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Does rigid employment legislation harm profits in Europe?
Laporšek, Suzana, 1984- ; Stubelj, Igor, 1969-
Despite the importance of the employment legislation framework for companiesʼ operation, only little attention has been devoted to the empirical research on the relationship between rigidity of ...employment laws and profits. This paper tries to fill this gap by studying the relationship employment protection legislation index and net operating surplus and mixed income as an aggregate measure of profits. The empirical analysis is based on the panel regression techniques using data for 18 European countries over the 1998-2008 period. Our findings point on a statistically significant negative relation between EPL index and profits at the level of economies. As the rigid employment legislation translates into higher hiring and firing costs for the employer, this affects the labor flows dynamics and may hinder the labor market allocation efficiency, productivity of workers and investment activities of firms. Consequently, the firm performance may fall, resulting in lower aggregate profits. Though the estimated relation between EPL and profits is small, our findings point on the need of further flexibilization of employment protection regulation, particularly among European countries where the labor market is rather inflexible. The process of flexibilization should, however, be addressed in a broader manner, among others following the guidelines of the flexicurity concept set at the level of the European Union. This would be beneficial not only for labor market performance and productivity, but also for the competitiveness of the European economies.
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