The economic significance of laws relating to employment protection and different forms of employment: Analysis of a panel of 117 countries, 1990–2013

Publication Date01 Mar 2019
International Labour Review, Vol. 158 (2019), No. 1
Copyright © The authors 2019
Journal compilation © International Labour Organization 2019
Centre for Business Research, University of Cambridge, emails:; lebishop42@; (corresponding author). ** ILO, Geneva, emails: fenwick@ilo.
org; *** Evidence for Policy Design India, Institute for Financial
Management and Research, Chennai, email: The authors wish to thank the
ESRC–DFID Joint Fund for Poverty Alleviation Research (Award ES/J019402/1, “Labour law and
poverty alleviation in low- and middle-income countries”) and the ILO for supporting their research.
Their work builds on an analysis rst presented in Chapter 4 of the ILO’s World Employment and
Social Outlook 2015: The changing nature of jobs (ILO, 2015a). The analysis presented here does
not necessarily represent the views of any of their afliated institutions.
Responsibility for opinions expressed in signed articles rests solely with their authors, and
publication does not constitute an endorsement by the ILO.
The economic signicance of laws
relating to employment protection
and different forms of employment:
Analysis of a panel of 117 countries,
Zoe ADAMS,* Louise BISHOP,* Simon DEAKIN,* Colin FENWICK,**
Abstract. The authors use time series econometric analysis applying non-stationary
panel data methods to estimate the relationships between employment protection
legislation and legal protection of different forms of employment (part-time, xed-
term and agency work), and economic outcomes, with a data set based on the
Centre for Business Research Labour Regulation Index (CBR–LRI), covering
117 countries from 1970 to 20 13. Findings suggest that these laws have become
signicantly more protective over time and that strengthening worker protection
is associated with an increase in labours share of national income, rising labour
force participation, rising employment, and falling unemployment, although the
observed magnitudes are small when set against wider economic trends.
The economic effects of labour regulation continue to be widely debated.
In the European Union (EU), for example, the view that worker-pro-
tective labour laws have negative economic consequences has inuenced the
“structural reforms” initiated since 2008 in response to the sovereign debt
crisis (Escande Varniol et al., 2012). However, the European case is, in many
respects, atypical of the way that the debate has been developing. Theory no
International Labour Review2
longer maintains that labour laws necessarily operate to distort market out-
comes. In 2015, the World Bank’s Doing Business Report, in a reversal of its
earlier position that “laws created to protect workers often hurt them” (World
Bank, 2007, p. 19), noted that “employment regulations are unquestionably
necessary” and “benet both workers and rms”; labour laws could have a
negative impact on competitiveness and growth not simply where they were
“excessive” but also where they were “insufcient” (World Bank, 2014, p. 231).
This shift in perspective reects a growing theoretical consensus that labour
market institutions are needed to facilitate coordination and allocate risk within
the employment relationship. In particular, these institutions provide elements of
insurance and income smoothing that are not straightforward to obtain through
private contracting, due to information asymmetries and collective action costs.
If this view is correct, the net welfare effects of employment regulation may be
positive, depending on the level of protection it provides. The consequences of
labour laws may also depend on how they interact with a number of other fac-
tors inuencing national social and economic outcomes. From a theoretical per-
spective, the debate has become more complex but also somewhat indeterminate.
The empirical literature has also been evolving, without reaching a very
clear outcome. In 2012, after reviewing recent studies, the World Bank sug-
gested that the estimated effects of labour regulation “prove to be relatively
modest in most cases”’ so that “overall, labour policies and institutions are
neither the major obstacle nor the magic bullet for creating good jobs for de-
velopment in most countries” (World Bank, 2012, p. 258). This marks a shift
from the previous consensus of a few years ago that the empirical evidence
generally argued against the benecial effects of protective labour laws (World
Bank, 2007), but it leaves numerous questions unanswered.
This article presents new empirical evidence on the evolution of labour
laws and their relationship with changes in employment, unemployment,
productivity and inequality, using data from the Labour Regulation Index
developed at the Centre for Business Research at Cambridge University – the
“CBR–LRI data set” (Adams, Bishop and Deakin, 2017). This data set pro-
vides a unique time series of changes in labour laws across a range of devel-
oped and developing countries, going back to the early 1970s. Analyses of
this data set have been presented in the past (see Deakin, Lele and Siems,
2007; Deakin and Sarkar, 2008; Deakin, Malmberg and Sarkar, 2014; Deakin,
Fenwick and Sarkar, 2014), but only for a few countries. The data set has
now been signicantly extended and, in this article, we report ndings regard-
ing the relationship between labour laws and economic trends in a panel of
117 countries, for the period from 1990 to 2013. Our focus is on the laws
regulating different forms of employment (DFE),
including self-employment,
part-time employment, xed-term contracts and temporary agency work, and
on employment protection legislation (EPL) more generally.
1 We use the term “different forms of employment” in a way which is analogous to the term
“non-standard forms of employment” in the ILOSTAT database.
The economic significance of employment protection laws 3
The remainder of the article is organized into ve sections. The rst sec-
tion briey reviews the current state of the art regarding the theoretical ef-
fects of employment protection and related laws, noting its indeterminacy. In
the second section, we describe the methods used to construct the data set.
The third section provides a descriptive account of trends in the data and the
fourth sets out the econometric analysis and results. We provide our conclu-
sions in the nal section.
Theory and research questions
The overriding message from the voluminous literature on the economic
effects of labour laws is that “the theoretical effect of ring restrictions on
employment levels is ambiguous” (Autor, Donohue and Schwab, 2006, p. 214).
In a frictionless labour market, the additional protection that mandatory le-
gislation offers workers would, in principle, be bargained away, for example,
through a reduction in wages or other employment benets, so avoiding any
inefciencies (Gruber, 1994). If the labour market is not perfectly competitive,
which is a more realistic basis for analysis (Manning, 2003), the imposition of
statutory controls could induce distortions or imperfections in the allocation
of resources by raising rms’ ring (and hence hiring) costs (Lazear, 1990).
Simply adding to the costs of hiring and ring workers will not necessarily
lead to a net decrease in employment as the two effects may cancel each other
out (Bentolila and Bertola, 1990), but slowing down labour market transitions
may have broader negative effects, including deterring innovation by market
entrants concerned about high severance costs in the event of business failure
(Grifth and Macartney, 2010), and exaggerating the effects of the economic
cycle (Bentolila and Bertola, 1990; Duval, Furceri and Jalles, 2017).
On the other hand, if fairness at work is a benet that workers value
but employers tend to under-provide, for example because of adverse selec-
tion effects, dismissal legislation can induce an increase in labour supply and
also help shift the employment exchange to a more efcient contractual equi-
librium (Summers, 1989; Levine, 1991). This view is consistent with evidence
associating stricter employment protection laws with increases in rm-level in-
novation, the logic being that workers are more prepared to share knowledge
with managers if the rm can make credible job security commitments (Acha-
rya, Baghai and Subramanian, 2013). In the same vein, other studies suggest
positive correlations between employment protection legislation, enhanced
worker–employer cooperation and labour productivity (Koeniger, 2005; Zhou,
Dekker and Kleinknecht, 2011; Bartling, Fehr and Schmidt, 2013).
As the literature on these questions has evolved, attention has increas-
ingly focused on the detail of employment protection laws. At one time it
was thought that part-time, xed-term and temporary agency work were in-
herently more exible as contractual arrangements than the “standard” model
of full-time, indenite-duration employment, and should therefore be encour-
aged through selective deregulatory reforms (OECD, 1994). A more recent

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