECD countries. Our results suggest that countries characterized by high union density tend to experience more volatile movements in output, whereas the degree of coordination of the wage bargaining system and the strictness of employment protection legislation appear to be only of limited importance. We also find some evidence suggesting that highly coordinated wage bargaining systems have a dampening impact on inflation volatility.

Does employment protection help immigrants? Evidence from European labor markets

High levels of employment protection reduce hiring and firing and have a theoretically ambiguous effect on the employment level. Immigrants, being new to the labor market, may be less aware of employment protection regulations and less likely to claim their rights, which may create a gap between the costs for employers of hiring a native relative to hiring an immigrant. This paper tests that hypothesis drawing on evidence for the EU and on two natural experiments for Spain and Italy. The results suggest that strict employment protection legislation (EPL) gives immigrants a comparative advantage relative to natives. Stricter EPL is found to reduce employment and reduce hiring and firing rates for natives. By contrast, stricter EPL has a much smaller effect on immigrants.

Employment Protection, Technology Choice, and Worker Allocation

Using a country-industry panel dataset (EUKLEMS) we uncover a robust empirical regularity, namely that high-risk innovative sectors are relatively smaller in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between a safe technology with known productivity and a risky technology with productivity subject to sizeable shocks. Strict EPL makes the risky technology relatively less attractive because it is more costly to shed workers upon receiving a low productivity draw. We calibrate the model using a variety of aggregate, industry and micro-level data sources. We then simulate the model to reflect both the observed differences across countries in EPL and the observed increase since the mid-1990s in the variance of firm performance associated with the adoption of information and communication technology. The simulations produce a differential response to the arrival of risky technology between low- and high-EPL countries that coincides with the findings in the data. The described mechanism can explain a considerable portion of the slowdown in productivity in the EU relative to the US since 1995.

What Explains Prevalence of Informal Employment in European Countries: The Role of Labor Institutions, Governance, Immigrants, and Growth

This paper looks into institutional and other macro determinants of prevalence of informal dependent employment, as well as informal self-employment, in European countries, using European Social Survey data on work without legal contract in on 30 countries, covering years 2004-2009. Consistently with theoretical predictions, quality of business environment has a significant negative impact on prevalence of both types of informal employment. The share of non-contracted employees is negatively affected by perceived quality of public services and positively related to economic growth. Informal self-employment is positively related to growth in Europe at large, as well as in Eastern and Southern Europe. The level of GDP per capita also has a positive impact on the prevalence of informal employment in Europe at large and within Eastern and Southern Europe, whilst an opposite effect is found in Western and Northern Europe. Other things equal, the share of non-contracted employees in the labor force across European countries increases with the minimum-to-average wage ratio, with union density, with the share of first and second generation immigrants, and with income inequality, but falls with stricter employment protection legislation (EPL) and higher tax wedge on labor. Thus it appears that in Europe at large, labor cost effects of EPL and taxes are weaker than their impact via perceptions of job security and law enforcement, along with tax morale and the income effect. Yet the EPL effect on informality is positive (i.e., cost-related) when either Eastern and Southern Europe or Western and Northern Europe are considered separately. Furthermore, within Western and Northern Europe, the minimum wage effect is negative, whilst within Eastern and Southern Europe, the union effect is negative; in both cases, we offer a supply side explanation.

Boosting Productivity via Innovation and Adoption of New Technologies: Any Role for Labor Market Institutions?

The authors present empirical evidence on the determinants of industry-level multifactor productivity growth. They focus ontraditional factors,including the process of technological catch up, human capital, and research and development (R&D), as well as institutional factors affecting labor adjustment costs. Their analysis is based on harmonized data for 17 manufacturing industries in 18 industrial economies over the past two decades. The disaggregated analysis reveals that the process of technological convergence takes place mainly in low-tech industries, while in high-tech industries, country leaders tend to pull ahead of the others. The link between R&D activity and productivity also depends on technological characteristics of the industries: while there is no evidence of R&D boosting productivity in low-tech industries, the effect is strong in high-tech industries, but the technology leaders tend to enjoy higher returns on R&D expenditure compared with followers. There is also evidence in the data that high labor adjustment costs (proxied by the strictness of employment protection legislation) can have a strong negative impact on productivity. In particular, when institutional settings do not allow wages or internal training to offset high hiring and firing costs, the latter reduce incentives for innovation and adoption of new technologies, and lead to lower productivity performance. Albeit drawn from the experience of industrial countries, this result may have relevant implications for many developing economies characterized by low relative wage flexibility and high labor adjustment costs.

Offshoring, labour market institutions and the elasticity of labour demand

This paper analyses the evolution of the elasticity of labour demand and the possible role of offshoring therein using industry-level data for a large number of OECD countries. The first main finding is that the wage elasticity of labour demand has increased substantially since 1980, although some of this increase may reflect a trend increase in the speed of adjustment rather than an increase in the long-run wage elasticity. The evidence on the potential contribution of offshoring to raising labour demand elasticity is mixed. No association is found between increases in offshoring and demand elasticity during the second half of the 1990s, but there is a significant cross-sectional association between higher average offshoring intensity during this period and higher demand elasticity. We also find some evidence that strict employment protection legislation weakens the cross-sectional association between offshoring and higher labour demand elasticity, suggesting that the relationship between offshoring and the labour demand elasticity may depend on the national institutional environment.

Employment Protection, Technology Choice, and Worker Allocation

Using a country-industry panel dataset (EUKLEMS) we uncover a robust empirical regularity, namely that high-risk innovative sectors are relatively smaller in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between a safe technology with known productivity and a risky technology with productivity subject to sizeable shocks. Strict EPL makes the risky technology relatively less attractive because it is more costly to shed workers upon receiving a low productivity draw. We calibrate the model using a variety of aggregate, industry and micro-level data sources. We then simulate the model to reflect both the observed differences across countries in EPL and the observed increase since the mid-1990s in the variance of firm performance associated with the adoption of information and communication technology. The simulations produce a differential response to the arrival of risky technology between low- and high-EPL countries that coincides with the findings in the data. The described mechanism can explain a considerable portion of the slowdown in productivity in the EU relative to the US since 1995.

An Economic Analysis of Dismissal Legislation: Determinants of Severance Pay in West Germany

Severance pay is a vital part of employment protection legislation (EPL). We investigate the incidence and level of severance pay for dismissed employees. Our theoretical model predicts that not only the law and its interpretation by labour courts but also the costs of a suit have an impact. Using West German panel data for 1991-2006, we find that the employees' costs resulting from a suit and the legal determinants of such transfers affect the incidence of severance payments. In contrast, their level only varies with legal regulations. Our results imply that the strictness of EPL in Germany varies with extra-legal factors like employees' financial constraints.

Dependent self-employment as a way to evade employment protection legislation

This paper examines whether the strictness of employment protection legislation encourages employers to contract out work to their own paid employees by the formula of dependent self-employment, while making transitions to independent self-employment less likely by altering the relative valuation of risk between salaried work and self-employment in favour of the former. In conducting this analysis, discrete choice models are applied to data drawn from the European Community Household Panel from 1994 to 2001. To test the hypotheses, a tentative individual measure of the potential severance payment that a worker would receive in the case of dismissal is included as well as aggregated variables that try to capture differences in labour market institutions and macroeconomic conditions. Evidence for a positive impact of the strictness of employment protection legislation and the potential severance payment on transitions to dependent self-employment is found. The opposite effects, however, are detected for individuals becoming independent self-employed.

Does the Impact of Employment Protection Legislation on FDI Differ by Skill-Intensity of Sectors? An Empirical Investigation

In line with previous literature this paper finds that strict employment protection legislation has a negative impact on the volume of inward Foreign Direct Investment. Rigid labor markets result in high adjustment and exit costs which deter foreign investments. We also find that the deterrent effect of inflexible labor markets is larger for industries with relatively high shares of low-skilled workers employed. Our findings are consistent with the view that governments can support structural change by tightening labor market regulations which especially deters inflows of FDI into low-skill industries. To avoid a drop in high-skill FDI host countries should simultaneously improve other location factors especially relevant for the latter.

An economic analysis of dismissal legislation: Determinants of severance pay in West Germany

Severance pay is a vital part of employment protection legislation (EPL). We investigate the incidence and level of severance pay for dismissed employees. Our theoretical model predicts that not only the law and its interpretation by labour courts but also the costs of a suit have an impact. Using West German panel data for 1991–2006, we find that the employees’ costs resulting from a suit and the legal determinants of such transfers affect the incidence of severance payments. In contrast, their level only varies with legal regulations. Our results imply that the strictness of EPL in Germany varies with extra-legal factors like employees’ financial constraints.

Regulierung, Lebenszufriedenheit und Arbeitsplatzsicherheit Eine Analyse auf Basis von internationalen Umfrage- und Regulierungsdaten

Abstract Individual well-being is mostly measured by income so that non-monetary dimensions are not accounted for. To complement the analysis of wellbeing, survey-based data concerning satisfaction with life and happiness are used. These surveys include variables like health, social capital, regulation density and job security. An international comparison shows that the perceived job security is significantly lower in Germany than in many other European countries - even though the government aims to foster job security via regulatory measures like strict employment protection legislation. Contrary to political intention, the survey suggests that tight regulation does not correspond with a high degree of perceived job security. The latter seems to be stronger influenced by indicators like labor market performance and individual qualification.