The right of workers to job security is safeguarded. Dismissals without just cause or for political or ideological reasons are forbidden.
A study that compared the labor markets in Portugal and the United States uncovered the following facts: [***See Olivier Blanchard and Pedro Portugal, “What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets,” American Economic Review 91, no. 1, (2001), 187–207.***]
- The flows into unemployment from employment and the flows from employment to unemployment are much lower in Portugal compared to the United States.
- Average unemployment duration in Portugal is about three times that of the United States.
- Job protection is very high in Portugal relative to the United States.
Even though Portugal and the United States have similar overall unemployment rates, the underlying flows are quite different in the two countries. Flows between employment and unemployment—and vice versa—are much smaller in Portugal. This means that if you lose your job, it is likely to take a long time to find a new one. If you have a job, you are likely to keep it for a long time. As we would expect from this, people typically spend much longer periods of time in unemployment in Portugal than they do in the United States. If we compare the United States with Europe more generally, we see similar patterns. In 2010, the average unemployment duration for workers ages 15–24 was about 10.6 months in Europe but only 5.9 months for the United States. For workers in the 25–54 age group, the duration was higher in both Europe (13.7 months) and the United States (8.2 months) than for younger workers. [***See “Unemployment Duration,” Online OECD Employment database, accessed June 30, 2011,http://www.oecd.org/document/34/0,3746,en_2649_33927_40917154_1_1_1_1,00.ht ml#uduration.
Saylor URL: http://www.saylor.org/books Saylor.org***] Recall that in 2010, Europe and the United States had similar rates of unemployment. Employment duration, however, is still much higher in Europe than the United States. In both places, older workers tend to be unemployed for longer periods than younger workers. But European workers are typically unemployed for much longer periods of time than US workers. [***These figures come from “Average Duration of Unemployment,” OECD, accessed June 30, 2011, http://stats.oecd.org/Index.aspx?DataSetCode=AVD_DUR.***]
The Organisation for Economic Co-operation and Development (OECD) conducted a large study on the employment protection legislation in a variety of developed countries. The main study (OECD Employment Outlook for 2004,http://www.oecd.org/document/62/0,3746,en_2649_33927_31935102 _1_1_1_1,00.html) created a measure of employment protection and then attempted to relate it to labor market outcomes in different countries. The reasoning we have just presented suggests that in countries with relatively high levels of employment protection, labor markets would be much more sluggish.
Formulating a comprehensive measure of employment protection is not easy. In principle, the idea is to measure the costs of firing workers and various regulations of employment. Examples would include requirements on advance notice of layoffs and the size of severance payments that firms are obliged to pay. In some countries, a firm must go to court to lay off workers. For temporary workers, there are specific restrictions placed on this form of contract, as in the discussion of France that opened this chapter. In reality, these costs are difficult to detect and convert to a single measure. The OECD findings should be interpreted with these challenges in mind.
Another OECD publication (http://www.oecd.org/dataoecd/40/56/36014946.pdf) examines employment protection legislation across OECD countries in 1998 and 2003.[*** This discussion is based on Figure A.6 of OECD, “Annex A: Structural Policy Indicators,”Economic Policy Reforms: Going for Growth, accessed June 30, 2011,http://www.oecd.org/dataoecd/40/56/36014946.pdf.****] Portugal was the country with the highest level of employment protection legislation, while the United States was the lowest. France was above average, while the United Kingdom and Canada were below average. The OECD analysis highlighted two effects of such legislation on labor market flows:
- It limits flows from employment into unemployment because it is costly to fire workers.
- It limits flows from unemployment to employment because firms, when deciding to hire a worker, will realize that they may wish to fire that worker sometime in the future.
The first effect is the more obvious one; indeed, it provides the rationale for employment protection. If it is hard to fire workers, then firms are less likely to do so. The second effect is less obvious and more pernicious. If it is hard to fire workers, then firms become more reluctant to hire workers. Put yourself in the place of a manager wondering whether to make a hire. One concern is that the person you are considering will turn out to be unsuitable, or a bad worker. Another is that conditions in your industry will worsen, so you may not need as many employees. In those circumstances, you want to be able to let the worker go. If you will not be able to do so, you may decide it is safer simply to make do with the workers you already have.
The OECD analysis particularly stressed the effects on the labor market experience of relatively young workers. The report emphasized that stronger legislation is linked to lower employment of young workers. If it is costly to sever a relationship, then a firm will not give a young worker a chance in a new job. The OECD also noted an important benefit of employment protection legislation: it enhances the willingness of young workers to invest in skills that are productive at their firms. Without a strong attachment to the firm, workers have little incentive to build up skills that are not transferable to other jobs.
- 749 reads
