Employment Protection

Employment protection was and is still a controversial public issue, so economists engage more and more in the heated discussion.

But what exactly means the expression “Employment Protection”?

 Employment Protection includes regulations concerning hiring and firing and is provided by different institutional arrangements like the private market, the labor legislation, collective bargaining arrangements and of course court interpretations of legislative and contractual provisions. Therefore, it is a large set of policy instruments and institutional variables that affect the functioning of the labor market. It covers dismissals protection (procedural inconveniences, notice and severance payments, and the standards/penalties fixed for “unfair” dismissals); limitations on the use of fixed term and temporary work agency contracts and the regulation of working hours periods. It also includes additional “labor standards” (e.g. regulations on parental/maternity leave).

On the one side employment protection offers many benefits for the workers, but also for firms. For the workers who are considered to be risk- averse, employment protection reduces their economic uncertainty by enforcing job and income security. Furthermore it also enhances worker satisfaction and long-term attachment to the job. This again turns out to be a benefit for the firm, due to the fact that the stable employment relationships may provide more loyalty to the firm.

Consequently, employment protection could provoke greater willingness to invest in on-the-job-training, thus Employment Protection may enhance skill formation and it could result in productivity gains. Additionally, when workers feel secure in their workplace, they might not be averse to the introduction of new technologies or the reorganization of working practices. It is also a mean of encouraging firms’ social responsibility when they have to adjust their labor force in response to an unfavorable economic situation.

On the other side, this social responsibility means an additional cost for firms. Nowadays, as the integration of national economies into the international economy advances, flexibility plays a major role, as it allows the firms to cope with a rapidly changing environment. Thus, many economists argue that employment protection generates labor market rigidity. By raising labor costs, the more cautious firms may be in recruiting workers for regular jobs. Consequently Employment Protection Legislation worse their flexibility to handle changing economic conditions.

In the view of the current high unemployment rates in the European Union due to the worldwide credit crunch in 2008 and the following recession, one might ask why some countries within the European Union are definitely more affected than others.

What do you think, could we say that employment protection causes the cross-country differences in labor market performance?

References:

  • OECD (1999), Employment Outlook, OECD, Paris

  • Pissarides (2001), “Employment Protection”, Labor Economics 8, 131-159

  • Addison, J.T. and P. Teixeira (2003), “The Economics of Employment Protection”, Journal of Labor Research, Vol. 24, Issue 1, pp. 85-129

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