sou · GYB393 · 2011-01-01 00:00:00 — The advantage of this approach is that, in contrast to standard cross-country analysis, it can control for unobserved factors that, on average, are likely to have the same effect on productivity in all industries. They find that mandatory dismissal regulations have a depressing impact on productivity growth in industries where layoff restrictions are more likely to be binding. (2007) studies a quasi-natural experiment generated by a law introduced in in 1989: out of the 12 paragraphs in the law that dictated the costly procedure required for dismissals for cause, eight did not apply to firms employing 20 or fewer workers. Using detailed matched employer- employee longitudinal data and difference-in-difference matching methods, examines the impact of that differentiated change in firing costs upon several variables, measured from 1991 to 1999. The results suggest that firing costs of the type studied here hurt firm performance, decrease workers' effort and increase their bargaining power. Overall, the empirical literature suggests that job protection has negative effects on productivity by lowering the involvement of workers in their job and by reducing the ability of employers to manage their efficiently. In practice, employment protection legislation induces labor market segmentation between unstable jobs, with poor working conditions, and stable jobs, with better working conditions. This is because firms need to use more temporary jobs when protection of permanent jobs is stronger in order to adapt employment to changes in production. Specifically, when there are substantial firing costs for permanent jobs, firms are relatively reluctant to hire new entrants into such jobs. Instead, new entrants are placed in temporary jobs where their productivity can be assessed before a permanent offer is made. New entrants disproportionately include Bilaga 6 till LU2011 The costs of job protection the young, women and, possibly, immigrants. Moreover, the coexistence of strong protection of permanent jobs with temporary jobs induces an inefficient labor turnover because firms are more reluctant to transform temporary jobs into permanent jobs when they anticipate that the cost of termination of permanent jobs is higher. Available empirical work does suggest that stringent regulation of permanent jobs increases labor market duality. (2007), using 1994–98 International Adult Literacy Survey microdata, investigates the impact of employment protection laws on the incidence of temporary employment by demographic group. His study covers , , , the , , the and the , countries with widely differing levels of mandated employment protection. He finds that more stringent employment protection for permanent jobs (as measured by the ) increases the relative incidence of temporary employment for less experienced and less skilled workers, for young workers, native women, immigrant women and those with low cognitive ability. This outcome is important since temporary jobs tend to be lower paying, and offer less training, other things being equal, than permanent jobs; moreover, workers in temporary express lower levels of job satisfaction than comparable workers in permanent jobs (Booth et al., 2002). Thus, policies that lead to a substitution of temporary jobs for permanent jobs may actually worsen the welfare of the average worker, especially in the event that this policy does not lead to lower unemployment. As shown by Figure 8 the share of temporary jobs tends to be higher in countries where protection of permanent jobs is more stringent. Figure 8 shows that is just above the average when one looks at the share of temporary jobs. However, when we focus on youth, aged between 15 and , it appears that the share of young workers occupying temporary jobs is high in relative to most other countries, as shown by Figure 9. This suggests that the youth are disadvantaged by the combination of strong protection of permanent jobs and weak restrictions on temporary jobs. Indeed, Figure 10 shows that is, together with , the country with the highest difference between the unemployment rate of youth and the unemployment of prime age workers. In , the unemployment rate of young workers reached 19.4 percent in 2008 The costs of job protection Bilaga 6 till LU2011 while the unemployment rate of prime age workers was 5.4 percent at that time. Share of temporary jobs in total employment and protection of permanent jobs Figure 8: Share of temporary jobs in total employment and protection of permanent jobs (average of protection against individual dismissal and specific requirements for collective dismissal) in 2008. Bilaga 6 till LU2011 The costs of job protection Figure 9 Share of 15–24 year old workers in temporary jobs and protection of permanent jobs Share of temporary jobs Figure 9: Share of 15–24 year old workers in temporary jobs and protection of permanent jobs (average of protection against individual dismissal and specific requirements for collective dismissal) in 2008. The costs of job protection Bilaga 6 till LU2011 Figure 10 The gap between employment protection of permanent jobs and regulation of temporary jobs Figure 10: The gap between employment protection of permanent jobs and regulation of temporary jobs (horizontal axis) and the difference between unemployment rate of youth (15–) and unemployment rate of prime age workers (25–) (vertical axis). The protection of permanent jobs is equal to the average of protection against individual dismissal and specific requirements for collective dismissal. The labor market segmentation induced by stringent regulation of permanent jobs improves the security of permanent jobs but at the expense of an increasing instability of temporary jobs. Therefore, the impact of protection of permanent jobs on overall job security is ambiguous. Actually, more stringent regulation of permanent jobs can be associated with stronger feelings of job insecurity not only for temporary workers but also for permanent workers as shown by the empirical study of and Postel-Vinay (2009). and Postel-Vinay construct indicators of the perception of job security for various types of jobs in 12 European countries using individual data from Community Household Panel. Then, they consider the relation between reported job security and summary measures of employment protection legislation strictness on one hand, and unemployment insurance benefit generosity on the other. They find that, after controlling for selection into job types, workers feel most secure in permanent Bilaga 6 till LU2011 The costs of job protection public sector jobs, least secure in temporary jobs, with permanent private sector jobs occupying an intermediate position. They also find that perceived job security in both permanent and temporary jobs is positively correlated with unemployment insurance generosity, while the relationship with employment regulation strictness is negative: workers feel less secure in countries where jobs are more protected! These correlations are absent for permanent public jobs, suggesting that such jobs are perceived to be by and large insulated from labor market fluctuations. While care needs to be taken in establishing the causality of these correlations, this result suggests that job protection is not the best response to the problem of job insecurity. 5Does the current Swedish employment protection legislation warrant reforms? The Swedish employment protection legislation provides a strong protection to permanent workers. Economic analysis shows that the protection of permanent jobs can be justified by the need to protect workers against arbitrary dismissals and by the need to induce firms to internalize the social costs of layoffs. However, the protection of permanent jobs entails some costs because it reduces employment, productivity, innovations and economic growth. From this perspective, two aspects of the Swedish employment protection legislation warrant special attention. First, the strong duality between flexible rules for temporary contracts and strict protection for permanent jobs. This duality is beneficial to some workers but is detrimental to others. Second, the protection of permanent jobs is conceived in a way that does not allow the Swedish regulation to properly achieve the two goals of employment protection legislation presented above: the protection of workers from arbitrary dismissals and the internalization of the social costs of labor turnover. 5.1The dangers of reforms at the Figure 11 and 12 show that the regulation of temporary jobs became much less stringent over the last 25 years in , whereas the regulation of permanent jobs decreased only a . It can also be seen that the regulation of temporary jobs decreased greatly in compared to the average of countries, whereas the regulation of permanent jobs evolved similarly for and for the average of countries. Does the current Swedish employment protection legislation warrant reforms? Bilaga 6 till LU2011 the last 25 years, employment protection legislation has been reformed at the : permanent workers have been protected in the same way during this period, but it has become easier to use temporary jobs. Figure 11 Regulation of permanent jobs Figure 11: Regulation of permanent jobs in and in the countries over the period 1985–2008. The indicators go from 0 for the weakest regulation to 6 for the strongest. Bilaga 6 till LU2011 Does the current Swedish employment protection legislation warrant reforms? Figure 12 Regulation of temporary jobs Figure 12: Regulation of temporary jobs in and in the countries over the period 1985–2008. The indicators go from 0 for the weakest regulation to 6 for the strongest. Rather than reduce permanent job protection, a number of European countries decreased the protection of temporary jobs in the 1990s. The studies devoted to these events show that policies which make the labor market more flexible at the are fairly ineffectual and may be perverse: marginal reforms tend to artificially increase the turnover rate and have a very modest effect on job creation, while having potentially harmful effects on welfare. and Landier (2002) and Cahuc and Postel-Vinay (2002) find that the high turnovers in fixed-duration jobs can lead to higher, not lower, unemployment. And, even if unemployment comes down, workers may actually be worse off, going through many spells of unemployment and fixed duration jobs, before obtaining a regular job. Looking at French data for young workers over the 1980s and the 1990s, and Landier conclude that the reforms that eased the creation of temporary jobs without any change in the regulation of permanent jobs have substantially increased turnover, without a substantial reduction in Does the current Swedish employment protection legislation warrant reforms? Bilaga 6 till LU2011 unemployment duration and that their effect on the welfare of young workers appears to have been negative. Cahuc and Carcillo (2006) study the consequence of the implementation a new employment contract introduced in in 2005. This new contract applied exclusively to small businesses of no more than twenty employees. During the first two years, the new contract allows the employer to terminate the contract without having to provide an explanation. During those first two years, employers need only give their employees two weeks notice before dismissal, and after six months the notice period is extended to one month. Then, after two years, the contract is automatically transformed into a regular permanent contract. Using a dynamic model of the labor market, it is found that the introduction of the new contract has a very slight positive impact on employment. But the reform also increases job turnover because it induces firms to terminate contracts before the end of the two year period. In making jobs less secure for employees, the labor reform is expected to have a negative impact on job seekers' welfare. It is also found that the reform has bigger positive effects on employment in the short run than in the long run, because its first effect is to job creation, the impact of the hike in job destruction appearing afterwards. This transitional honeymoon, job creating effect, of two-tier labor market reforms has also been stressed by Boeri and (2007) who provide some evidence with Italian data. (2010) uses longitudinal data on individuals from Community Household Panel over the 1996–2001 period to investigate the impact of reforms of employment protection systems in nine countries. A robust finding is that policies making it easier to create temporary jobs on average raise the likelihood that wage and salary workers will be in temporary jobs. This effect is felt primarily when the regional unemployment rate is relatively high. However, there is no evidence that such reforms raise employment. Thus, these reforms, while touted as a way of jump-starting individuals' careers in the job market, appear rather to encourage a substitution of temporary for permanent work. Regarding the impact of reforms of permanent employment protection, finds either positive effects or weak positive but insignificant effects on employment and on the incidence of permanent jobs among the employed depending on the different estimation techniques. Bilaga 6 till LU2011 Does the current Swedish employment protection legislation warrant reforms? Overall, it appears that partial reforms of employment protection legislation, which consist of reducing regulation of temporary jobs without making any change in the regulation of permanent jobs, have not been successful. Their main drawback is to increase inefficient job turnover by raising the gap between the cost to terminate permanent jobs and the ease of using temporary jobs. Empirical studies show that these reforms have no significant long run effect on employment and that they are detrimental to the youth, the less skilled and the immigrants. These findings suggest that it could be worth considering changes in the reform strategy of employment protection regulation which has been adopted over the last 25 years in : comprehensive reforms may prove more fruitful than partial reforms. It has been stressed that there are two justifications for employment protection legislation: first the protection of workers from arbitrary dismissals, second, the internalization of the social costs of labor turnover. From this perspective, the analysis of the Swedish employment protection legislation gives rise to two observations. Abolish the rules which favor the insiders Some features of the Swedish employment protection legislation have anything to do with the justifications of employment protection legislation that have been put forward. Some rules protect permanent workers, over-represented in trade unions relative to temporary workers and unemployed workers. However, these rules neither protect workers from arbitrary dismissals nor induce employers to internalize the social cost of layoffs in an efficient way. These rules comprise the order of selection of layoffs in case of redundancy, the rehiring priority and the obligations made on the internal reassignment of employees. A different order of priority may be chosen by collective agreement. But case-law indicates that there are limits to bargaining freedom in this respect: a collectively agreed redundancy list must not be contrary to good practice or otherwise improper. Moreover, even if some rules in the Does the current Swedish employment protection legislation warrant reforms? Bilaga 6 till LU2011 current law can be circumvented by collective agreements, these rules influence the outcome of collective agreements through their effects on the fallback positions of the parties in the bargaining. These rules may also be used as focal points on which the parties coordinate their claims. Obviously, it can be argued that these rules hinder managers from getting rid of troublesome workers, for instance those complaining about insalubrious working conditions, organizing union activities or simply criticizing their superiors. This is true. But applying these rules is an indirect and costly way to protect workers against arbitrary dismissals. In order to reach efficient outcomes, the manager should choose those who are dismissed, possibly with the trade unions if there is a collective agreement which stipulates that this should be the case. The court should be in charge to check that there are no arbitrary dismissals. It is clear that the current rules are not easy to change, because permanent workers benefit from them. But it is certainly worth considering such reforms because empirical studies indicate that such rules decrease productivity, reduce employment, hinder innovation, increase labor market segmentation, and that they are detrimental to the youth, the less skilled and the immigrants. The internalization of the social costs of labor turnover The internalization of the social costs of labor turnover is not ensured by the Swedish employment protection legislation. Here too, it can be argued that the mandatory order of selection of layoffs in case of redundancy, the rehiring priority and the obligations made on the internal reassignment of employees, by reducing layoffs, induce employers to reduce labor turnover and then to take into account the social cost of labor turnover. However, this argument is wrong for two reasons. First, in practice, these rules reduce the turnover of permanent workers, but they also increase the turnover of temporary workers. The effect on overall turnover is ambiguous. Second, these rules prevent employers from systematically the most efficient workers. These rules do not necessarily reduce the number of layoffs. They change their composition and they decrease productivity because they lower the quality of the matches between workers and jobs. Actually, by reducing the quality of job matches, and then Bilaga 6 till LU2011 Does the current Swedish employment protection legislation warrant reforms? productivity, wages and finally taxes (which are proportional to incomes), these rules are likely to increase the social costs of layoffs. One way to remedy the under-assessment of the social value of jobs by firms is to fiscalize employment protection by integrating it into the financing of unemployment insurance and the welfare system. The principle underlying this fiscalization applies in many life situations where insurance is used. A reckless driver puts her own life in danger, and those of others too. Her attitude may cost society dear in expenses alone. This is why automobile insurance premiums depend on the personal history of each driver, especially the number of accidents she has caused. The same principle can be applied to terminations of employment. A bonus-malus mechanism, by which firms pay into unemployment insurance at rates that rise with the number of jobs they have terminated, makes it possible to limit inefficient destructions of jobs. It constitutes a form of job protection which incentivizes employers to take the costs they impose on unemployment insurance and the welfare system into account when they destroy jobs. It is worth noting that a bonus-malus mechanism exists in the , where charges associated with the payment of unemployment benefits are assigned to employers through experience rating. Employers who initiate comparatively more job separations and thus increase the burden on the unemployment insurance system must pay higher unemployment insurance contributions than those that initiate fewer separations. An event which occurred in the state of sheds an interesting light on the effect of this mechanism of experience rating. In 1985 this state adopted the mechanism, while the neighboring states of and did not. It has been observed that employers in have less tendency to fire their workers. Substituting fiscalization of job protection for the set of rules which impose the order of selection of layoffs in case of redundancy, the rehiring priority and the obligations made on the internal reassignment of employees is a means to allow employers to manage their efficiently, to induce them to take into account the social costs of layoffs, and also to provide funding to unemployment insurance and to public employment services. The logic of fiscalizing employment protection thus lies in taxing job destructions while providing more generous and more efficient unemployment insurance. This is why the fiscalization of Does the current Swedish employment protection legislation warrant reforms? Bilaga 6 till LU2011 employment protection reconciles both employers' and workers' needs, flexibility and security, by ensuring the worker safe transitions inside the labor market, while maintaining and improving competitiveness of the companies. Moreover, the fiscalization of employment protection allows us to get rid of the labor market segmentation induced by rigid rules imposed on layoffs for economic reasons. By making firing taxes increase smoothly with seniority, whatever the form of labor contract, either temporary or permanent, it is possible to avoid the gap between jobs with different status, which gives rise to inefficient labor turnover. It should be noticed that social partners can play an important role in the implementation of the fiscalization of job protection. The firing tax has to be chosen together with the unemployment benefits and other redistributive tools. Accordingly, social partners should naturally participate in the design of the fiscalization of job protection in countries where they manage social insurances. The design of this system should allow social partners to manage a consistent unemployment insurance in which the firing tax is used to finance not only unemployment benefits but also all aspects of coaching of job seekers, such as counseling and vocational training for instance. Since the firing tax has to take into account the social cost of job destruction, its level can differ according to region, industry, firm size and other relevant criteria which can be defined by social partners. Achieving the reconciliation of flexibility and security (flexicurity) is an essential condition to improve workers' welfare and growth in a context where globalization and technological progress have an effect on our daily lives, rapidly changing the needs of workers and enterprises. Companies have to be innovative if they want to survive; workers have to be flexible if they want to keep or find a job. From this perspective, we recommend consideration of a comprehensive reform of the Swedish em- ployment protection legislation, that substitutes firing taxes which increase smoothly with seniority for the current set of rules which impose the order of selection of layoffs in case of redundancy, the rehiring priority and the obligations made on the internal reassignment of employees. Acemoglu, , and Angrist, J., 2001, Consequences of Em- ployment Protection: The Case of the Americans with Disabilities Act, , 109: 915-957 , J. and Teixeira, P., 2003, The Economics of Employment Protection. , 24: 85-129. Alesina, A., Algan, Y., Cahuc, P. and , P., 2010, Family Values and the Regulation of Labor. , R. and Carneiro, P., 2009, Enforcement of Regulation, Informal Employment, Firm Size and Firm Performance, , 37(1): 28-46. . and ., 1993, in the : Layoff Incentives and Cross Subsidies. , 11: 70-95. . and ., 2000, The Effects of the Payroll Tax on Wages, Employment, Claims and Denials. , 78: 81-106. Autor, D, , . Schwab, S., 2006. The Costs of Wrongful- Discharge Laws. , 88(2): 211-231. Autor, D.H., , W., and Kugler, A., 2007, Do Employment Protections Reduce Productivity? Evidence from U.S. States, , 117: F189-F217.