The Impact of Employment Protection Legislation on the Labor Market Under a Negative Economic Shock
 
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Publish date: 2012-12-31
 
Gospodarka Narodowa 2012;260(11-12):1–23
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JEL CLASSIFICATION CODES:
J65
J68
 
ABSTRACT:
The article is concerned with the problem of employment protection legislation (EPL) and its impact on the labor market, especially on employment and unemployment. The purpose of the discussion is to determine the nature and scope of employment protection legislation and to examine its influence on labor markets in OECD countries. Employment protection is a set of standards and procedures governing the dismissal of workers and, as such, it has an influence on employment, unemployment and wages. The impact of employment protection legislation on the labor market is transmitted by two major mechanisms: a direct weakening of fluctuations in employment and unemployment and falling profits, a factor that reduces demand for labor. The authors hypothesize that there is a U-shaped relationship between the level of employment protection and employment/unemployment. The hypothesis that employment protection legislation has an impact the labor market was tested empirically using data for 26 OECD countries from the 2008-2011 period. The results show that it is reasonable to expect major declines in employment (accompanied by increases in unemployment) during a crisis in countries where employment protection legislation is either relatively weak or relatively strong. The smallest decreases in employment (increases in unemployment) during the crisis can be expected in countries in which the EPL indicator is close to 2.
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