CPB-ROA Conference on «Flexibility of the Labour Market» The Hague 20-21 January 2011 Setting it Right: Employment Protection, Labour Reallocation, Productivity John P. Martin and Stefano Scarpetta Directorate for Employment, Labour and Social Affairs OECD OECD, Directorate for Employment, Labour and Social Affairs
Focus of the Paper Process of labour reallocation is a crucial factor in driving productivity growth Employment Protection (EP) is a potentially important determinant of labour reallocation and productivity growth Literature on the impacts of EP on labour reallocation is limited Paper reviews evidence on these links drawing on recent OECD work 2
EP in OECD countries Protection of permanent workers against (individual) dismissal Specific requirements for collective dismissal 2008 Regulation on temporary forms of employment (scale 0-6) 4 3.5 3 2.5 2 1.5 1 0.5 0 Source: Online OECD Employment database . 3
REALLOCATION OF JOBS AND WORKERS Focus on both job creation/job destruction by firms (firm-level job reallocation) and hires and quits (worker reallocation) Job creation (JC) = net employment growth at new + expanding firms; Job destruction (JD) = jobs lost at exiting + contracting firms; Job reallocation = JC + JD Worker reallocation = hires + separations Data on job flows come from business registers/tax files – see Haltiwanger et al . (2006) Data on worker flows obtained from micro-data underlying national LFSs. 4
REALLOCATION OF JOBS AND WORKERS Country averages of job and worker reallocation rates expressed in percentages and adjusted by industry composition Panel A. Job reallocation and excess job reallocation, Panel B. Worker reallocation and excess worker reallocation, 1997-2004 2000-05 Worker reallocation Excess worker reallocation Job reallocation Excess job reallocation % % 70 35 60 30 50 25 40 20 30 15 20 10 10 5 0 0 Czech Republic Slovenia Denmark Spain United Kingdom Poland Ireland Sweden Norway Germany Belgium Slovenia Austria Greece Brazil United Kingdom Mexico United States Hungary Portugal Finland Estonia Germany Sweden Turkey United States Finland France Switzerland Portugal Slovak Republic Hungary Italy 5 Source: OECD Employment Outlook 2009.
THEORETICAL LINKS BETWEEN EP, LABOUR REALLOCATION AND PRODUCTIVITY Imposition of firing costs likely to hinder efficient workforce adjustment to shocks tending to lower labour reallocation (Mortensen and Pissarides, 1994; Bentolila and Bertola, 1990) Reform of EP via asymmetric liberalisation of temporary contracts leads firms to substitute temporary for permanent workers If EP raises costs of workforce adjustments and/or composition of employment between temporary and regular contracts, likely to have negative impact on efficient allocation of labour/productivity growth 6
EVIDENCE ON LINKS BETWEEN LABOUR REALLOCATION AND PRODUCTIVITY GROWTH The effect of net entry on total labour productivity growth Estonia Korea, Rep. Chile Portugal Netherlands Slovenia United States Hungary France Germany 0 5 10 15 20 25 30 35 40 45 50 (in % of total productivity growth) 7 Source : Bartelsman, Haltiwanger and Scarpetta (2009).
EVIDENCE ON LINKS BETWEEN EP AND LABOUR REALLOCATION Many country case studies (US, Italy, Spain, Turkey) provide supporting evidence Similar effects from cross-country panel studies, e.g. OECD (2010) which analysed worker flows using industry-level data for 24 industries and 24 countries • It uses a DiD approach, controlling for country and industry effects Results in OECD (2010) suggest that a 1 point increase in EP strictness for regular workers cuts worker reallocation by between 5 ¼ and 6¾ percentage points; similarly estimated to cut separation rates by 2¼-3 percentage points 8
Regulation for individual and collective dismissals, share of temporary workers and overall impact on worker reallocation Regulation for individual and collective dismissals, share of temporary workers and overall impact on worker reallocation 6% *** 4% *** 2% 0% -2% ** -4% *** -6% Min Max Min Max Share of temporary Worker reallocation workers (overall effect) 9 Source: OECD Employment Outlook 2010.
EVIDENCE ON LINKS BETWEEN EP AND PRODUCTIVITY Evidence from country case studies mixed on this key link But evidence from cross-country studies is more consistent: strict EP has a negative impact on TFP and labour productivity OECD (2007), Bassanini et al . (2009) use a DiD approach to data for 19 industries in 11-16 OECD countries over the period 1982-2003 • Results show that strict EP for regular workers has a significant negative impact on labour productivity growth. 10
DO WORKERS BENEFIT FROM MORE FLEXIBLE EP PROVISIONS? Average wage premia to job change, 1995-2001 7% *** 6% 5% *** 4% *** 3% 2% 1% 0% -1% * -2% * -3% Job change Voluntary Involuntary Job-to-job Job-to-jobles job change job change transition s transition Source: OECD Employment Outlook 2010. 11
POLICY CONCLUSIONS Reforms to EP should be part of a comprehensive strategy to create more and better jobs, see OECD (2006). • Must include appropriate macroeconomic policies; steps to increase product market competition; foster lifelong learning Comprehensive approach needs to secure a new “flexicurity - type balance” which includes: • Reasonably generous social safety net • Backed by effective activation regime Several different routes to reform of EP as part of a comprehensive reform package 12
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