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non-permanent employment and the deepening of “two-track” labor markets characterized by these (growing) precarious jobs and (shrinking) permanent jobs. There is now a literature on this so-called “partial reform” and new proposals to unify “insider-outsider” labor markets, especially in southern Europe where this phenomenon is most prevalent (e.g., Bentolila, Dilado, and Jimeno (2011) for Spain; Boeri (2011) for Italy; Cahuc and Kramarz (2004) for France).

While EPL clearly provides job security protection to covered workers, it is controversial because of sharp differences in views about the overall efficiency and distributional effects. Once again, these differences basically reflect the institutionalist-distortionist divide, with the former view emphasizing the protection and security afforded workers and the latter focusing on potential employment losses and privileging “insiders”.

How might EPL affect the outcomes of interest to this paper? Theoretical considerations are largely indeterminate with respect to employment and productivity effects. Some models (e.g., Bentolila and Bertola 1990) show that more costly job security provisions should increase average employment within a given firm while a model by Hopenhayn and Rogerson (1993) demonstrate that, on the other hand, they will reduce employment on the extensive margin by lowering firm entry and job creation rates.<sup>31</sup> While not conclusive in terms of effects on employment levels, theory does suggest that EPL should moderate employment fluctuations over the business cycle and should reduce turnover (e.g., Bentolila and Bertola 1990). Some models (e.g., Kugler 2004) show that job security rules create incentives for high-turnover firms to operate in the informal sector. Theoretical expectations about productivity effects are also indeterminate (OECD 2007). On the one hand, strict EPL could constrain the flow of workers into emerging high-productivity sectors and discourage technological change that is laborsaving. On the other hand, because of commitment signals and expected tenure effects, it could increase worker effort and incentives to invest in human capital; at the same time, it could motivate productivity-enhancing investments to compensate for any additional costs associated with job security rules.

The empirical work on the impacts of EPL is complicated by methodological issues, some of which were discussed in section 2. Measurement is particularly troublesome since job security rules cannot easily be reduced to a single number, like the minimum wage. There are two dominant approaches used in the field. One is to create an index where values reflect the strictness of EPL. The most widely used example of this approach is the OECD EPL index which assesses countries on a 6-point scale in terms of the strictness of its provisions for protecting permanent workers against individual dismissal, for collective dismissal requirements, and for the regulations governing temporary forms of employment.<sup>32</sup> A second approach more directly attempts to measure the monetary costs an employer can be expected to incur in complying with job security regulations. For example, Heckman and Pagés (2004) compute the expected average cost (present value) at the time of hiring to the firm for dismissing a regular

> 31 In fact, in an early paper, Lazear (1990) shows that, in perfectly competitive labor markets with no credit constraints, job security provisions should have no employment effects since contracts could be written to compensate for any associated costs.

> 32 Each of these has an index and they are combined into a composite index.  For more on the OECD measure, see www.oecd.org/employment/protection.