Labour market effects of employment protection

Abstract

"In Germany employment protection regulations are one of the key areas of statutory labour market regulation. Since the early 1980s the degree of flexibility of regulations to safeguard employment has been the subject of the debate surrounding the need to deregulate labour law. Possible, counter-productive effects of employment protection on the levels of economic growth, employment and unemployment as well as on the increasing persistence of unemployment are a central issue in the still controversial debate. Starting out from the main points of criticism levelled at rather strict employment protection such as that in Germany, the paper selects an internationally comparative perspective. It is based firstly in detail on an extensive OECD study in the 1999 "Employment Outlook" on the labour market effects of employment protection. Secondly this is augmented by calculations made at the IAB on the relationship between regulation strictness on the one hand and growth dynamics and employment and unemployment thresholds on the other hand. Then the results are integrated into a broader theoretical-conceptional framework, namely the knowledge of law and economics. The paper comes to the following results: the labour market effects of regulations on employment protection are frequently overrated. Thus there is little evidence that regulation strictness has an effect on the levels of employment and unemployment, if one disregards the statistical relationship between a low regulation level and high economic growth, which requires further examination. However, such regulations are probably not neutral with regard to the structure of unemployment and employment. New entrants to the labour market, people returning to work and unemployed people have a harder time on regulated labour markets. The empirical and theoretical findings provide no justification for a large-scale deregulation of employment protection legislation. Nevertheless in every legal system there is some need for revision because the prevailing conditions are in a constant state of change. The conclusion looks at the issue from an employment-policy viewpoint, and discusses the possible need for reform in the institutionalisation of employment protection in particular against the background of the change in the economic structure." (Author's abstract, IAB-Doku) ((en))

Cite article

Walwei, U. (2002): Labour market effects of employment protection. In: IAB Labour Market Research Topics No. 48, p. 1-28.