Employment protection legislation and collective bargaining agreements disproportionately protect the jobs of prime age men, according to new research by Professor Lawrence Kahn, published in the June 2007 issue of the Economic Journal.
But this protection is achieved by creating a large set of outsiders – including the young, women, immigrants and lower skilled workers – who spend considerable time out of work or shifting among temporary jobs, which are lower paid and offer less training than permanent jobs.
The research looks at government mandates that limit firms’ rights to fire workers from regular employment (so-called permanent jobs), joblessness and temporary employment (jobs with fixed duration in which there are few protections against dismissal).
While such protections are designed to increase workers’ job security, high firing costs are expected to make firms reluctant to hire inexperienced or unskilled workers into permanent, protected jobs. Moreover, these effects are likely to be stronger where firms are constrained by high wage floors, such as those negotiated by centralised unions and management federations.
The study uses data from the mid-1990s on individuals from seven Western countries with widely varying laws regulating firms’ rights to dismiss workers from regular employment to study the impact of these laws on joblessness and the incidence of temporary employment.
The countries range from those with few restrictions, such as Canada, the UK and the United States, to those with extremely high costs or cumbersome procedures for firing workers, such as Italy and the Netherlands. In addition, Finland and Switzerland, two countries with intermediate levels of employment protection, are included. The data come from the International Adult Literacy Survey, which sampled individual adults from a variety of countries over the period 1994-98.
The research finds that across these countries, all else equal, the strength of employment protection mandates as measured by the OECD is positively associated with the relative incidence of joblessness among the young and immigrants (compared with older individuals and natives, respectively).
Moreover, among wage and salary workers, stronger protection mandates for regular jobs raise the relative incidence of temporary employment for young workers, native women and especially immigrant women, as well as those with low cognitive ability. These effects on joblessness and temporary employment are stronger in many instances the higher a country’s level of collective bargaining coverage.
As an illustration of these findings, compare the incidence of permanent jobs in two countries with extremely different employment protection regimes: the United States, where firms are relatively free to fire workers, and the Netherlands, which, unlike the United States, has mandated unfair dismissal compensation, mandatory notice for
individual dismissals and cumbersome procedures that firms must follow in order to exercise these rights.
Among prime age wage and salary workers (age 46-55 years), about 96% in each of these nations has a permanent job. But among employed youth (age 16-25 years), 81% of those in the United States but only 68% of the Dutch have permanent jobs. The paper’s statistical results imply that the US-Dutch differences in employment protection mandates are responsible for virtually all (about 98%) of this US-Dutch difference in the age gap in permanent employment.
The Netherlands also has a higher gender gap, native-immigrant gap and high skill-low skill gap in permanent employment than the United States, with men, natives and high skilled workers being more likely to have a permanent job than women, immigrants and the low skilled in the Netherlands. The results imply that most of these differences are also explained by the greater level of protection afforded workers on regular jobs in the Netherlands.
ENDS
Notes for editors: ‘The Impact of Employment Protection Mandates on Demographic Temporary Employment Patterns: International Microeconomic Evidence’ by Lawrence Kahn is published in the June 2007 issue of the Economic Journal.
Lawrence Kahn is Professor of Labor Economics and Collective Bargaining at Cornell University.
For further information: contact Lawrence Kahn on +1-607-255-0510 (email: lmk12@cornell.edu; website: http://www.ilr.cornell.edu/directory/lmk12); or Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com).