Turning Pink Slips into Red Tape: The Unintended Effects of Employment Protection Legislation
Forthcoming, Contemporary Economic Policy
35 Pages Posted: 22 Jun 2016 Last revised: 26 Jul 2016
Date Written: July 26, 2016
This paper presents evidence on the link between employment protection legislation (EPL) and the rate of unemployment in a cross-country panel data set of OECD countries from 1985-2013. We use both a traditional panel specification with lags of the policy variable, and also a unique structural panel vector autoregression (PVAR) method to determine the long-run dynamic interaction between employment protection legislation and unemployment. We confirm that more restrictive EPL for permanently employed workers causes a significant and persistent increase in unemployment, but the effect is only apparent at long lag lengths, some 2-5 years after the law has been implemented.
Keywords: Unemployment, Employment Protection Legislation
JEL Classification: E24, J68, J65, J63
Suggested Citation: Suggested Citation