Employment Protection Laws and Privatization

44 Pages Posted: 26 Jan 2011

See all articles by Krishnamurthy Subramanian

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

William L. Megginson

University of Oklahoma

Multiple version iconThere are 2 versions of this paper

Date Written: January 26, 2011

Abstract

Do employment protection laws hinder privatization? Using privatization deals in fourteen European countries from 1977-2003 and within-country variation in employment protection laws, we find that stringent employment protection laws significantly deter privatization. The fear of job cuts apparently leads organized labor in the state-owned enterprises to vehemently oppose privatization. We find that stringent employment protection laws inhibit privatization disproportionately more in industries that are less productive and require lower level of job skill, consistent with the fear of retrenchment being greater in the less-productive and low-skilled sectors. We also find that stringent employment protection laws inhibit privatization disproportionately more in unionized industries, consistent with the fact that workers in these industries exert considerable political pressure. To obtain these results exploiting inter-industry differences, we use industry-level measures for the United States as an instrument to alleviate potential endogeneity concerns. We employ panel regressions that include fixed effects to control for unobserved factors at the country, industry and year levels. We also examine specifications including country-specific and industry-specific trends to account for spurious correlations stemming from such trends in privatization and in enacting employment protection laws. Our results are also robust to controlling for endogenous changes in employment protection laws due to: (i) changes in a country’s government, specifically adopting or rejecting a left-of-center political stance; (ii) trade liberalization; and (iii) country-level economic growth.

Keywords: Employment protection, labor laws, privatization

JEL Classification: G15, G38, J8, K31, L33

Suggested Citation

Subramanian, Krishnamurthy and Megginson, William L., Employment Protection Laws and Privatization (January 26, 2011). Available at SSRN: https://ssrn.com/abstract=1748454 or http://dx.doi.org/10.2139/ssrn.1748454

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

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