Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Here's some data from 1998:

This "employment protection index" is a measure of things like legal requirements for advance notice of layoffs and severance pay, and the degree of regulation of temporary employment contracts, where 0 means "little regulation" and 100 means "highly regulated."

In a graph:

For those with knowledge of statistics, the line in the graph is a regression line of the unemployment rate on the employment protection index.

The regression suggests that for every 10 points of increase in the employment protection index, the unemployment rate increases by about 0.4 points. However, variation in the EPI explains only 7% of the variation in unemployment rates, so it's not a very tight fit, as the graph indicates.

For what it's worth, this seems to indicate that labor regulations play some role in increasing unemployment, but there is little evidence for the overwhelming effects of labor market reregulation suggested by the "party line." For example, (taking the regression literally for a moment) if Germany were to deregulate its labor markets to Irish levels, the data indicate that doing so would knock only about 1.5 points off of the unemployment rate, which would be far from solving the whole German unemployment problem. And even that is probably an overestimate.

Here are some more sophisticated analyses along the same lines:

(1) Unemployment and Labor Market Institutions: The Failure of the Empirical Case for Deregulation, by Dean Baker, Andrew Glyn, David Howell, and John Schmitt

The authors conclude that the statistical evidence for the supposed beneficial effects of labor market deregulation is not strong:

[T]he evidence [for "the widespread belief that rigidities generated by labor market institutions lie at the heart of the unemployment crisis"] is far from conclusive. [T]here is no simple relationship
between any of the labor market institutions and the unemployment rate.

Furthermore, there is more than one path to low unemployment rates:

Countries with very different institutional frameworks have managed to achieve unemployment rates substantially below the OECD average. While the United States and United Kingdom stand out as countries that have achieved low rates of unemployment with relatively weak labor market protections, the OECD also includes examples of countries that have achieved comparable results - Austria, Denmark, Netherlands, Norway, and Sweden - with high levels of labor-market protections. A complete and convincing analysis of the relationship between labor-market institutions and unemployment must be able to explain the success of these more regulated countries as well.

(2) The Role of Shocks and Institutions in the Rise of European Unemployment, by Olivier Blanchard and Justin Wolfers

The authors conclude that labor market regulations do matter, but only in conjunction with macro-economic "shocks" (such as oil price increases, the post-1970 slowdown in productivity growth, shifts in labor demand, and so forth). Neither shocks nor institutions alone can explain both the rise in unemployment and current differences in unemployment rates across countries. This is because there is not enough differences in the degree of "shocks" across countries to explain current differences in unemployment rates, while many of the labor market institutions blamed for poor labor market performance actually pre-date the rise in unemployment.

And here is some historical data on the evolution of labor market protections across countries:

by TGeraghty on Thu Aug 11th, 2005 at 10:24:52 PM EST
I forgot to mention that Blanchard and Wolfers are relatively optimistic about the European labor market situation:

. . . one can be mildly optimistic about the future of European unemployment. The effects of some of the adverse shocks should go away. The real interest rate is likely to be lower in the future than in the recent past. The dynamic effects of . . . adverse labour demand shifts should eventually prove favorable to employment. Institutions are also slowly becoming more employment-friendly. . . . the more favourable macroeconomic environment and the improvement in institutions should lead to a substantial decline in unemployment.

Of course, that was written in 2000 . . .

The Baker et. al. paper also contains this little tidbit that the "party line" always fails to mention:

. . . the mode of bargaining coordination appears to have a substantial impact on the unemployment rate. . . . Increasing bargaining coordination . . . may allow for lower unemployment without the same welfare costs [as deregulation] for workers.

Both Ireland and the Netherlands, for example, relied heavily on negotiated wage moderation via coordinated "social partnership" bargaining between labor, business, and government to reduce unemployment. Wage moderation allows for more expansionary fiscal and monetary policies, because the risk of inflation is reduced.

by TGeraghty on Thu Aug 11th, 2005 at 10:50:54 PM EST
[ Parent ]
Ireland had massive unemployment when it had bugger all regulation of employment and is down to structural (<5%) with pretty good job protection. You can fire people here, but you'd better go through the appropriate process.
by Colman (colman at eurotrib.com) on Fri Aug 12th, 2005 at 01:56:03 AM EST
[ Parent ]
If we concentrate on the "hire & fire" issue, what are the differences between Ireland and Germany for instance? When I actually had employees, the recommended procedure to cover myself against getting my ass sued off was:

  • Issue a warning about whatever sub-standard behaviour led me to want to get rid of them, together with a plan for fixing the problem.
  • Issue a formal warning.
  • Fire them.

This was a high-tech, small company, no unions, nothing. I was being advised by a high-end firm of solicitors. This was the minimum you needed to do.

That would take at least six weeks to a month, and if you didn't have cause, forget it. Once they get through their probationary period of at most six months or so and become a permanent employee you can't fire them without cause. You can make them redundant, but then you have to pay redundancy (the statutory rate was recently increased on that) depending on length of service and god help you if they catch you filling their job within a year - it's suing time again.

What do they make you do in Germany? Sacrifice goats to the horned god? Swim across a lake of sauerkraut?

by Colman (colman at eurotrib.com) on Fri Aug 12th, 2005 at 02:23:46 AM EST
[ Parent ]
Don't know about Germany, but in France it's pretty much what you're saying. You must be careful to carry out the steps according to the rules, that's all. An employer who has reason to fire an employee can perfectly well do so. An employer that does not have good reason... Well, is there a country where you can't sue for unlawful dismissal?
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Aug 12th, 2005 at 09:01:59 AM EST
[ Parent ]


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