Employment policies and data

OECD Employment Outlook 2004 - Chapter 2: Striking facts


Chart 1. Unemployment benefits re-assure workers while EPL makes them worry [adapted from Chart 2.8]  (xls,98Kb,English)

There are several dimensions to the concept of labour market security: stability in employment, the opportunity to find a new job quickly after a spell of unemployment or inactivity, and finally income security for those who participate in the labour market. EPL seems to contribute to the first of these dimensions, namely the stability of employment relationships. Indeed, it tends to reduce the risk of job loss. The flip side is that job protection also has an adverse effect on exit rates from unemployment, thus prolonging the average unemployment spell. As such, it contributes to a certain form of labour market insecurity. Moreover, implementing severance payment schemes is only a very partial solution to the problem of affording a minimum income for the unemployed. In fact, at the aggregate level, EPL fails to cover all individuals facing income risk and lacks any redistribution patterns between individuals. Therefore, EPL has to be considered relative to the generosity of unemployment insurance benefits and active labour market policies: unemployment benefits may better guarantee workers against income risk and active labour market policies may be more effective in maintaining and enhancing their employability.
This view is supported by Chart 1, where it emerges that generous unemployment benefits are correlated positively with workers’ perceptions of employment security while stricter EPL is correlated negatively with them. As expected, temporary workers feel less secure than their permanent counterparts. Strikingly, not only does more stringent EPL make temporary workers feel less secure but, it seems to have a similar effect on the very workers that it is meant to protect.
This does not mean that EPL has no role to play. Dismissals represent a cost for society and, on the point of view of economic efficiency as well as social welfare, it is important that each of the concerned parties, notably employers, take responsibility for this cost. This thesis is developed in some recent analysis showing that some components of EPL could provide incentives for firms to take the social cost of their dismissal decisions into account.