EMPLOYMENT PROTECTION AND LABOUR MARKET PERFORMANCE, Chapter 2, OECD (1999)

The potential incompatibility of employment protection legislation (EPL) with labour market flexibility has occasioned much debate and a growing body of research. The central question has been whether excessively strict EPL has been an important contributor to the persistently high unemployment experienced in many OECD countries since the early 1980s. But empirical research to date has not provided a clear-cut answer to this question. Part of the reason for this is that most of the cross-country research has used data on EPL at one point in time and this data base is now increasingly outdated. New data are presented here that describe the EPL legislation and practices currently prevailing in 27 OECD countries. The resulting portrait shows that such legislation and practices differ substantially across countries, with EPL being most strict in southern Europe, France, and Germany, and least restrictive in English-speaking countries. When these data for the late 1990s are compared with analogous data for the late 1980s, it is shown that there generally have not been large shifts in overall EPL strictness. However, a number of countries have liberalised significantly the regulation of temporary employment in the past ten years, while a smaller number have liberalised EPL for regular employment or tightened specific components of EPL. These new data provide the basis for a reassessment of the links between EPL and labour market performance. Consistent with prior studies, there appears to be little or no association between EPL strictness and overall unemployment. However, EPL may be more strongly associated with the level of employment and the demographic composition of employment and unemployment. Simple bivariate associations suggest that stricter EPL raises employment for prime-age men but lowers employment for youths and women, with the overall effect being a net reduction. Similarly, youths and perhaps women appear to bear a larger share of the burden of unemployment. However, these associations tend to be weaker or entirely absent when multivariate techniques are used to control for other factors that influence employment and unemployment levels. The evidence is more robust for EPL tending to increase self-employment and lower turnover rates in the labour market. The latter result implies that fewer individuals become unemployed in those countries where employment protection is stricter but once unemployed, they have a higher risk of remaining unemployed for a long period of time.