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

• Author: Louise BISHOP,Zoe ADAMS,Simon DEAKIN,Sara MARTINSSON GARZELLI,Giudy RUSCONI,Colin FENWICK
• Date: 01 March 2019
• DOI: http://doi.org/10.1111/ilr.12128
• Published date: 01 March 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: zla20@cam.ac.uk; lebishop42@

gmail.com; s.deakin@cbr.cam.ac.uk (corresponding author). ** ILO, Geneva, emails: fenwick@ilo.

org; sara86martinsson@hotmail.com. *** Evidence for Policy Design India, Institute for Financial

Management and Research, Chennai, email: giu.rusconi@gmail.com. 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,

1990–2013

Zoe ADAMS,* Louise BISHOP,* Simon DEAKIN,* Colin FENWICK,**

Sara MARTINSSON GARZELLI,** Giudy RUSCONI***

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 labour’s 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),

1

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