Studies that have examined this issue (almost exclusively in Latin America) do not lead to a clear conclusion. Perry et al. (2007, 121) conclude from the regional and country-level studies in Heckman and Pagés (2004) that “a credible case can be built that labor legislation had a substantial impact on the size of the formal sector”. However, taking a more critical look at this and other relevant research, Kucera and Roncolato (2008) find the evidence less conclusive, with results varying according to model specifications. Statistically significant findings are sometimes “borderline”, and there are several cases of no significant relationship.

More generally, the aggregate employment impacts of EPL can be affected by interactions with other labor market institutions. The union density and collective bargaining structure appear to be particularly relevant, at least in the OECD, although there is no consensus on exactly how these institutions influence the effects of EPL (e.g., Elmeskov, Martin, and Scarpetta 1998; Belot and van Ours 2000; IMF 2003). Although there is limited research on the subject in developing countries, interactions between institutions are evident from some studies. For example, Ahsan and Pagés (2009) find that the negative effects of EPL on employment are only important in Indian states where the costs of dispute resolution are high. Enforcement is another institutional feature that matters. Almeida and Carneiro (2009) show that across municipalities in Brazil, the negative effect of EPL depends on the strictness of enforcement.

The research has been quite consistent in identifying how the impacts of EPL vary for different types of workers. The effects are most favorable for those who are covered by job security rules, with prime-age males and the better educated overrepresented in this group. In contrast, the lower hiring rates associated with strong EPL may have a negative effect on those outside its protective umbrella (i.e., those who are not working or in non-covered jobs). Youth, women, and the less skilled are overrepresented in this group. Montenegro and Pagés (2003) found that the introduction of more protective rules in Chile had adverse effects for women relative to men, for youth relative to the more experienced, and for the less skilled relative to the skilled.

Thus, although strict EPL tends to create employment barriers for these groups, loosening these rules will not necessarily benefit these “outsiders” if reforms are only partial. Many countries, especially in the 1990s and early 2000s, attempted to remove these barriers by making temporary contracting less restrictive while leaving permanent worker protections unchanged. The result was increases in precarious employment, especially for women, youth, and the less skilled (OECD 2004, 2006). Therefore, any overall employment gains for these groups may be offset by the increased likelihood that their employment will be in temporary rather than permanent jobs.

# _Impacts on labor market dynamics_

Job security rules have clear impacts on labor market dynamics. Empirical research confirms theoretical expectations that rules discouraging dismissals and temporary contracts lengthen durations in different labor market states (employment, unemployment, not in the labor force) and, accordingly, reduce flows between these states. A number of cross-country studies have shown that the strictness of EPL explains a significant part of country variation in job and worker flows (e.g., OECD 2004, 2010; Caballero et al. 2004; Micco and Pagés 2006; Haltiwanger, Scarpetta, and Schweiger 2008). Single-country studies using longitudinal data have come to similar conclusions. For example, Kugler (1999) found that the 1990 reduction in 16