The impact of Employment Protection on International Comparisons of Earnings

University of Birmingham lead: Professor Stan Siebert

Project summary

This study goes ‘Beyond Wages’ in international comparisons of worker welfare by testing whether the job security offered by stricter employment protection legislation (EPL) produces a compensating wage differential (CWD) that lowers wages. Specifically, we ask whether industries that “need” labour flexibility due to their high layoff rates experience a greater wage decline in countries with stricter EPL. We find this to be true using industry data for 11 OECD countries over 1984-2005. For the workforce as a whole, the CWD is −4% of annual wages per point of EPL in intrinsically high layoff industries, and somewhat higher for skilled workers.

Research Objectives

Many governments use EPL to improve job security. Article 30 of the Charter of Fundamental Rights of the EU (Official Journal 2000) states that “every worker has the right to protection against unjustified dismissal”. Security is important to workers, judging for example by the efforts of unions in Italy to preserve the Workers Statute provision which requires reinstatement (not only compensation) of workers adjudged to be unfairly dismissed. Job insecurity also has adverse health effects. Nevertheless, the question arises as to whether simple competitive theory holds, in which case increases in EPL should cause wages to fall, cushioning the effects of EPL on employment.

Most research effort has been expended on testing for employment effects of job security, but wage effects have received less attention. In fact, in our research  we find that many workers are prepared to accept a  wage reduction in return for stricter EPL. Our paper takes advantage of the industry-based EU KLEMS dataset to estimate the compensating wage differential associated with EPL, employing a difference-in-difference approach first proposed by Rajan and Zingales (AER 1998).

Research Outputs

The work has been presented at the National Institute for Economic and Social Research conference in honour of Martin Weale January 2017

Research Team

  • Prof W S Siebert, UoB

  • Prof Mary O’Mahony, Kings College-London

Partner organisations and sponsors

Funder has been the European Commission 7th Framework Programme, project Indicser, Grant Agreement no: 244 709 with a contribution from project e-Frame, Grant Agreement no. 290520. Also workshop support from the University of Birmingham’s Research and Innovation fund.

Further information

Economic Measurement and Analysis: A Conference in Honour of Martin Weale.