Employment protection legislation and labour market performance

Workshop Measuring Law – Paris, 15-16 December 2006

Strictness of EPL in OECD countries: presentation of the OECD indicator It measures the strictness of EPL, i.e. the constraints

and costs that employers face when dismissing workers or using temporary contracts;

It was developed at the end of the 1980s and has been updated twice since then (end of the 1990s and 2003);

The information is collected through questionnaires sent to labour ministries in OECD countries and integrated with legal documents and internet information;

It is now available as a time series where each change in legislation is attributed to the year in which the measure came into effect.

Strictness of EPL in OECD countries: presentation of the OECD indicator

EPL for permanent contracts (version 1=1/2; version 2=5/12):

Regular procedural inconveniences (1/3): Notification procedures (1/2): 0=oral statement is

enough; 1=written statement of the reasons for dismissal to be delivered; 2=a third party must be notified; 3=employer cannot dismiss without agreement of a third party [score=scale*3]

Delay before notice can start (1/2): number of days plus 6 days if warning is needed, 1 day for oral notification or notice handed to employee, 2 days if letter must be sent in mail, 3 days for registered mail: 0 if less or equal to 2 days; 6 if >=45 days.

Strictness of EPL in OECD countries: presentation of the OECD indicator

EPL for permanent contracts (ctd):

Notice and severance pay for no-fault individual dismissals by tenure categories (1/3):

Length of notice period at ternure 9 months, 4 years, 20 years in months (1/7 each)

Severance pay at ternure 9 months, 4 years, 20 years in months pay (4/21 each)

Strictness of EPL in OECD countries: presentation of the OECD indicator

EPL for permanent contracts (ctd):

Difficulty of dismissal (1/3): Definition of unfair dismissal (1/4): 0=worker capability or

redundancy of job are adequate and sufficient ground for dismissal; 1= age and tenure must be considered; 2= transfer and retraining must be offered; 3= worker capability cannot be ground for dismissal [score=scale*2]

Trial period before eligibility arises (1/4): 0= more or equal to 24 months; 6=less than 1.5 months

Unfair dismissal compensation at 20 years of tenure (1/4): 0= <=3 month’; 6= >30

Extent of reinstatement (1/4): 0-3 [score=scale*2]

Strictness of EPL in OECD countries: presentation of the OECD indicator

Regulation of collective dismissals (version 2=2/12):

Definition of collective dismissal (1/4): 0= no additional regulation; 1= from 50 dismissals upwards; 2= from 20 dismissals upwards; 3= from 10 dismissals upwards; 4= specific regulations start to apply from less than 10 employees [score=scale*6/4]

Additional notification requirements (1/4): 0= no additional requirements; 1= one more actor notified; 2= two more actors notified [score=scale*3]

Additional delays involved in days (1/4): 0= 0; 6= more or equal to 90 days

Other special costs to employers (1/4) such as additional severance pay, social compensation plans: 0= no additional requirement; 1 one additional requirement; 2 additional requirements [score=scale*3]

Strictness of EPL in OECD countries: presentation of the OECD indicator

EPL for temporary contracts:

Fixed Term Contracts (1/2): Valid cases for use of fixed-term contracts (1/2): 0=only

objective or material situations; 1= if specific exemptions apply (new activity, unemployed workers); 2= exemptions exist on both employer or employee side; 3=no restrictions [score=6-scale*2]

Maximum number of successive FTC (1/4): 0=No limit; 6 = less than 1.5

Maximum cumulated duration of successive FTC (1/4): 0= No limit; 6= less than 12 months

Strictness of EPL in OECD countries: presentation of the OECD indicator

EPL for temporary contracts (ctd):

Temporary Work Agencies (1/2):

Type of work for which TWA employment is legal(1/2): 0=TWA employment is illegal; 1-3 depending on the degree of restrictions; 4= no restrictions apply [score=6-scale*6/4]

Restrictions on the number of renewals (1/4): 2=No restrictions; 4= restrictions apply

Maximum cumulated duration of successive TWA contracts (1/4): 0= No limit; 6= less than or equal to 6 months

Some limitations Collective bargaining agreements are not

always accounted for (they are included if there is no other legislation about dismissals – i.e. New Zealand);

Enforcement is crucial but information is too limited to include it in the index.

Strictness of EPL in OECD countries: present situation

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

United

Sta

tes

United

Kin

gdom

Canada

New Z

ealand

Irelan

d

Austra

lia

Switzer

land

Slova

k Rep

ublic

Hungar

y

Japa

n

Denm

ark

Czech

Repu

blic

Korea

Finlan

d

Polan

d

Austri

a

Nether

land

sIta

ly

Ger

man

y

Belgiu

m

Norway

Sweden

Franc

e

Gre

ece

Spain

Mex

ico

Portu

gal

Turkey

2003(Scale 0-6)

Regulation on temporary forms of employmentSpecific requirements for collective dismissalProtection of regular workers against (individual) dismissal

Strictness of EPL in OECD countries: present situation

Protection of regular employment against individual dismissal and regulation on temporary forms of employment

Overall EPL strictness: version 1 versus version 2

Protection of regular employment against individual dismissal, 2003 (Scale 0-6)

AUS

AUT

BEL

CAN

CZE

DNK

FIN

FRADEU

GRE

HUNIRL ITA

JPNKOR

MEX

NLD

NZL

NORPOL

PRT

SVK

ESPSWE

CHE

TUR

GBR

USA0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Regulation of temporary forms of employment, 2003 (Scale 0-6)

EPL overall including collective dismissal (version 2), 2003 (Scale 0-6)

AUS

AUT

BEL

CAN

CZEDNK

FIN

FRA

DEU

GRE

HUN

IRL

ITA

JPN

KOR

MEX

NLD

NZL

NOR

POL

PRT

SVK

ESP

SWE

CHE

TUR

GBR

USA

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

EPL overall excluding collective dismissals (version 1), 2003 (Scale 0-6)

Regular work total

0.0

0.5

1.0

1.5

2.0

2.5

0.0 0.5 1.0 1.5 2.0 2.5

Temporary work

Regular work individual

0.0

0.5

1.0

1.5

2.0

2.5

0.0 0.5 1.0 1.5 2.0

Temporary work

Regular individual

0.0

0.5

1.0

1.5

2.0

2.5

0.0 0.5 1.0 1.5 2.0 2.5

Temporary

Correlation 0.33* Correlation 0.98***

Strictness of EPL in OECD countries: changes over time

Changement de la législation de la fin des années 1980 à 2003

-1.8

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

Change in EPL legislation Late 1980s to 2003

-1.8

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

Reform examples: the case of Austria

Reform of the severance pay system through the creation of individual saving accounts.

Employers pay 1.54% of the payroll on an individual saving account from the first day of employment until contract termination;

In the event of dismissal, an employee with at least 3 years of job tenure can choose between receiving his/her severance payment from the account at once, or saving the entitlements towards a future pension (the balance is then carried over to the next employer)

For the employer’s standpoint, this system suppresses the specific monetary cost of a dismissal, while it tends to increase labour costs in general. For the employee, it reduces the cost of job mobility.

Reflected as severance pay set to zero

Reform examples: the case of New Zealand

Radical changes in the principles regulating EPL, promoting collective bargaining as a positive basis for employment relationships:

The new law – ERA – does not explicitly define dismissal procedures.

The ERA requires employers to negotiate such procedures in collective bargaining and act in good-faith.

Reflected in more complex notification procedures

Links between EPL and labour market dynamics

EPL tends to reduce both firing and hiring:

Dismissal costs reduce firing in times of slow economic growth

When hiring workers employers take the likelyhood that firing costs will be incurred in the future into account, thus strict EPL tends to reduce job creation

Links between EPL, employment and unemployment

The net impact of EPL on aggregate employment and unemployment is ambiguous a priori and empirical evidence gives mixed results.

However, this study suggests a negative link between strict EPL and employment rates for specific groups.

EPL and labour market performance of various socio-demographic groups

Strict EPL could reduce employment rates of youth and prime-age women.

The effects on employment rates of low-skilled workers and older workers are ambiguous.

The main beneficiaries appear to be prime-age men, representing the « core » labour market.

Differences between the strictness of EPL for permanent and temporary workers could contribute to explain the rise in the incidence of temporary employment among the low-skilled.

Making the most of EPL

Why protect existing jobs rather than workers all through their working life?

This question leads to analysing the role of EPL vis-à-vis unemployment insurance and active labour market policies, two policy tools contributing to greater security for labour market participants.

The role of EPL vis-à-vis other available policy tools: EPL and unemployment insurance

Relative to unemployment insurance, EPL presents some draw-backs:

It introduces inequalities between permanent workers and those on temporary contracts.

The entitlement to severance payments does not consider individual characteristics that are bound to play a key role in determining the degree of income protection needed.

EPL lacks any redistribution patterns between individuals.

The role of EPL vis-à-vis other available policy tools: EPL and unemployment insurance

A centralised body – such as an unemployment insurance benefit system – may be more efficient in taking individual situations into account as well as assisting and monitoring job search.

Nevertheless EPL may play some additional role with respect to unemployment insurance. Firings have a social cost and EPL partly puts on employers the responsibility of financing the costs resulting from their layoff decisions.

Unemployment insurance re-assures workers while EPL makes them worry

Security index, late 1990s

USA

GBRCHE

SWE

ESP

PRT

POL

NOR

NZL

NLD

JPN

ITA

HUN

FRA

DNK

CZE

CAN

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

0.0 1.0 2.0 3.0 4.0

Overall stritcness of EPL (version 2), late 1990s

Security index, late 1990s

USA

GBRCHE

SWE

ESP

PRT

POL

NOR

NZL

NLD

JPN

ITAHUN

FRA

DNK

CZE

CAN

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

0 5 000 10 000 15 000 20 000

Unemployment benefits per unemployed, late 1990s

The system of Experience Rating in the United States

In the United States, experience-rating links employers’ social security contributions to the layoff history of the firm.

Some evaluation studies of the system lend support to this policy initiative, in terms of lower unemployment as well as greater job stability in that experience-rating seems to have reduced the cyclicality of employment.

The role of EPL vis-à-vis other available policy tools: EPL and Active Labour Market Policies

Complementarities between EPL and active labour market policies:

EPL reinforces employment stability by imposing layoff costs on employers, but it tends to make unemployment spells longer.

Active labour market policies could facilitate transitions from unemployment to work.

Limits: strict EPL could reduce the effectiveness of active labour market policies

Active labour market policies raise perceptions of employment security

Security index, late 1990s

USA

GBRCHE

SWE

ESP

PRT

POL

NOR

NZL

NLDJ PN

ITAHUN

FRA

DNK

CZE

CAN

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8

0 5 000 10 000 15 000Expenditure on active labour marked policies per unemployed,

late 1990s

The Danish flexicurity model Denmark combines a moderate level of EPL with effective activation of unemployment benefit recipients – the so-called « flexicurity » model

This policy mix has helped guarantee sufficient dynamism in the labour market while ensuring adequate employment security among workers – i.e. facilitating transitions from unemployment to work.

But, in its present format, this model is quite expensive (5% of GDP for active and passive labour market programmes) Flexible labour

market

Generous welfare systems

Active Labour Market Policies /

activation

Conclusions:

The OECD Jobs Strategy (2006) recommends that countries:

« Make sure that employment protection legislation helps labour-market dynamism and provides security to workers »

In particular for EPL on permanent contracts: EPL should be reformed in countries where it is overly strict by

sanctioning unfair dismissal but reducing constraints to dismissals for economic reasons;

Severance costs and administrative procedures should be made more predictable so as to reduce judicial uncertainty;

Reasonable dismissal notice periods should be provided so as to help laid-off workers find new jobs

Conclusions (2):

And for EPL on temporary contracts:

Regulations on FTC may need to be relaxed in some countries;

In order not to aggravate labour market duality and thus undermine labour market performance in the long-run, a more balanced treatment between temporary and permanent contracts should be pursued;

One option to achieve the latter would be to have dismissal protection rights increase with seniority.