Self-employment as a vehicle for labour market integration of immigrants and natives. The role of employment protection legislation

• Published date: 05 November 2018
• Date: 05 November 2018
• DOI: https://doi.org/10.1108/IJM-10-2018-0332
• Pages: 1064-1079
• Author: Magdalena Ulceluse,Martin Kahanec
• Subject Matter: Economics,Labour economics

Self-employment as a vehicle

for labour market integration

of immigrants and natives

The role of employment protection legislation

Magdalena Ulceluse

School of Public Policy, Central European University, Budapest, Hungary, and

Martin Kahanec

School of Public Policy, Central European University, Budapest, Hungary;

University of Economics, Bratislava, Slovakia;

Central European Labour Studies Institute, Bratislava, Slovakia and

Global Labor Organization, Essen, Germany

Abstract

Purpose –The purpose of this paper is to investigate the effect of employment protection legislation (EPL) on

self-employment in a comparative analysis between immigrants and natives. Specifically, it investigates whether,

as a result of more stringent regulations, self-employment becomes a vehicle for better labour market integration

for immigrants and natives, and for better matching between the supply and demand of labour and skills.

Design/methodology/approach –The authors use OECD indicators on the strictness of EPL,

self-employment rates calculated for natives and immigrants from the EU Labour Force Survey and a range

of control variables, in a longitudinal study covering 18 European countries over the period 1995–2013. The

analysis employs a panel regression with random effects as the baseline model, with country and time fixed

effects models serving for robustness checks.

Findings –The results indicate that EPL of regular contracts affects native self-employment positively, with

some evidence of a negative effect for immigrants. On the other hand, EPL of temporary contracts positively

affects immigrants’self-employment. These results indicate that a stricter EPL crowds out incumbent native

workers from the prime employment segment of regular contracts into self-employment, whereas a similar

effect exists for immigrant workers in the segment of temporary contracts. This is consistent with the

hypothesis of segmentation of labour market opportunities between insiders and outsiders, with implications

for immigration, employment and entrepreneurship policies.

Originality/value –This is the first study to systematically study the effect of EPL on immigrant and

native self-employment in a comparative framework. It elucidates to what extent self-employment serves as

an alternative channel of labour market integration in response to less and more strict regulation of regular

and temporary employment contracts. Distinguishing immigrant and native workers helps us understand

how these effects may differ for outsiders and insiders in the labour market, as represented by the two groups.

Keywords Employment protection legislation, Immigrant self-employment

Paper type Research paper

1. Introduction

The effect of labour market institutions on labour market outcomes has been the subject of

extensive research and heated policy debates over the past decades. One of the most

investigated[1] such institution has been employment protection legislation (EPL), and its

consequences on labour market processes. This focal point is not surprising, as deciding on

the degree of strictness of EPL is paramount to deciding between economic efficiency and

employment protection. According to Pissarides (2001), the right degree of protection should

strike a balance between the flexibility required by companies to adapt to changing labour

demands and advances in technology and the need to protect the workers from unfair

International Journal of Manpower

Vol. 39 No. 8, 2018

pp. 1064-1079

© Emerald PublishingLimited

0143-7720

DOI 10.1108/IJM-10-2018-0332

Received 15 October 2018

Accepted 15 October 2018

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

www.emeraldinsight.com/0143-7720.htm

JEL Classification —J81, J88, J38, J15

1064

IJM

39,8

treatment by the employer. At the same time, there has been a renewed interest among

policy makers in the role that self-employment can have in promoting job creation, enabling

workers to secure an alternative form of employment, which is especially relevant if waged

employment is not readily accessible for them[2].

EPL aims to protect workers from dismissal and wage loss, unfair treatment by

employers, to counter imperfection in financial markets that limit workers’ability to insure

themselves against job loss. However, except for in a perfectly functioning market, we

would expect consequences of employment legislation on labour market outcomes and

dynamics (Lazear, 1990). Because EPL increases firms’firing costs, it may impact on job

flows and the level of employment (Sá, 2011). Opponents of EPL argue that employment

levels decrease, as given the costs of firing employees, attracting new workers is risky, and

so, employers are reluctant to hire more of them (Liebregts and Stam, 2016). Thus, by

imposing costs on firms’adaptation to changes in demand and technology, EPL may affect

not only job destruction but also job creation (Scarpetta, 2014). A corollary of this

phenomenon is that incumbent workers are likely to gain from stricter employment

regulation which protects their employment, but outsiders are prone to losing from it,

furthering inequality among various unevenly affected demographic groups (Heckman and

Pagés, 2004).

The empirical literature exploring the relationship between EPL and self-employment is

rather thin, and presents inconclusive evidence (see Section 2.3). Moreover, none of these

studies disentangles the effect of EPL on self-employment for different demographic groups,

which, as previously mentioned, would likely be unevenly affected by EPL’s stringency.

This is where the present study intends to make a meaningful contribution: it aims to

identify what effect, if any, EPL has on self-employment rates, in a comparative analysis

between immigrants and natives. The nexus between EPL and alternative forms of

employment may indeed be particularly strong for immigrants, as they face multiple

barriers to full integration in the labour market (Constant et al., 2009, 2011). To the extent

that EPL intervenes in the relationship between employers and employees, the former may

be more reluctant to hire immigrants also due to informational asymmetries, or lack of trust,

between employers and immigrant workers, as compared to native workers (Becker, 2010).

This effect may be amplified by the lack of comparable levels of social or human capital on

the side of immigrants. Another barrier to immigrants’employment, possibly interacting

with EPL, may be the lack of recognition of their qualification in the host country. As a

result, immigrants can be expected to be more prone to seeking alternative forms of

employment, including self-employment. Testing the effects of EPL on self-employment in a

comparative, immigrant-native framework enables us to shed light on the possible

mechanisms through which EPL affects employment.

European countries have enacted various laws on employment protection[3] over the

past several decades, requesting employers to provide, for instance, severance pay or

notifications of termination of contract. This variation of EPL across countries and over

time provides a rare opportunity to study how EPL affects immigrants’self-employment, as

it allows us to follow changes across relatively comparable countries and over time in a

longitudinal approach. We conduct such analysis on the set of EU-15[4] countries and

Iceland, Switzerland and Norway for the period 1995–2013. Random and fixed effects

regression analyses are used to disentangle country-level, time-varying determinants of

immigrant self-employment rates.

The paper has a twofold contribution to the existing literature. First and foremost, we

investigate the effect of EPL on self-employment rates, in a comparative analysis between

immigrants and natives, which is, to the author’s knowledge, the first study of its kind. By

virtue of being outsiders to the local labourmarket, the hypothesis is thatimmigrants tend to

be more affectedby stringent EPL, with consequences for employment and business creation.

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integration