Employment protection and labour market adjustment in some OECD countries: Evolving institutions and variable enforcement

This report studies analytical and empirical issues encountered in the assessment of the influence on aggregate labour markets of legal provisions, institutional arrangements, and jurisprudence in the area of employment protection. It summarises the current state of knowledge in the field, outlines useful research directions, and offers a preliminary discussion of new relevant information. Section 2 surveys existing theoretical work and empirical evidence on the relationship between Employment Protection Legislation (EPL) and broad labour market performance indicators. (The more complex issue of whether employment-reduction costs can directly or indirectly increase the productivity of employment relations is not directly addressed in this Report. We do note, however, that such effects and/or insurance concerns must have motivated existing legislation, and should be taken into account by any reform process). Formal models of dynamic labour demand do not yield clear-cut implications as to the relation between employment protection and main labour market aggregates, such as employment and unemployment rates and labour force participation. However, these models unambiguously indicate that employment should be more stable and individual employment relationships more durable when employment reduction is costly for employers. The set of rules governing unfair dismissals, layoffs for economic reasons, severance payments, minimum notice periods, administrative authorisation for dismissals and prior discussion with representative of unions and/or labour market administrations certainly implies that employment reductions are costly for employers; it does so, however, in ways that are hard to represent quantitatively. Previous research has circumvented measurement difficulties by r..