Employment protection, employment and unemployment rates in European Union countries during the Great Recession

ABSTRACT

This paper analyses the impact of employment protection legislation on the evolution of employment and unemployment in European Union economies during the Great Recession. The results show that employment protection did not have a significant impact on employment growth. Regarding unemployment rates, we obtain contrasting results: high employment protection for temporary workers was associated with larger increases in unemployment rates, whereas high protection for permanent workers against individual dismissal was associated with lower increases in unemployment rates. Nonetheless, employment protection for permanent in conjunction with that for temporary workers had a positive impact on unemployment rates.

KEYWORDS:

• Employment
• unemployment
• Great Recession
• employment protection

JEL CLASSIFICATION:

• E24
• J88

Acknowledgements

This study was funded by the Spanish Ministry of Economics and Competitiveness (RTI2018-099225-B-I00). We thank the useful comments made by two anonymous referees. Usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Alternative EPL indicators are the EPLex index of the International Labour Organization (https://www.ilo.org/travail/info/db/WCMS_435450/lang–en/index.htm) and the CBR Labour Regulation Index (CBR-LRI) of the Centre for Business Research at the University of Cambridge (https://www.repository.cam.ac.uk/handle/1810/256566).The main advantages of the OECD EPL indexes over EPLex index are that OECD EPL indexes cover a longer period, and that EPLex index only gives information on employment protection for regular contracts and individual dismissals.Regarding CBR-LRI (Adams et al. 2017; Deakin 2018), OECD EPL indexes have some advantages. First, the CBR-LRI dataset does not construct a synthetic composite index: this index must be estimated by the researcher, which creates problems of comparability among different studies. The second advantage has to do with the theoretical foundations of the indicators. OECD indexes are based on the assumption that labour law rules introduce rigidities into the labour market. Consequently, they can be used to test empirically the hypothesis that flexible labour markets produce better results in employment and unemployment. In contrast, from a theoretical perspective, CBR-LRI indexes are formally neutral (Deakin 2018).

2. Many international organizations, such as OECD, IMF and European Commission, have based their recommendations in favor of a higher labour market flexibility on empirical studies that used OECD’s EPL indexes (Myant and Brandhuber 2016).

3. Versions differ in terms of the number of indicators included in each index and the period covered (https://www.oecd.org/employment/emp/oecdindicatorsofemploymentprotection.htm).

4. Due to space constraints, we cannot analyse the content of the labour law reforms in Europe that have affected the employment protection for workers. The interested reader can consult Clauwert and Schömann (2012) and Schömann (2014).

5. Hausman tests prove the validity of the random effects mode (data available upon request).

6. Data available upon request.

7. Data are available upon request.

8. The analysis of the confidence intervals (90%, 95% and 99%) of the coefficients of the independent variables confirm the conclusions obtained based on the study of the p-values. Data available upon request.

Additional information

Funding

This work was supported by the Ministerio de Economía y Competitividad [RTI2018-099225-B-I00].