One area of labour market regulation that appears to have particularly adverse effects on unemployment are stringent hiring and firing rules.
While strict hiring rules restrict temporary work agencies and the use of fixed-term contracts, tight firing rules make it difficult and costly for employers to lay off workers.
These rules, as well as strict labour market regulation in general, have a particularly adverse impact on women and young people.
Women often take a career break to have children and later on try to get back into employment. Young people are just entering working life.
Therefore, it is plausible that both groups are more strongly affected when employers are reluctant to hire staff due to stringent labour market regulation.
Another type of labour market regulation that appears to raise unemployment on a world-wide scale is military conscriptions.
A main reason may be that conscripts leaving the armed forces after the end of their service have difficulties finding a job because they did not gather the skills and work experience that employers are looking for.
The longer the conscription period, the more severe this mismatch is likely to be. This effect appears to be the strongest among young people. This is obviously because conscripts typically are in this age group.
Apart from the indicators that measure the strictness of hiring and firing regulation and the use of conscription, also looked at is indicators that measure the strictness of minimum wage laws, the centralisation of wage bargaining and the generosity of unemployment benefits.
It is believed that if Italy (a typical country with strict regulation) had enjoyed the same flexibility in labour market regulation as the United States (a typical country with flexible regulation), its unemployment rate might have been 2.3 percentage points lower among the total labour force, 3.4 percentage points lower among women and 5.6 percentage points lower among young people.
Using an aggregate indicator, which is measuring the overall strictness of labour market regulation, is the average of these five individual indicators.
On average over the years 2000-2003, Italy’s flexibility of labour market regulation (as measured by the aggregate indicator) was rated 3.6 out of 10 – while the United States was rated 7.2 and the United Kingdom was rated 6.8.
Research suggests that the UK’s fairly flexible labour market regulation is likely to strengthen the economy’s resilience to weather the current crisis.
Although unemployment is going to rise sharply for some time, countries with more flexible regulation will probably experience a faster and more pronounced fall in unemployment once the crisis is overcome.