Does Employment Protection Legislation Induce Structural Unemployment? Evidence from 15 OECD Countries

Afful, Efua Amoonua (2014): Does Employment Protection Legislation Induce Structural Unemployment? Evidence from 15 OECD Countries.

Abstract

This paper estimates the Non-Accelerating Inflation Rate of Unemployment (NAIRU) for 15 OECD economies from 1990 to 2012 using an iterative Phillips curve process and tests the relationship between strictness of employment protection and the NAIRU. A possible negative externality of employment protection legislation is a higher level of structural unemployment. Using Prais-winsten estimation correcting for panel-level heteroscedasticity a panel-specific first-order autoregressive process, results indicate that there is no relationship between strictness of protection for individual and collective dismissals for regular contracts and the NAIRU. The effect of strictness of employment protection for regular contracts is sensitive to model specification; the coefficient loses its significance when full controls are used in estimation. An implication is that deregulation is not a necessary policy tool in addressing the problem of structural unemployment.

• Item Type: MPRA Paper
• Language: English
• Keywords: NAIRU, natural rate, structural unemployment, employment protection legislation
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; J - Labor and Demographic Economics > J4 - Particular Labor Markets > J48 - Public Policy; K - Law and Economics > K3 - Other Substantive Areas of Law > K31 - Labor Law

References

Abel, Andrew B., and Ben S. Bernanke, 2005. Macroeconomics, 5th Edition, Pearson Addison Wesley.

Addison, John T., Paulino Teixeira, and Jean-Luc Grosso, 2000. "The Effect of Dismissals Protection on Employment: More on a Vexed Theme," Southern Economic Journal 67(1):105-22.

Avdagic, Sabina, 2013. “Is Deregulation Necessary? The Effects of Employment Protection on Unemployment,” CELSI Discussion Paper No. 17.

Ball, Laurence, and N. Gregory Mankiw, 2002. “The NAIRU in Theory and Practice,” Journal of Economic Perspectives, 16(4):115–136.

Ball, Laurence M., 2009. “Hysteresis in Unemployment: Old and New Evidence” National Bureau of Economic Research Working Paper No. 14818.

Bassanini, A. and R. Duval, 2006. “Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions”, OECD Economics Department Working Paper No. 486, and OECD Social, Employment and Migration Working Paper No. 35.

Belot, M. and Jan C. van Ours, 2001. “Unemployment and Labor Market Institutions: An Empirical Analysis,” Journal of the Japanese and International Economies, 15(4):403-418.

Bertola, Guiseppe, 2006. “Europe’s Unemployment Problems,” for M. Artis and F. Nixson, eds. Economics of the European Union, 3rd edition, Oxford University Press.

Blanchard, Olivier J., and Lawrence H. Summers, 1986. “Hysteresis in Unemployment.” NBER Working Paper Series, No. 2035.

Blanchard, Olivier, and Lawrence F. Katz., 1997. “What We Know and Do Not Know about the Natural Rate of Unemployment,” Journal of Economic Perspectives, 11(1):51-72.

Brauer, David, 2007. “The Natural Rate of Unemployment,” Congressional Budget Office Working Paper No. 18566. Cahuc, Pierre, and Andre Zylberberg, 2004. Labor Economics, MIT Press, Cambridge, MA.

Di Tella, Rafael, and Robert MacCulloch, 2005. "The Consequences of Labor Market Flexibility: Panel Evidence Based on Survey Data," European Economic Review 49(5):1225-1259.

Einarsson, Bjarni G., and Jósef Sigurdsson. 2013. “How “Natural” is the Natural Rate? Unemployment Hysteresis in Iceland,” Central Bank of Iceland, Working Paper No. 64.

Elmeskov, J., J. Martin and S. Scarpetta, 1998, “Key Lessons for Labour Market Reforms: Evidence from OECD Countries’ Experiences”, Swedish Economic Policy Review, 5(2).

Freeman, Richard B., 2002. "Institutional Differences and Economic Performance among OECD Countries," CEP Discussion Papers, No. 0557.

Friedman, Milton, 1968. “The Role of Monetary Policy,” The American Economic Review 58(1):1-17.

Gianella, Christian, Isabell Koske, Elena Rusticelli, and Olivier Chatal, 2008. “What Drives the NAIRU? Evidence from a Panel of OECD Countries,” OECD Economics Department Working Papers No. 649, OECD Publishing.

Greene, William, 2003. Econometric Analysis (5th Edition), Prentice Hall, Upper Saddle River, NJ.

King, Thomas B., and James Morley, 2007. “In Search of the Natural Rate of Unemployment,” Journal of Monetary Economics 54(2):550-564.

Lazear, Edward P., 1990. "Job Security Provisions and Employment," Quarterly Journal of Economics 105:699-726.

Lindbeck, Assar, 1999. “Unemployment – Structural,” Institute for International Economic Studies, Seminar Paper No. 676.

Lucas, Robert E., 1976, “Econometric Policy Evaluation: A Critique,” Carnegie-Rochester Conference Series on Public Policy, 1(1):19-46.

Murphy, Robert G., 1998. “Accounting for the Recent Decline in the NAIRU.” Boston College Working Papers in Economics, No. 414.

OECD, 2013. “Protecting jobs, enhancing flexibility: A new look at employment protection legislation,” OECD Employment Outlook 2013, OECD Publishing.

Phillips, A. W., 1958. “The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861 – 1957.” Economica, 25(100):283–299.

Pîrvu, Gheorghe, and Adriana Totîlca, 2011. “Unemployment Costs,” Annals of Computation Economics, 1(39):53-60.

Romer, David, 2006. Advanced Macroeconomics, 3rd Edition. McGraw-Hill Irwin New York, NY.

Scarpetta, S., 1996. “Assessing the Role of Labour Market Policies and Institutional Settings on Unemployment: A Cross-Country Study,” OECD Economic Studies 26:43-98.

Slacalek, Jiri, 2005. Productivity and the Natural Rate of Unemployment,” DIW Berlin, German Institute for Economic Research, Working Paper No. 461.

Stiglitz, Joseph. 1997. “Reflections on the Natural Rate Hypothesis,” Journal of Economic Perspectives, 11(1):3–10.

Venn, D., 2009. “Legislation, Collective Bargaining and Enforcement: Updating the OECD Employment Protection Indicators”, OECD Social, Employment and Migration Working Papers, No. 89, OECD Publishing.