Impact of employment protection legislation on employment and exporting in select African countries

Abstract

Labour market flexibility is an important issue in both development and labour economics. More flexibility in the labour market is believed to facilitate job creation, but also makes it easy for employers to terminate employment contracts and may be in conflict with the notion of decent jobs as promoted by the International Labour Organization and workers' unions. It is therefore not surprising that labour market flexibility or inflexibility has received a lot of attention in the extant literature. Using a sample of about 4700 firms from six African countries, we investigate the impact of restrictive labour regulation on a number of economic outcomes and find that more restrictive labour market regulations are detrimental to export propensity, export intensity, investment and employment. Policy-makers must be cautious, however, when implementing employment regulations as too flexible regulations may benefit employers at the expense of employees.

Keywords:

• employment protection
• labour market flexibility
• African firms
• regulation
• exports
• employment
• investment

Notes

³Flexibility can be understood as the capacity to respond rapidly and efficiently to changing economic environments.

⁴One should note that there are many other factors in addition to labour market flexibility that affect foreign direct investment, such as infrastructure, size of the market, human capital, and so forth.

⁵A labour market is inflexible if the level of unemployment insurance benefits is too high or their duration is too long, or if there are too many restrictions on the freedom of employers to fire and to hire, or if the permissible hours of work are too tightly regulated, or if excessively generous compensation for overtime work is mandated, or if trade unions have too much power to protect incumbent workers against competition and to control the flow of work at the site of production, or perhaps if statutory health and safety regulations are too stringent (Solow, 1998).

⁶The Tunisian revolution started in December 2010 and resulted in the fall of the Tunisian government led by President Ben Ali in January 2011.

⁷For a description of the World Bank firm-level surveys, see: http://www.enterprisesurveys.org/.

⁸Permanent contracts entail the payment of pension and medical aid expenses, expenses that employers can avoid paying if workers are employed on short-term contracts.