Summary Indicators of Product Market Regulation with an Extension to Employment Protection Legislation

Abstract

This paper presents a database on indicators of product market regulations and employment protection legislation for most of the OECD countries and illustrates a methodology for aggregating these detailed indicators into summary indicators of the strictness of regulations. The summary indicators are obtained by means of factor analysis, in which each component of the regulatory framework is weighted according to its contribution to the overall variance in the data. These indicators are used to assess the regulatory approaches across countries as well as the interrelations between various sets of regulatory provisions. While regulatory provisions can be classified and assessed from a variety of standpoints, this paper focuses exclusively on the relative friendliness of regulations to market mechanisms: there is no attempt to assess the overall quality of regulations or their aptness in achieving their stated public policy goals. The guiding principle inspiring the conception of the summary indicators of regulations is the likely influence of regulations on the choices and market opportunities of firms. The detailed indicators refer to: economic regulation concerning market access, the use of inputs, output choices, pricing and international trade and investment; administrative regulation (i.e. the interface between government agencies and economic agents) including means for communicating regulatory requirements to the public as well as compliance procedures; and employment protection legislation (EPL) for regular as well as temporary employment contracts.

A number of stylised facts emerge from the analysis. While the increasing degree of economic integration in the OECD area has levelled out differences in international trade and investment policies, the friendliness to product market competition of inward-oriented regulations still differ significantly across OECD countries. Economic regulations that restrict competition are generally matched by burdensome administrative environments and public ownership appears to be often associated with legal limitations to the number of competitors. Moreover, there is evidence of asymmetric liberalisation of EPL in a number of OECD countries: while regulation for regular contracts has remained largely unchanged, many countries (especially in Europe) have eased regulations for temporary contracts. Finally, the summary indicators of product market regulation and EPL suggest that, across countries, restrictive regulatory environments in the product market tend to be associated with restrictive employment protection policies.

JEL Classification: C81, K2, J38, L5