Is employment protection legislation a driver or an inhibitor of entrepreneurship? The interaction between stringency and enforcement

• Date: 21 October 2024
• Pages: 115-143
• DOI: https://doi.org/10.1108/IJM-11-2023-0705
• Published date: 21 October 2024
• Subject Matter: Economics,Labour economics
• Author: Emilio Congregado,Ana Rodriguez-Santiago,Concepción Román

Is employment protection

legislation a driver or an inhibitor

of entrepreneurship?

The interaction between

stringency and enforcement

Emilio Congregado

Department of Economics, University of Huelva, Huelva, Spain and

Centro Cient

�

ıfico Tecnol�

ogico Huelva, Huelva, Spain

Ana Rodriguez-Santiago

Department of Economics, University of Huelva, Huelva, Spain;

Centro Cient

�

ıfico Tecnol�

ogico Huelva, Huelva, Spain and

Applied Economics Department, University of M�

alaga, M�

alaga, Spain, and

Concepci�

on Rom�

an

Department of Economics, University of Huelva, Huelva, Spain and

Centro Cient

�

ıfico Tecnol�

ogico Huelva, Huelva, Spain

Abstract

Purpose –This study aims to revisit the relationship between the stringency of employment protection

legislation and entrepreneurship at the macro-level using time series data from 28 OECD countries.

Design/methodology/approach –To address model uncertainty, a Bayesian model averaging

methodology is employed, overcoming issues related to predictor selection. Additionally, the study delves

into the interaction between employment protection legislation and the rule of law, considering potential

unintended consequences and overlapping effects. Heterogeneity within self-employment is explored, making

a distinction between solo self-employment and employer entrepreneurship.

Findings –The findings reveal that the impact of employment protection legislation, both for regular and

temporary employment, on aggregate solo self-employment rates is contingent upon the level of practical

regulatory compliance. The legislation can either stimulate or hinder entrepreneurship, highlighting the

nuanced nature of its influence on macro-level entrepreneurial activities.

Practical implications –The results of this study provide valuable insights for policymakers and regulators

by emphasizing the complexity of the relationships under consideration. Understanding the potential interactions

between employment protection legislation, rule of law and practical regulatory compliance is crucial for

designing an effective and conducive regulatory environment for entrepreneurship.

Originality/value –This research offers a unique contribution to the literature in three distinct ways: by

addressing model uncertainty through Bayesian model averaging, examining the interaction between employment

protection legislation and the rule of law and differentiating between solo self-employment and employer

International

Journal of

Manpower

115

JEL Classification — C11, C23, J23, J24, J38, J40, K31, L26, M13

© Emilio Congregado, Ana Rodriguez-Santiago and Concepci�

on Rom�

an. Published by Emerald

Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence.

Anyone may reproduce, distribute, translate and create derivative works of this article (for both

commercial and non-commercial purposes), subject to full attribution to the original publication and

authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

Funding: Funding for open access publishing was provided by Universidad de Huelva/CBUA. The

authors acknowledge funding from the Spanish Ministry of Science, Innovation and Universities through

project PID2020-115183RB-C22; from Junta de Andaluc�

ıa through grant P20-00733 and Research Group

SEJ-487 (Spanish Entrepreneurship Research Group – SERG) and from Research and Transfer Policy

Strategy of the University of Huelva 2021.

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/0143-7720.htm

Received 29 November 2023

Revised 16 July 2024

Accepted16 September 2024

InternationalJournal of Manpower

Vol. 45 No. 10, 2024

pp. 115-143

Emerald Publishing Limited

0143-7720

DOI 10.1108/IJM-11-2023-0705

entrepreneurship. These distinctive elements enhance the originality and value of the study, providing a more

nuanced understanding of the intricate relationship between legal frameworks and macro-level entrepreneurship.

Keywords Entrepreneurship, Self-employment, Institutions, Employment protection legislation, Stringency,

Compliance, Enforcement, Bayesian model averaging

Paper type Research paper

1. Introduction

Self-employment dynamics in OECD countries between the 2008 and 2020 crises have sparked

renewed interest among scholars and analysts. It has been widely argued that there is an

association between self-employment growth and the deterioration of labor market conditions

(Henley, 2023). During this period between the Great Recession and the Great Pandemic, while

some countries with high self-employment rates experienced a significant decline in self-

employment rates (e.g. Greece, Portugal, or Turkey), others such as the Netherlands and the

United Kingdom reached their highest levels of self-employment on record, surpassing 5

million in the UK and nearly 1.4 million in the Netherlands (Eurostat, Labor Force Survey,

2019). During the Great Recession, numerous countries introduced policies aimed at promoting

entrepreneurship among the unemployed, with the goal of transforming unemployment into

self-employment. As a result, many of the newly self-employed individuals were marginal or

non-genuine entrepreneurs [1]. However, what sets this period apart is the limited opportunities

for transitioning from self-employment to traditional employment after the recession. Thus, the

most surprising and striking fact is that there has been no real change in the proportion of

individuals choosing self-employment, but rather a significant decrease in the proportion of

individuals leaving self-employment (Valletta et al., 2020). This suggests a disruption in the

counter-cyclicality of self-employment, potentially driven by the limited availability of full-

time job opportunities in the wage sector (Borowczyk-Martins and Lal�

e, 2020).

Given the arguments presented above, it may appear that the inter-crisis period was

characterized by a significant increase in self-employment, particularly among marginal

entrepreneurs and vulnerable workers. However, it is important to note that not all instances

of self-employment during this period were associated with precarious jobs. There was also a

notable rise in self-employment within professional, scientific, and technical fields, driven by

individuals seeking a better work-life balance and flexible working hours (Molina, 2020).

The resurgence of self-employment in recent decades has been closely linked to various

trends in the labor market. These include the fragmentation of large firms and the inclination

towards contracting out (Taylor, 2004), changes in industry composition (Blanchflower and

Shadforth, 2007), and the rise of necessity-driven entrepreneurs resulting from limited

options in the labor market (Fairlie and Fossen, 2020). Furthermore, the prominence of

dependent forms of self-employment in heavily regulated labor markets (Muehlberger, 2007;

Rom�

an et al., 2011), alongside the rapid growth of digitally-enabled forms of work

(Congregado et al., 2022), has reshaped the self-employment landscape.

Thus, the proliferation of digital labor platforms has become a significant catalyst for the

increase in self-employment, particularly in advanced economies. For firms, these platforms

have facilitated the outsourcing of tasks, accelerating contracting out processes and

transforming regular employment into roles performed by professional freelancers and

contractors (Boeri et al., 2020). For workers, digital platforms offer additional income

opportunities, especially for those in involuntary part-time employment, while also serving as

an alternative employment option for marginalized groups (Valletta et al., 2020). Furthermore,

these digital platforms provide new opportunities and customers for professionals, contractors,

and freelancers, creating an enabling framework for flexible working arrangements.

To this scenario, we must add the potential impact of employment protection legislation

(EPL) increasing self-employment as a way to circumvent regulations and protection (Rom�

an

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