Impact of Employment Protection Legislation on Unemployment in OECD Countries: A Meta-Analysis

1. UNIVERSITY OF IOANNINA DEPARTMENT OF ECONOMICS The Impact of Employment Protection Legislation on Unemployment in OECD Countries: A Meta-Analysis Georgios Giotis and Michael Chletsos MAER-Net Colloquium, Prague 2015

2. 2015 MAER-Net Colloquium Intuition • Many economists such as Nickell (1997) and Blanchard and Wolfers (2000) suggest that differences in the labor market institutions and the labor market regulations which are designed to form the appropriate labor market policy, can explain the differences in unemployment rates across countries. • More specifically, the protection of employment status, the regulation on the unemployment benefits, the power of the unions, the minimum wage and other institutions in the labor market, can account for the variability of unemployment rates. • In our analysis we try to investigate the impact on unemployment rates of one of these tools of social policy, the employment protection, which has gained growing attention since the early 90’s (Lazear, 1990). Georgios Giotis and Michael Chletsos

3. 2015 MAER-Net Colloquium Purpose • Whether employment protection has any effect on unemployment is an issue of disagreement in either the theoretical or empirical studies of the related literature. • In this frame of divergence of views, it seemed quite challenging to approach this issue with meta-analysis techniques which are very useful statistical tools for reviewing empirical results. • During our research we did not find any meta-study on the employment effect of Employment Protection Legislation (EPL) and our purpose is to investigate this issue using a meta-sample of 74 empirical studies which generated 866 estimates. Georgios Giotis and Michael Chletsos

4. 2015 MAER-Net Colloquium What exactly is EPL? • EPL is a multidimensional institution, which is quite difficult to quantify as it includes several types related to employment protection measures, such as firing (e.g. worker’s right to appeal against his lay-off, requirements for dismissals and redundancy procedures), hiring, collectively bargained conditions during employment, rules in favor of disadvantage groups, temporary employment protection terms or training rules. • Many forms of set regulations can be found but empirical research uses mostly indexes elaborated by the OECD. The methodology for their formation is based on 21 basic items classified into three main areas: a) protection of regular workers, b) regulation of temporary employment and c) specific requirements for collective dismissals. Georgios Giotis and Michael Chletsos

5. 2015 MAER-Net Colloquium Theoretical expectations on the effect of EPL on unemployment • Whether EPL has any effect on unemployment is an issue of contention between economists.Basic economic theory suggests that, stricter employment protection reduces the propensity to hire by employers, since they fear that such decisions will not be easy to reverse in the future, for example during economic downturns. • On the other hand, employment protection also leads firms during downswings to keep more workers employed, than they would have otherwise done. Therefore, employment protection reduces both job creation and job destruction, so that the net effect on unemployment is not a priori known. Georgios Giotis and Michael Chletsos

6. 2015 MAER-Net Colloquium Previous Literature • Employment protection legislation has been debated during the last 25 years. Lazear (1990) noted that the impact on labor costs may be offset through bargaining, which could weaken or eliminate the adverse effect on employment. Until then, and especially since the beginning of the millennium, a large literature can be found on the employment effect of EPL and this issue is quite controversial in the findings. • A survey by Skedinger (2010) includes over one hundred references on this topic and a more recent one by OECD (2013) includes 149 references, driven by the interest to explain the increasing unemployment rates which European countries face since the beginning of the 21th century. Georgios Giotis and Michael Chletsos

7. 2015 MAER-Net Colloquium Some empirical studies on the effect of EPL on unemployment rate

8. 2015 MAER-Net Colloquium Our meta-sample (1) • We found more than 200 studies on the employment effect of EPL since 1990 using: • the search machine Google Scholar • the economic databases RePEc, Econlit, ScienceDirect and JSTOR • 108 references  Skedinger (2010) • 149 references  OECD (2013) • references from all studies of the meta-sample • We excluded those studies which used an employment measure other than the unemployment rate. In this way the genuine effect will be more robust and more easily measurable with respect to the effect of the strictness of EPL on the unemployment rate. Georgios Giotis and Michael Chletsos

9. 2015 MAER-Net Colloquium Our meta-sample (2) • Moreover we excluded studies a) which did not use a continuous measure of the dependent variable and reported probabilities (from logit or probit estimations) and b) when we could not calculate either the t-statistic or its standard error which are both needed for publication selection bias correction. • In general, in the identifying and coding process we followed the protocols of the MAER-NET community (2013). • In our analysis we use coefficients but as soon as the coding of the studies with their moderators will be finished, they will be replaced by the partial correlations which are considered more stable. • Our meta-sample consists of 74 studies which generated 866 estimates. Georgios Giotis and Michael Chletsos

10. 430 estimates < 0 431 estimates > 0 5 estimates = 0 Funnel graph from our meta-sample (n=843) (Number of observations is not 866 since 23 estimates were dropped out as outliers).

11. 2015 MAER-Net Colloquium The FAT–PET approach • To test for the presence of publication bias and the precision of the estimated empirical effect we follow Stanley et al. (2008) and Efendicet al. (2011) and we performed the FAT-PET-MRA which is: ti = β0 + β1(1/SEi) + vi Funnel Asymmetry Test (FAT) and Precision Effect Test (PET) (n=866) Georgios Giotis and Michael Chletsos

12. 2015 MAER-Net Colloquium Multiple MRA • Like any regression model, the estimates of MRA’s coefficients can become biased when important explanatory variables are omitted. MRA previous model can be expanded to include moderator variables that explain variation in EPL estimates. The meta - regression model we estimate then (taking account the study heterogeneity) takes the form: Georgios Giotis and Michael Chletsos

13. The coding of the studies is ongoing. • The 23 moderators we will use in the MRA analysis are the following:

14. Economists disagree on the employment effect of EPL. Using a sample of 74 studies from OECD countries which produced 866 estimates we find that: The 430 estimates are negative, 431 estimates are positive and the rest 5 estimates are zero. The genuine effect is positive but so small that is of no significant use. (a 10% stricter employment regulation leads to 0.019% increase in the unemployment rates) As potential sources of heterogeneity we identified: i) the measurement of EPL ii) the existence of additional labor market institutions and policies, and iii) study characteristics related to the country, the structure of the data, the group related, the model specifications and the estimation method. 2015 MAER-Net Colloquium Concluding Remarks Georgios Giotis and Michael Chletsos

15. 2015 MAER-Net Colloquium Theoretical Considerations & Future Research • In our study we find that the “genuine” effect of a stricter EPL on unemployment is positive but so small that is of no practical use. • Moreover, previous meta-analysis on the effect of minimum wages on employment have shown no or very small negative impact. • Can differences in the labor market institutions and regulations explain the differences in the levels of employment among countries? • Are other institutions such as trade unions or ALMP or maybe labor cost policies such as tax wedge more appropriate to account for these differences? • Are business cycles better indicators to explain the trends and patterns in the unemployment rate? Georgios Giotis and Michael Chletsos

16. END OF THE PRESENTATION THANK YOU Georgios Giotis and Michael Chletsos