Employment protection legislation

Last updated

Employment protection legislation (EPL) includes all types of employment protection measures, whether grounded primarily in legislation, court rulings, collectively bargained conditions of employment, or customary practice. [1] The term is common among circles of economists. Employment protection refers both to regulations concerning hiring (e.g. rules favouring disadvantaged groups, conditions for using temporary or fixed-term contracts, training requirements) and firing (e.g. redundancy procedures, mandated prenotification periods and severance payments, special requirements for collective dismissals and short-time work schemes).

Contents

There exist various institutional arrangements that can provide employment protection: the private market, labour legislation, collective bargaining arrangements and not the least, court interpretations of legislative and contractual provisions. Some forms of de facto regulations are likely to be adopted even in the absence of legislation, simply because both workers and firms derive advantages from long-term employment relations. [2]

Definition

According to Barone (2001) with the acronym EPL economists refer to the entire set of regulations that place some limits to the faculties of firms to hire and fire workers, even if they are not grounded primarily in the law, but originate from the collective bargaining of the social partners, or are a consequence of court rulings. [3] In particular, provisions favouring the employment of disadvantaged groups in society, determining the conditions for the use of temporary or fixed-term contracts, or imposing training requirements on the firm, affect hiring policies, while redundancy procedures, mandated pre-notification periods and severance payments, special requirements for collective dismissals and short-time work schemes influence firing decisions. The nature of these restrictions on the firms’ freedom to adjust the labour input is quite similar in all OECD countries, but the actual procedural details and the overall degree of stringency implied by them varies considerably. These provisions are enforced through the worker’s right to appeal against his lay-off.

Some aspects of these regulations, like the length of advance notices or the dimension of severance payments can be measured with precision. Other important features of EPL, like for example the willingness of labour courts to entertain appeals by fired workers, or how judges interpret the concept of “just cause” for termination, are much more difficult to quantify.

Employment Protection Legislation Index by the OECD

One of the more frequently used measures of the strictness of the EPL in each country and through different years is the so-called Employment Protection Legislation Index elaborated by the OECD. This index is calculated along 18 basic items, which can be classified in three main areas: [4]

  1. Employment protection of regular workers against individual dismissal;
  2. Specific requirements for collective dismissals; and
  3. Regulation of temporary forms of employment.

The 18 first-digit inputs are then expressed in either of the following forms:

  1. Units of time (e.g. delays before notice can start, or months of notice and severance pay);
  2. As a number (e.g. maximum number of successive fixed-term contracts allowed); or
  3. As a score on an ordinal scale specific to each item (0 to 2, 3, 4 or simply yes/no).

Then, these different scoring is converted into cardinal scores that are normalized to range from 0 to 6, with higher scores representing stricter regulation. Therefore, each of the different items is normalized according to weighted averages, thus constructing three sets of summary indicators that correspond to successively more aggregated measures of EPL strictness.

The last step of the procedure involves computing, for each country, an overall summary indicator based on the three subcomponents:

  1. Strictness of regulation for regular contracts,
  2. Temporary contracts, and
  3. Collective dismissals.

The summary measure for collective dismissals is attributed just 40% of the weight assigned to regular and temporary contracts. The rationale for this is that the collective dismissals indicator only reflects additional employment protection triggered by the collective nature of the dismissal. In most countries, these additional requirements are quite modest. Moreover, summary measures for collective dismissals are only available since the late 1990s. An alternative overall index, so-called Version 1, has been thus calculated as an unweighted average of the summary measures for regular and temporary contracts only. While more restrictive than the previous one (so-called Version 2), this alternative measure of the overall EPL strictness allows comparisons over a longer period of time (since the late 1980s compared with the late 1990s). [5]

The EPL index elaborated by the OECD. EPL index for OECD countries.jpg
The EPL index elaborated by the OECD.

Effects of employment protection legislation

On the duality of the labour market

Some economists have claimed that empirical evidence gives support to their theories, according to which EPL leads to a segmentation in the labour market between the so-called insiders, the workers with a protected job, and the outsiders, who are people that are either unemployed or employed with fixed-term, part-time or temporary contracts, or even in the black economy, and face big difficulties to find a job covered by EPL because of the firms’ reduced propensity to hire.[ citation needed ] This latter group is mainly constituted by youths, women, racial minorities and unskilled workers. [3]

On unemployment

Whether EPL has any effect on unemployment is an issue of contention between economists. On the one hand, assuming that the cyclical wage pattern is not affected by mandated firing costs, EPL reduces the propensity to hire by employers, since they fear that such decisions will be difficult to reverse in the future, in case of a recession. On the other hand, EPL also leads firms during downswings to keep more workers employed, than they would have otherwise done. Therefore, EPL reduces both job creation and job destruction, so that the net effects on average employment and unemployment are not identifiable a priori. What is instead agreed among economists, is that more stringent EPL lowers the fluctuations in the quantity of labour demanded over the business cycle, leading to smoother dynamic patterns of those aggregates. [3]

Economists considering that EPL has no effect on unemployment include Blanchard and Portugal (2000). [6] In their article they compare two opposite countries as regards their EPL stance: Portugal with one of the more strict legislations in the world and the US with one of the more flexible ones. In spite of these differences, both countries have similar unemployment rates which undermines the argument considering that EPL has any effect on unemployment. Instead, the authors claim that EPL does affect two other variables: job flows and unemployment duration. EPL would reduce job flows (from employment to unemployment: employers are less willing to fire, given that they must pay indemnification to workers) therefore reducing unemployment but would increase unemployment duration, increasing the unemployment rate. These two effects would neutralize each other, explaining why overall, EPL has no effect on unemployment.

Nickell (1997) [7] arrived to similar conclusions when stating that labor market rigidities that do not appear to have serious implications for average levels of unemployment included strict employment protection legislation and general legislation on labor market standards.

Among those that have found evidence suggesting that EPL increases unemployment are Lazear (1990). [8] The author argued that mandated severance pay seemed to increase unemployment rates. His estimates suggested that an increase from zero to three months of severance pay would raise the unemployment rate by 5.5 percent in the United States.

On employment

Lazear (1990) [9] once again argues he has evidence suggesting that EPL reduces the employment-to-population ratio. In his article he claims that the best estimates suggest that moving from no required severance pay to three months of required severance pay to employees with ten years of service would reduce the employment-population ratio by about one percent. In the United States that would mean over a million jobs. Lazear argues that the young could bear a disproportionate amount of the burden.

To the contrary, Bertola and Bentolila (1990) [10] found evidence supporting the idea that firing costs have a larger effect on firms' propensity to fire than to hire, and therefore (slightly) increase average long-run employment.

On wages

Several authors have found that EPL has significant effects on wages. As stated by Lazear (1990), [11] in a perfect labor market, severance payments can have no real effects as they can be undone by a properly designed labor contract. Leonardi and Pica (2006) found evidence supporting this claim. They suggest that in the case of Italy an EPL reform in 1990 had as effect to reduce entry wages by 6 percent, implying that firms tend to transfer the increase in the cost of firing (due to EPL) onto workers. In fact, in their study they find that 25 percent of the firing cost was shifted onto lower wages in the case of Italy. [12] Similarly, Brancaccio, Garbellini, and Giammetti (2018) found that EPL reductions have no significant links with real GDP growth whereas they are significantly correlated with wage share reductions. [13]

On firm efficiency and profits

In principle the effects on profits are ambiguous. Because of EPL, firms engage themselves in labour hoarding practices, which lead them to employ a lower quantity of workers during upswings, while keeping inefficient levels of employment in downturns. For a given level of wages, this loss of productive efficiency would result in lower average profits. On the other hand, if firms operated in a context of efficiency wages, by inducing more stable relationships with the workers and reducing their job and income insecurity, EPL could allow them to pay lower wages, without reducing the effort provided by the labour force employed, with beneficial effects on profits. [3]

On product market regulation

There appears to be agreement among economists on the positive correlation between product market and employment regulation. Although employment protection legislation is only one aspect of the wide range of regulatory interventions in the labour market, Nicoletti et al. (2000) find evidence suggesting that, across countries, restrictive regulatory environments in the product market tend to be associated with restrictive employment protection policies. They claim that the indicators presented in their paper are closely related, with a statistical correlation of 0.73 (significant at the 1% level). In other words, according to these results, restrictive product market regulations are matched by analogous EPL restrictions to generate a tight overall regulatory environment for firms in their product market as well as in the allocation of labour inputs. The strong correlation between regulatory regimes in the product market and EPL also suggests that their influence may have compounded effects on labour market outcomes, making regulatory reform in only one market less effective than simultaneous reform in the two markets. [14]

Kugler and Pica (2003) find similar results in the case of the Italian economy. They present a matching model which illustrates how barriers to entry in the product market (product market regulation) mitigate the impact of labor market deregulation, (that is, mitigate the effects of a reduction in the strictness of EPL). In the author's opinion, this means that there are economic complementarities between labor and product market policies in their model, in the sense that the effectiveness of one policy depends on the implementation of the other policy. Thus, an important implication of their model is that labor market deregulation will be less effective in the presence of heavier regulations of entry. [15] Similar results are obtained by Koeniger and Vindigni (2003). [16]

On hours per worker

Whereas EPL may have not a significant effect on unemployment, strict EPL gives incentives to the firms to resort to other sources of flexibility like overtime, which, as shown by Abraham and Houseman (1994), [17] indeed tends to be used much more in Continental European countries, where the variability of hours per worker is significantly higher than in the Anglo-Saxon labour markets.

Economic theory

In economic theory, several authors have argued that employment protection can be desirable when there are frictions in the working of markets. For example, Pissarides (2001) and Alvarez and Veracierto (2001) show that employment protection can play an important role in the absence of perfect insurance markets. [18] [19] Schmitz (2004) argues that constraining contractual freedom by legislating employment protection can be welfare-enhancing when principal-agent relationships are plagued by asymmetric information. [20]

See also

Notes

  1. OECD Employment Outlook, June 1999, Chapter 2, Employment Protection and Labour Market Performances, page 50.
  2. OECD Employment Outlook, June 1999, Chapter 2, Employment Protection and Labour Market Performances, page 51.
  3. 1 2 3 4 Barone, Andrea (2001): Employment protection legislation: a critical review of the literature. Taken from www.cesifin.it Archived 2007-09-30 at the Wayback Machine .
  4. For a detailed description of this procedure, see OECD, Employment Outlook 1999, Chapter 2, Annex 2.B.
  5. OECD Employment Outlook 2004, Chapter 2, Employment Protection Regulation and Labour Market Performance.
  6. Blanchard, O. and Pedro Portugal (2000): What hides behind an unemployment rate: Comparing Portuguese and U.S. labor markets. The American Economic Review, Vol. 91, No. 1. (Mar., 2001), pp. 187–207.
  7. Nickell, Stephen (1997): Unemployment and Labor Market Rigidities: Europe versus North America. The Journal of Economic Perspectives, Vol. 11, No. 3. (Summer, 1997), pp. 55–74.
  8. Lazear, Edward P. (1990): Job Security Provisions and Employment. The Quarterly Journal of Economics, Vol. 105, No. 3. (Aug., 1990), pp. 699–726.
  9. Lazear, Edward P. (1990): Job Security Provisions and Employment. The Quarterly Journal of Economics, Vol. 105, No. 3. (Aug., 1990), pp. 699–726.
  10. Bentolila, Samuel and Giuseppe Bertola (1990): Firing Costs and Labour Demand: How Bad is Eurosclerosis?. The Review of Economic Studies, Vol. 57, No. 3. (Jul., 1990), pp. 381–402.
  11. Lazear, Edward (1990): Job Security Provisions and Employment. Quarterly Journal of Economics, 105(3): 699–726.
  12. Leonardi, Marco and Giovanni Pica (2006): Effects of Employment Protection Legislation on Wages: a Regression Discontinuity Approach. IZA Working Papers. Downloadable .
  13. Brancaccio, Emiliano and Nadia Garbellini, and Raffaele Giammetti (2018): Structural labour market reforms, GDP growth and the functional distribution of income. Structural Change and Economic Dynamics Volume 44, March 2018, Pages 34-45. https://doi.org/10.1016/j.strueco.2017.09.001.
  14. Nicoletti, Giuseppe; Stefano Scarpetta and Olivier Boylaud (2000): Summary Indicators of Product Market Regulation with an Extension to Employment Protection Legislation. OECD Economics Department Working Papers NO. 226, April 13, 2000, p.51. Downloadable
  15. Kugler, Adriana and Giovanni Pica (2003): Effects of Employment Protection and Product Market Regulations on the Italian Labor Market. Journal of Economic Literature, November 12, 2003, p. 7. Downloadable .
  16. Koeniger, Winfried and Andrea Vindigni (2003): Employment Protection and Product Market Regulation. IZA WZB Economics Seminar Series. July 28, 2003. Downloadable [ permanent dead link ].
  17. Abraham K.G. and Houseman S.N.(1994): Does Employment Protection Inhibit Labour Market Flexibility? Lessons from Germany, France and Belgium. In Blank R.M. (ed.) Social Protection versus Economic Flexibility: Is there a trade-off?. The University of Chicago Press, (1994)
  18. Pissarides, Christopher A (2001). "Employment protection". Labour Economics. 8 (2): 131–159. doi:10.1016/s0927-5371(01)00032-x. ISSN   0927-5371.
  19. Alvarez, Fernando; Veracierto, Marcelo (2001). "Severance payments in an economy with frictions". Journal of Monetary Economics. 47 (3): 477–498. doi:10.1016/s0304-3932(01)00058-7. ISSN   0304-3932.
  20. Schmitz, Patrick W (2004). "Job protection laws and agency problems under asymmetric information". European Economic Review. 48 (5): 1027–1046. doi:10.1016/j.euroecorev.2003.12.007. ISSN   0014-2921.

Related Research Articles

<span class="mw-page-title-main">Labour economics</span> Study of the markets for wage labour

Labour economics, or labor economics, seeks to understand the functioning and dynamics of the markets for wage labour. Labour is a commodity that is supplied by labourers, usually in exchange for a wage paid by demanding firms. Because these labourers exist as parts of a social, institutional, or political system, labour economics must also account for social, cultural and political variables.

A minimum wage is the lowest remuneration that employers can legally pay their employees—the price floor below which employees may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century. Because minimum wages increase the cost of labor, companies often try to avoid minimum wage laws by using gig workers, by moving labor to locations with lower or nonexistent minimum wages, or by automating job functions.

<span class="mw-page-title-main">Unemployment</span> People without work and actively seeking work

Unemployment, according to the OECD, is people above a specified age not being in paid employment or self-employment but currently available for work during the reference period.

A layoff or downsizing is the temporary suspension or permanent termination of employment of an employee or, more commonly, a group of employees for business reasons, such as personnel management or downsizing an organization. Originally, layoff referred exclusively to a temporary interruption in work, or employment but this has evolved to a permanent elimination of a position in both British and US English, requiring the addition of "temporary" to specify the original meaning of the word. A layoff is not to be confused with wrongful termination. Laid off workers or displaced workers are workers who have lost or left their jobs because their employer has closed or moved, there was insufficient work for them to do, or their position or shift was abolished. Downsizing in a company is defined to involve the reduction of employees in a workforce. Downsizing in companies became a popular practice in the 1980s and early 1990s as it was seen as a way to deliver better shareholder value as it helps to reduce the costs of employers. Research on downsizing in the US, UK, and Japan suggests that downsizing is being regarded by management as one of the preferred routes to help declining organizations, cutting unnecessary costs, and improve organizational performance. Usually a layoff occurs as a cost-cutting measure. A study of 391 downsizing announcements of the S&P 100 firms for the period 1990-2006 found, that layoff announcements resulted in substantial increase in the companies’ stock prices, and that the gain was larger, when the company had prior layoffs. The authors suggested, that the stock price manipulation alone creates a sufficient motivation for publicly-traded corporations to adopt the practice of regular layoffs.

The term efficiency wages was introduced by Alfred Marshall to denote the wage per efficiency unit of labor. Marshallian efficiency wages would make employers pay different wages to workers who are of different efficiencies such that the employer would be indifferent between more-efficient workers and less-efficient workers. The modern use of the term is quite different and refers to the idea that higher wages may increase the efficiency of the workers by various channels, making it worthwhile for the employers to offer wages that exceed a market-clearing level. Optimal efficiency wage is achieved when the marginal cost of an increase in wages is equal to the marginal benefit of improved productivity to an employer.

Personnel economics has been defined as "the application of economic and mathematical approaches and econometric and statistical methods to traditional questions in human resources management". It is an area of applied micro labor economics, but there are a few key distinctions. One distinction, not always clearcut, is that studies in personnel economics deal with the personnel management within firms, and thus internal labor markets, while those in labor economics deal with labor markets as such, whether external or internal. In addition, personnel economics deals with issues related to both managerial-supervisory and non-supervisory workers.

The degree of labour market flexibility is the speed with which labour markets adapt to fluctuations and changes in society, the economy or production. This entails enabling labour markets to reach a continuous equilibrium determined by the intersection of the demand and supply curves.

<span class="mw-page-title-main">Insider-outsider theory of employment</span> Theory of labor economics

The insider-outsider theory is a theory of labor economics that explains how firm behavior, national welfare, and wage negotiations are affected by a group in a more privileged position. The theory was developed by Assar Lindbeck and Dennis Snower in a series of publications beginning in 1984.

Labour in India refers to employment in the economy of India. In 2020, there were around 476.67 million workers in India, the second largest after China. Out of which, agriculture industry consist of 41.19%, industry sector consist of 26.18% and service sector consist 32.33% of total labour force. Of these over 94 percent work in unincorporated, unorganised enterprises ranging from pushcart vendors to home-based diamond and gem polishing operations. The organised sector includes workers employed by the government, state-owned enterprises and private sector enterprises. In 2008, the organised sector employed 27.5 million workers, of which 17.3 million worked for government or government owned entities. The Human Rights Measurement Initiative finds that India is only doing 43.9% of what should be possible at its level of income for the right to work. Employees are routinely taken advantage of by their employers because of loose labour laws across all industries in India.

<span class="mw-page-title-main">Étienne Wasmer</span> French professor and economist (born 1970)

Étienne Wasmer is a French professor and economist currently holding a Professorship at New York University in Abu Dhabi. Wasmer mainly focuses on the fields of labor economics, job search theory, discrimination and human capital. He teaches microeconomics and labor economics.

In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The microeconomic theory of monopsony assumes a single entity to have market power over all sellers as the only purchaser of a good or service. This is a similar power to that of a monopolist, which can influence the price for its buyers in a monopoly, where multiple buyers have only one seller of a good or service available to purchase from.

<span class="mw-page-title-main">Indian labour law</span> Laws regulating labour in India

Indian labour law refers to law regulating labour in India. Traditionally, the Indian government at the federal and state levels has sought to ensure a high degree of protection for workers, but in practice, this differs due to the form of government and because labour is a subject in the concurrent list of the Indian Constitution. The Minimum Wages Act 1948 requires companies to pay the minimum wage set by the government alongside limiting working weeks to 40 hours. Overtime is strongly discouraged with the premium on overtime being 100% of the total wage. The Payment of Wages Act 1936 mandates the payment of wages on time on the last working day of every month via bank transfer or postal service. The Factories Act 1948 and the Shops and Establishment Act 1960 mandate 15 working days of fully paid vacation leave each year to each employee with an additional 7 fully paid sick days. The Maternity Benefit (Amendment) Act, 2017 gives female employees of every company the right to take 6 months' worth of fully paid maternity leave. It also provides for 6 weeks worth of paid leaves in case of miscarriage or medical termination of pregnancy. The Employees' Provident Fund Organisation and the Employees' State Insurance, governed by statutory acts provide workers with necessary social security for retirement benefits and medical and unemployment benefits respectively. Workers entitled to be covered under the Employees' State Insurance are also entitled to 90 days worth of paid medical leaves. A contract of employment can always provide for more rights than the statutory minimum set rights. The Indian parliament passed four labour codes in the 2019 and 2020 sessions. These four codes will consolidate 44 existing labour laws. They are: The Industrial Relations Code 2020, The Code on Social Security 2020, The Occupational Safety, Health and Working Conditions Code, 2020 and The Code on Wages 2019.

<span class="mw-page-title-main">Adriana Kugler</span> American economist

Adriana Debora Kugler is a Colombian-American economist. She is the U.S. Executive Director at the World Bank, nominated by President Biden and confirmed by the U.S. Senate last April. She is a professor of public policy at Georgetown University and she is currently on leave from her tenured position at Georgetown. She served as the Chief Economist to U.S. Labor Secretary Hilda L. Solis from September 6, 2011 to January 4, 2013.

Alan Manning is a British economist and professor of economics at the London School of Economics.

Youth unemployment in Italy discusses the statistics, trends, causes and consequences concerning the topic of unemployment among young Italians.

The rate of youth unemployment in South Korea fluctuated in the 9–11% range between 2001 and 2014. It was above 10% in 2018 and down to 7.1% by the end of 2019 - the lowest level since 2011.

<span class="mw-page-title-main">Jan van Ours</span> Dutch economist

Jan C. van Ours is a Dutch economist and currently Professor of Applied Economics at the Erasmus University Rotterdam (EUR). He belongs to the most highly cited economists in the Netherlands and is the 1996 winner of the Hicks-Tinbergen Award.

<span class="mw-page-title-main">Pierre Cahuc</span> French economist

Pierre Cahuc is a French economist who currently works as Professor of Economics at Sciences Po. He is Program Director for the IZA Institute of Labor Economics's programme "Labour Markets" and research fellow at CEPR. His research focuses mainly on labour economics and its relationship with macroeconomics. In 2001, he was awarded the Prize of the Best Young Economist of France for his contributions to economic research. He belongs to the most highly cited economists in France and Europe's leading labour economists.

Francis Kramarz is a French economist who works as Professor at the École Nationale de la Statistique et de l'Administration Économique (ENSAE), where he has been directing the Center for Research in Economics and Statistics (CREST). He is one of the leading labour economists in France.

Denmark is a Scandinavian country in Europe consisting of the Jutland Peninsula and numerous islands. Typically, Denmark has had relatively low unemployment rates. Currently, Denmark has generous unemployment benefits in the form of private insurance funds. Unemployment benefits are typically payments made by the state or other authorized actors to unemployed persons.

References