Stringent Employment Protection Legislation Research Articles

Employment protection and FDI revisited: New evidence from micro data*

We use micro data on affiliates to Swedish multinational firms (MNEs) to explore the impact of more stringent employment protection legislation (EPL) on foreign direct investment (FDI). We add to the previous literature by exploring the impact of EPL on the extensive as well as intensive margin, and by distinguishing the impact on different types of affiliates. We find that employment and exports in exporting affiliates decline with EPL, and MNEs establish fewer exporting affiliates. In contrast, employment and sales rise with EPL in purely “horizontal” affiliates. We discuss possible mechanisms explaining this sharp asymmetry.

Employee protection and the tax sensitivity of wages: International evidence

This study examines whether employment protection legislation (EPL) affects the tax sensitivity of wages in an international setting. Using data on staggered corporate income tax changes across 18 OECD countries and a difference-in-differences approach, we find that tax hikes have a negative effect but tax cuts have no significant effect on changes in average employee wages. Stringent EPL can reduce the tax burden shifted to employees when the tax rate rises, especially in firms domiciled in countries with weaker investor protection. However, the effects of stringent EPL are insignificant when the tax rate falls. Further analyses show that EPL has more significant effects on the tax sensitivity of wages for more profitable and smaller firms. Our empirical results support the theoretical prediction that when tax-induced rents are distributed among shareholders and employees, the latter benefit from an improved bargaining position through stringent employee protection.

Employment protection and gender gap

PurposeThe purpose of this paper is to evaluate the impact of more stringent Employment Protection Legislation on employment outflows and wages of women compared to those of men.Design/methodology/approachThe authors exploit the Italian labor market reform of 1990 that raised firing costs for firms with less than 15 employees leaving unchanged existing rules for larger firms. The authors setup a natural experiment using this firm size threshold to examine if an increase of severance pay in small relative to large firms has a different impact on labor flows and earnings by gender. Using administrative linked employer–employee data, the authors find a significant reduced flow out of employment of women with respect to men in small relative to large firms after 1990.FindingsThe results also indicate a reduction of the gender wage gap after the reform of about 1.5 percent. These findings are statistically significant for women in fertility age and disappear if we consider older women.Originality/valueThe findings are consistent with the idea that employment protection may help in reducing gender disparities.

Youth earnings and labour market volatility in Europe

AbstractThe authors provide new evidence on youth earnings and labour market volatility, including flows into and out of employment, across Europe during the Great Recession. EU‐SILC data for the period 2004–13 reveal large disparities in volatility levels and trends across European countries. As expected, the Great Recession increased youth labour market volatility, offsetting the trends observed over the previous years of economic prosperity. A variance decomposition exercise points to greater exposure to worker turnover in southern Europe. Fixed effects regression on labour market institutions relates higher unemployment benefits and more stringent employment protection legislation to lower earnings and labour market volatility.

Short-time work in the Great Recession: firm-level evidence from 20 EU countries

Using firm-level data from a large-scale European survey among 20 countries, we analyse the determinants of firms using short-time work (STW). We show that firms are more likely to use STW in case of negative demand shocks. We show that STW schemes are more likely to be used by firms with high degrees of firm-specific human capital, high firing costs, and operating in countries with stringent employment protection legislation and a high degree of downward nominal wage rigidity. STW use is higher in countries with formalised schemes and in countries where these schemes were extended in response to the recent crisis. On the wider economic impact of STW, we show that firms using the schemes are significantly less likely to lay off permanent workers in response to a negative shock, with no impact for temporary workers. Relating our STW take-up measure in the micro data to aggregate data on employment and output trends, we show that sectors with a high STW take-up exhibit significantly less cyclical variation in employment.

Employment Protection and FDI Revisited: New Evidence from Micro Data

We use micro data on affiliates to Swedish multinational firms (MNEs) to explore the impact of more stringent employment protection legislation (EPL) on foreign direct investment (FDI). We add to the previous literature by exploring the impact of EPL on the extensive as well as intensive margin, and by distinguishing the impact on different types of affiliates. We find that employment and exports in exporting affiliates decline with EPL, and MNEs establish fewer exporting affiliates. In contrast, employment and sales rise with EPL in purely “horizontal” affiliates. We discuss possible mechanisms explaining this sharp asymmetry.

The Role of Labor Market Flexibility in the Job Matching Process in India: An Analysis of the Matching Function Using State-Level Panel Data

ABSTRACTUsing state-level panel data in India from 1999 to 2011, I estimate the matching functions to investigate the effect of labor market flexibility on new job matches. Next, I categorize the regions by the labor market flexibility and estimate the matching functions in the respective regions. This is the first original work that uses state-level data to estimate the matching function in India. The results show that there is no direct link between labor market flexibility and new hires, and this implies that overall effect of stringent employment protection legislation on efficiency of the job matching process is limited. However, the findings are consistent with the prediction of the search-matching model. The evidence shows that in a region with inflexible labor market, the job matching process is entirely vacancy-driven, implying a lack of labor demand. For such regions, it is recommended that policies aimed at boosting labor demand, such as employment subsidies, are appropriate for creating more employment.

Short-time Work in the Great Recession: Firm-Level Evidence from 20 EU Countries

Using firm-level data from a large-scale European survey among 20 countries, we analyse the determinants of firms using short-time work (STW). We show that firms are more likely to use STW in case of negative demand shocks. We show that STW schemes are more likely to be used by firms with high degrees of firm-specific human capital, high firing costs, and operating in countries with stringent employment protection legislation and a high degree of downward nominal wage rigidity. STW use is higher in countries with formalised schemes and in countries where these schemes were extended in response to the recent crisis. On the wider economic impact of STW, we show that firms using the schemes are significantly less likely to lay off permanent workers in response to a negative shock, with no impact for temporary workers. Relating our STW take-up measure in the micro data to aggregate data on employment and output trends, we show that sectors with a high STW take-up exhibit significantly less cyclical variation in employment.

Short-Time Work in the Great Recession: Firm-Level Evidence from 20 EU Countries

Using firm-level data from a large-scale European survey among 20 countries, we analyse the determinants of firms using short-time work (STW). We show that firms are more likely to use STW in case of negative demand shocks. We show that STW schemes are more likely to be used by firms with high degrees of firm-specific human capital, high firing costs, and operating in countries with stringent employment protection legislation and a high degree of downward nominal wage rigidity. STW use is higher in countries with formalised schemes and in countries where these schemes were extended in response to the recent crisis. On the wider economic impact of STW, we show that firms using the schemes are significantly less likely to lay off permanent workers in response to a negative shock, with no impact for temporary workers. Relating our STW take-up measure in the micro data to aggregate data on employment and output trends, we show that sectors with a high STW take-up exhibit significantly less cyclical variation in employment.

Youth earnings and labour market volatility in Europe

We provide new evidence on earnings volatility and labour market volatility, which also includes flows into and out of employment, of young workers across Europe during the Great Recession, and examine the institutional factors that may shape these flows. Using EU-SILC data, we document large disparities in volatility levels and trends across European countries. As expected, the Great Recession increased volatility among Europe's youth, offsetting the falling trend observed over the last years of economic prosperity. Larger unemployment benefits and more stringent employment protection legislation are related to lower earnings and labour market volatility.

ZATRUDNIENIE W NIEPEŁNYM WYMIARZE CZASU PRACY

Time-part Employment – Chances and ThreatsSummaryOver the last twenty years, an increasing share of employment across the EU countries has been made up of part time jobs. That is why the growth in part-time employment stands out as a prominent feature of modern labor markets. However, there are still remarkable differences in the relative volumes of the part-time employment share in different countries within the European Union.In recent years, the issue of labor market flexibility has become prominent in the debate over the labor market policy in Europe. The lack of dynamism in the flexibility of the labor markets within the EU countries, often characterized by a height share of long- term unemployment and stringent employment protection legislation, has frequently been blamed for the poor employment performance of the 80s and 90s.An increase in the rate of part-time work has been generally perceived as a positive development as it enables the employers to adjust work hours to the cyclical conditions more easily, facilitates an adjustment of production and labor costs as well as attracts people, who were previously unwilling or unable to work, towards the labor market. But one has to notice that some studies have found that part-time workers earn less than their full time colleagues, my be less likely to receive some benefits and face reduced chances for promotion.

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.

Turbulence and the Employment Experience of Older Workers

This paper provides a unified account of the trends in unemployment and labor force participation pertaining to the employment experience of older male workers during the past half-century. We build an equilibrium life-cycle model with labor-market frictions and an operative labor supply margin, wherein economic turbulence a la Ljungqvist and Sargent (1998) interact with institutions in ways that deteriorate employment. The model explains simultaneously: (i) the fall in labor force participation in the United States, (ii) the similar but more pronounced decline in Europe alongside rising unemployment rates and (iii) differences across European countries in the role played respectively by unemployment and labor force participation. The model also shows that policies that fostered early retirement may have exacerbated the deterioration of European labor markets: raising early retirement incentives to reduce unemployment among older workers tends to increase unemployment at younger ages, especially in turbulent economic times and under stringent employment protection legislation.

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.

Turbulence and the Employment Experience of Older Workers

This paper provides a unified account of the trends in unemployment and labor force participation pertaining to the employment experience of older male workers during the past half-century. We build an equilibrium life-cycle model with labor-market frictions and an operative labor supply margin, wherein economic turbulence a la Ljungqvist and Sargent (1998) interact with institutions in ways that deteriorate employment. The model explains simultaneously: (i) the fall in labor force participation in the United States, (ii) the similar but more pronounced decline in Europe alongside rising unemployment rates and (iii) differences across European countries in the role played respectively by unemployment and labor force participation. The model also shows that policies that fostered early retirement may have exacerbated the deterioration of European labor markets: raising early retirement incentives to reduce unemployment among older workers tends to increase unemployment at younger ages, especially in turbulent economic times and under stringent employment protection legislation.

Does Strict Employment Protection Discourage Job Creation? Evidence from Croatia

Employment protection legislation in Croatia is among the most strict in Europe. Firing is difficult and costly, and flexible forms of employment are limited. Is this apparent rigidity reflected-as one would expect based on standard economic theory-in low labor market dynamics? Is job creation low and hiring limited? Is the job security of insiders achieved at the cost of outsiders not being able to enter thelabor market? The author attempts to answer these questions by examining job flows. If the employment protection legislation is binding, then job and worker turnover should be low. He shows that this is indeed the case. Hiring is limited and the average job tenure is very long in Croatia. Job destruction is low, however job creation is still lower. The result is accumulation of unemployment, in large part due to new labor market entrants not being able to find a job. The high degree of job protection also seems to strengthen the bargaining position of insiders and results in relatively high wages. So, wages in Croatia are higher than among its competitors, even after adjusting for productivity. These high labor costs are likely to contribute to limited job creation in existing firms, but also are likely to discourage the entry of-and thus job creation in-new firms. The author presents evidence that firm growth has been indeed limited in Croatia, contributing to the low employment level. The author examines other potential causes of high unemployment in Croatia (the unemployment benefit system, labor taxation, the wage structure, and skill and spatial mismatches). He argues that they do not play a substantial part in accounting for poor labor market outcomes in Croatia. The author concludes that the stringent employment protection legislation is the key labor market institution behind low job creation and high unemployment. Based on this he recommends specific measures aimed at liberalizing the labor market to foster job creation and employment.

Identifying the effects of firing restrictions through size-contingent differences in regulation

We study the effects of the more stringent employment protection legislation (EPL) that applies in Italy to firms with over 15 employees. We consider firms' propensity to grow when close to that threshold and changes in employment policies when they pass it. Using a comprehensive matched employer–employees dataset, we find that the probability of firms' growth is reduced by around 2 percentage points near the threshold. Using the stochastic transition matrix for firm size, we compute the long-run effects of EPL on the size distribution, finding that they are quantitatively modest. We also find that, contrary to the implications of more stringent firing restrictions, workers in firms just above the threshold have on average less stable employment relations than those just below it. We document that this might be because firms above the threshold make greater use of flexible employment contracts, arguably to circumvent the stricter regulation on open-end contracts.

Did the pattern of aggregate employment growth change in the euro area in the late 1990s?

This paper examines whether the pattern of growth in euro area employment seen in the period 1997 to 2001 differs from that recorded in the past and what could be the reasons. First, a standard employment equation is estimated for the euro area as a whole. This shows that the lagged impact of both output growth and real labour cost growth, together with a productivity trend and employment ‘inertia’, can account for most of the employment developments between 1970 and the early 1990s. Conversely, these traditional determinants can only explain part of the employment development seen in recent years (1997 to 2001). Second, the paper shows sound evidence of a structural break in the aggregate employment equation in the late 1990s. Third, the paper provides some tentative explanations for this change in aggregate employment developments, using in particular country panels of institutional variables and of active labour market policies but also cross-sectional analyses. Among the relevant factors likely to have contributed to rising aggregate employment in recent years are changes in the sectoral composition of euro area employment, the strong development of part-time jobs, lower labour tax rates and possibly less stringent employment protection legislation and greater subsidies to private employment.

Did the Pattern of Aggregate Employment Growth Change in the Euro Area in the Late 1990s?

The paper examines whether the pattern of growth in euro area employment seen in the period 1997-2001 differed from that recorded in the past and what could be the reasons for that. First, a standard employment equation is estimated for the euro area as a whole. This shows that the lagged impact of both output growth and real labour cost growth, together with a productivity trend and employment inertia, can account for most of the employment developments between 1970 and the early 1990s. Conversely, these traditional determinants can only explain part of the employment development seen in recent years (1997-2001). Second, the paper shows sound evidence of a structural break in the aggregate employment equation in the late 1990s. Third, the paper provides some tentative explanations for this change in aggregate employment developments, using in particular country panels of institutional variables and of active labour market policies but also cross-sectional analyses. Among the relevant factors likely to have contributed to rising aggregate employment in recent years are changes in the sectoral composition of euro area employment, the strong development of part-time jobs, lower labour tax rates and possibly less stringent employment protection legislation and greater subsidies to private employment.