the impact of employment protection legislation on unemployment in oecd countries: a meta-analysis...

The Impact of Employment Protection Legislation on The Impact of Employment Protection Legislation on Unemployment in OECD Countries: A Meta-AnalysisUnemployment in OECD Countries: A Meta-Analysis

UNIVERSITY OF IOANNINADEPARTMENT OF ECONOMICS

Georgios Giotis and Michael Chletsos

MAER-Net Colloquium, Prague 2015

IntuitionMany economists such as Nickell (1997) and Blanchard and Many economists such as Nickell (1997) and Blanchard and Wolfers (2000) suggest that differences in the labor market Wolfers (2000) suggest that differences in the labor market institutions and the labor market regulations which are designed institutions and the labor market regulations which are designed to form the appropriate labor market policy, can explain the to form the appropriate labor market policy, can explain the differences in unemployment rates across countries.differences in unemployment rates across countries.

More specifically, the protection of employment status, the More specifically, the protection of employment status, the regulation on the unemployment benefits, the power of the regulation on the unemployment benefits, the power of the unions, the minimum wage and other institutions in the labor unions, the minimum wage and other institutions in the labor market, can account for the variability of unemployment rates.market, can account for the variability of unemployment rates.

In our analysis we try to investigate the impact on unemployment In our analysis we try to investigate the impact on unemployment rates of one of these tools of social policy, the employment rates of one of these tools of social policy, the employment protection, which has gained growing attention since the early protection, which has gained growing attention since the early 90’s (Lazear, 1990).90’s (Lazear, 1990).

2015 MAER-Net Colloquium


PurposeWhether employment protection has any effect on Whether employment protection has any effect on unemployment is an issue of disagreement in either the unemployment is an issue of disagreement in either the theoretical or empirical studies of the related literature.theoretical or empirical studies of the related literature.

In this frame of In this frame of divergence of views, it seemed quite divergence of views, it seemed quite challenging to approach this issue with meta-analysis challenging to approach this issue with meta-analysis techniques which are very useful statistical tools for reviewing techniques which are very useful statistical tools for reviewing empirical results.empirical results.

During our research we did not find any meta-study on the During our research we did not find any meta-study on the employment effect of Employment Protection Legislation (EPL) employment effect of Employment Protection Legislation (EPL) and our purpose is to investigate this issue using a meta-and our purpose is to investigate this issue using a meta-sample of 74 empirical studies which generated 866 estimates.sample of 74 empirical studies which generated 866 estimates.



What exactly is EPL?EPL is a multidimensional institution, which is quite difficult to EPL is a multidimensional institution, which is quite difficult to quantify as it includes several types related to employment quantify as it includes several types related to employment protection measures, such as firing (e.g. worker’s right to appeal protection measures, such as firing (e.g. worker’s right to appeal against his lay-off, requirements for dismissals and redundancy against his lay-off, requirements for dismissals and redundancy procedures), hiring, collectively bargained conditions during procedures), hiring, collectively bargained conditions during employment, rules in favor of disadvantage groups, temporary employment, rules in favor of disadvantage groups, temporary employment protection terms or training rules.employment protection terms or training rules.

Many forms of set regulations can be found but empirical Many forms of set regulations can be found but empirical research uses mostly indexes elaborated by the OECD. The research uses mostly indexes elaborated by the OECD. The methodology for their formation is based on 21 basic items methodology for their formation is based on 21 basic items classified into three main areas: a) protection of regular classified into three main areas: a) protection of regular workers, b) regulation of temporary employment and c) specific workers, b) regulation of temporary employment and c) specific requirements for collective dismissals.requirements for collective dismissals.



Theoretical expectations on the effect of EPL on unemployment

Whether EPL has any effect on unemployment is an issue of Whether EPL has any effect on unemployment is an issue of contention between economists.contention between economists. Basic economic theory suggests Basic economic theory suggests that, stricter employment protection reduces the propensity to hire that, stricter employment protection reduces the propensity to hire by employers, since they fear that such decisions will not be easy by employers, since they fear that such decisions will not be easy to reverse in the future, for example during economic downturns.to reverse in the future, for example during economic downturns.

On the other hand, employment protection also leads firms during On the other hand, employment protection also leads firms during downswings to keep more workers employed, than they would downswings to keep more workers employed, than they would have otherwise done. Therefore, employment protection reduces have otherwise done. Therefore, employment protection reduces both job creation and job destruction, so that the net effect on both job creation and job destruction, so that the net effect on unemployment is not unemployment is not a priori a priori known.known.



Previous Literature

Employment protection legislation has been debated during the Employment protection legislation has been debated during the last 25 years. Lazear (1990) noted that the impact on labor costs last 25 years. Lazear (1990) noted that the impact on labor costs may be offset through bargaining, which could weaken or may be offset through bargaining, which could weaken or eliminate the adverse effect on employment. Until then, and eliminate the adverse effect on employment. Until then, and especially since the beginning of the millennium, a large literature especially since the beginning of the millennium, a large literature can be found on the employment effect of EPL and this issue is can be found on the employment effect of EPL and this issue is quite controversial in the findings.quite controversial in the findings.

A survey by Skedinger (2010) includes over one hundred A survey by Skedinger (2010) includes over one hundred references on this topic and a more recent one by OECD (2013) references on this topic and a more recent one by OECD (2013) includes 149 references, driven by the interest to explain the includes 149 references, driven by the interest to explain the increasing unemployment rates which European countries face increasing unemployment rates which European countries face since the beginning of the 21th century.since the beginning of the 21th century.




Author(s) and year Sample Results

Scarpetta (1996) 17 OECD countries;1983-93

Employment protection increases unemployment rate.

Nickell (1997) 20 OECD countries;1983-88 & 1989-94

The effect of employment protection effect is negative on unemployment but statistically insignificant.

Elmeskov (1998) 19 OECD countries;1983-95

Employment protection raises structural unemployment

Addison et al. (2000) 20 countries; 1956-84 Employment protection is statistically insignificant.

Miles (2000) US panel from 1965-94 No effect on aggregate employment nor unemployment.

Botero et al. (2004) 85 countries Positive effect on unemployment rate

Kugler (2004) Colombian data1988, 1992, 1996

Reform contributed to about 10% of the reduction in unemployment rate between the pre and post reform periods.

Di Tella andMacCulloch (2005)

21 OECD countries:1984-90

Negative effect on the unemployment rate but not always significant

Pages andMontenegro (2007)

Chilean data; 1960-98 Job security does not have a significant impact on unemployment rates

Feldmann (2008) 74 countries; 2000-03 Labor market regulations increase unemployment

Some empirical studies on the effect of EPL on unemployment rate

Our meta-sample (1)We found more than 200 studies on the employment effect of EPL We found more than 200 studies on the employment effect of EPL since 1990 using:since 1990 using:

the search machine Google Scholarthe search machine Google Scholar the economic databases RePEc, Econlit, ScienceDirect and JSTORthe economic databases RePEc, Econlit, ScienceDirect and JSTOR 108 references 108 references Skedinger (2010) Skedinger (2010) 149 references 149 references OECD (2013) OECD (2013) references from all studies of the meta-samplereferences from all studies of the meta-sample

We excluded those studies which used an employment measure We excluded those studies which used an employment measure other than the unemployment rate. In this way the genuine effect will other than the unemployment rate. In this way the genuine effect will be more robust and more easily measurable with respect to the effect be more robust and more easily measurable with respect to the effect of the strictness of EPL on the unemployment rate. of the strictness of EPL on the unemployment rate.



Our meta-sample (2)Moreover we excluded studies a) which did not use a continuous Moreover we excluded studies a) which did not use a continuous measure of the dependent variable and reported probabilities (from measure of the dependent variable and reported probabilities (from logit or probit estimations) and b) when we could not calculate either logit or probit estimations) and b) when we could not calculate either the t-statistic or its standard error which are both needed for the t-statistic or its standard error which are both needed for publication selection bias correction.publication selection bias correction.

In general, in the identifying and coding process we followed the In general, in the identifying and coding process we followed the protocols of the MAER-NET community (2013).protocols of the MAER-NET community (2013).

In our analysis we use coefficients but as soon as the coding of the In our analysis we use coefficients but as soon as the coding of the studies with their moderators will be finished, they will be replaced by studies with their moderators will be finished, they will be replaced by the partial correlations which are considered more stable.the partial correlations which are considered more stable.

Our meta-sample consists of 74 studies which generated 866 Our meta-sample consists of 74 studies which generated 866 estimates.estimates.



Funnel graph from our meta-sample (n=843)Funnel graph from our meta-sample (n=843)(Number of observations is not 866 since 23 estimates were dropped out as outliers).(Number of observations is not 866 since 23 estimates were dropped out as outliers).

01

00

200

300

400

500

1/s

e

-20 -10 0 10 20estimate

430 estimates < 0431 estimates > 0

5 estimates = 0

The FAT–PET approachTo test for the To test for the presence of publication bias presence of publication bias and the and the precision of the precision of the estimated empirical effectestimated empirical effect we follow Stanley we follow Stanley et al. et al. (2008) and (2008) and Efendic Efendic et al.et al. (2011) and we performed the FAT-PET-MRA which is: (2011) and we performed the FAT-PET-MRA which is:

ttii = = ββ00 + β + β11(1/(1/SESEii) + v) + vii



OLS OLS-cluster REML FE WLS1/SE 0.0018884**

(2.31)0.0018884**

(2.26)0.0018834**

(2.27)0.0018835*

(1.71)0.0009348***

(8.93)Constant -0.4004946

(-1.60)-0.4004946

(-0.84)-0.3919488

(-1.52)0.9493228

(0.97)1.224165***

(5.25)R-squared 0.0061 0.0061 0.48%

(Adjusted)0.4531 0.0845

Funnel Asymmetry Test (FAT) and Precision Effect Test (PET) (n=866)

Multiple MRA

Like any regression model, the estimates of MRA’s coefficients Like any regression model, the estimates of MRA’s coefficients can become biased when important explanatory variables are can become biased when important explanatory variables are omitted. MRA previous model can be expanded to include omitted. MRA previous model can be expanded to include moderator variables that explain variation in EPL estimates. moderator variables that explain variation in EPL estimates. The meta - regression model we estimate then (taking account The meta - regression model we estimate then (taking account the study heterogeneity) takes the form:the study heterogeneity) takes the form:



Moderator variable DefinitionEPL measure OECD If study uses OECD index

EPR If study uses employment protection for regular workersEPT If study uses employment protection for temporary workers

FIRING If study uses firing indexHIRING If study uses hiring index

Labor market controllers

LMI If study uses another labor market institution (e.g. trade union, ALMP) as controllerHCOST If study uses a hiring cost variable (e.g.minimum wage or tax wedge) as controllerWAGE If study uses wage setting institutions (e.g. coordination, or bargaining) as controller

Country moderator

USA = 1, if estimate comes from USAEUROPE = 1, if estimate comes from a European country

OECD = 1, if estimate comes from a panel of OECD countriesStructure of data

Panel = 1, if estimate relates to panel data with cross-section as the baseTSERIES = 1, if estimate relates to time-series data with cross-section as the base

Group related

Teens = 1, if estimate relates to teenagersYouth = 1, if estimate relates to youthMales = 1, if estimate relates to males

Females = 1, if estimate relates to femalesSpecification controllers

ENDOG = 1, if estimate come from a methods that deals with endogeneityDLagged = 1, if estimate employs lagged dependent variableAveYear The average year of the time period that is used to estimate each elasticity

TIME = 1, if time-specific fixed effects are usedFE = 1, if country/state/industry fixed effects are used

Quality PUBLISH = 1, if the elasticity comes from a study that has been published in a journal

•The coding of the studies is ongoing.•The 23 moderators we will use in the MRA analysis are the following:

Concluding Remarks


Economists disagree on the employment effect of EPL.Economists disagree on the employment effect of EPL. Using a sample of 74 studies from OECD countries which produced 866 Using a sample of 74 studies from OECD countries which produced 866

estimates we find that:estimates we find that:

1.1. The 430 estimates are negative, 431 estimates are positive and the rest The 430 estimates are negative, 431 estimates are positive and the rest 5 estimates are zero.5 estimates are zero.

2.2. The The genuine effect is positive but so small that is of no significant use. (a genuine effect is positive but so small that is of no significant use. (a 10% stricter employment regulation leads to 0.019% increase in the 10% stricter employment regulation leads to 0.019% increase in the unemployment rates)unemployment rates)

3.3. As potential sources of heterogeneity we identified:As potential sources of heterogeneity we identified:

i) the measurement of EPLi) the measurement of EPL

ii) the existence of additional labor market institutions and policies, andii) the existence of additional labor market institutions and policies, and

iii) study characteristics related to the country, the structure of the data, iii) study characteristics related to the country, the structure of the data, the group related, the model specifications and the estimation method.the group related, the model specifications and the estimation method.


Theoretical Considerations & Future Research

In our study we find that the “genuine” effect of a stricter In our study we find that the “genuine” effect of a stricter EPLEPL on on unemployment is positive but so small that is of no practical use.unemployment is positive but so small that is of no practical use.

Moreover, previous meta-analysis on the effect of Moreover, previous meta-analysis on the effect of minimum wagesminimum wages on on employment have shown no or very small negative impact.employment have shown no or very small negative impact.

Can differences in the Can differences in the labor market institutions and regulationslabor market institutions and regulations explain the explain the differences in the levels of employment among countries?differences in the levels of employment among countries?

Are other institutions such as Are other institutions such as trade unionstrade unions or or ALMPALMP or maybe labor cost or maybe labor cost policies such as policies such as tax wedgetax wedge more appropriate to account for these differences? more appropriate to account for these differences?

Are Are business cyclesbusiness cycles better indicators to explain the trends and patterns in the better indicators to explain the trends and patterns in the unemployment rate?unemployment rate?



END OF THE PRESENTATIONEND OF THE PRESENTATION

THANK YOUTHANK YOU


the impact of employment protection legislation on unemployment in oecd countries: a meta-analysis...

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economicsgeorgios giotis