Does employment protection law protect

jobs?

Mark Beatson

Chief Economist, CIPD

Honorary Visiting Professor, London Metropolitan University

Context• EPL at centre of policy debates on regulation and

the labour market.

• Domestically:• ‘Burdens on business’/’over-regulation’• Beecroft reportversus• Exploited, insecure workers• Need for more regulation

• Internationally:• European social legislation (UK resistance to extending

EU competence, repatriation of powers)• Trade agreements

• How can economics contribute to the debate?

Coverage of this talk

• EPL narrowly defined – regulations governing individual dismissals both for economic and other reasons (conduct, performance etc.)

• Impact on employment and unemployment (levels, structure, distribution)

• Will not be covering:• Effects of EPL on other economic variables (e.g.

productivity, well-being)• Other labour market regulation (e.g. National

Minimum Wage, working time regulations, equalities legislation, flexible working etc.)

Brief history of EPL in the UK

• Statutory redundancy payments introduced in 1965.

• First legislation of individual dismissals in 1971.

• Employment Tribunals created to hear cases in 1974.

• Law consolidated in 1978 and 1996 (introduction of written statement of terms and conditions).

• Qualifying period has varied:• 1971 – 2 years• 1974 – 1 year• 1975 – 6 months• 1979 – 1 year• 1980 – 2 years (if <21 employees)• 1985 – 2 years (all)• 1999 – 1 year• 2012 – 2 years

How does EPL work in the UK? (Highly simplified!)• Employer only terminates an employee’s job lawfully if they follow

a fair procedure, act reasonably and have a fair reason:• Conduct• Capability/performance• Economic circumstances (redundancy)• Legal restriction• Some other justifying reason

• Individual who feels they have been dismissed unfairly can take their case to an Employment Tribunal (now required to go through conciliation first)

• Tribunal will judge whether employer followed fair procedure and whether decision was in range of reasonable responses

• If employee wins, can be re-instated (rare) or (more likely) compensation paid (according to earnings, length of service but with an upper limit)

• Some types of dismissal automatically unfair (e.g. during pregnancy, for exercising range of legal rights) – though Tribunal may still need to determine facts

Why do we have EPL?

• Original motivations:• Facilitate industrial restructuring

• Reduce number of strikes

• Fair treatment/natural justice

• Imbalance of power between employer and employee

• UK law does not treat employment contracts as sacrosanct even if entered into voluntarily

What does economics say about the likely effects of EPL? (Recap)

• Severance payments to laid-off workers increase the adjustment cost of lay-offs

• Discourage firms from hiring new workers during economic expansion

• Affects workers’ level of effort

What does economics say about the likely effects of EPL?• Bentolila and Bertola (1990): adjustment costs

affects firing (slightly) more than hiring with plausible assumptions about costs, discount rates etc. – net (small) positive effect on employment.

• Unemployment: if EPL reduces flow into and out of employment and if hysteresis exists (where time spent unemployed itself reduces chance of getting another job because of skills atrophy or employer discrimination) will this over time push up overall unemployment?

• Worker effort: EPL reduces ‘fear factor’ but long-term commitment also incentivises investment in the employment relationship (training, commitment)

Can we make testable predictions?

• Other things being equal:• Effect of EPL on level of employment and

unemployment: ambiguous in theory.

• EPL reduces job turnover (entries and exits) and flows into and out of unemployment => higher share of unemployment is long-term unemployed.

• EPL increases share of employment outside its scope (self-employment – in many countries temporary employment, short-duration employment etc.)

What are we testing?

• EPL has been in place in the UK for over 40 years

• EPL is widespread among advanced economies – no OECD or EU member has complete absence

• So in practice we cannot test EPL versus no EPL – which may not be a viable political option in any case

• Economic arguments and policy debate are typically between different forms of EPL – ‘stronger’ versus ‘weaker’ across a number of possible dimensions:

• Qualification period• Size of compensation payments• Definitions of reasonable grounds for dismissal• Process involved in deciding whether a dismissal was legal (e.g.

whether applies before or after termination, whether adjudicating body can ‘second guess’ employer, time taken to reach decision, possibilities for appeal)

• Degree of certainty in process

What methods can we use?

• Time series – ‘before and after’ comparisons of changes in EPL

• Cross-section – comparisons between countries with different EPL systems

• Types of analysis:• Econometric – regression analysis to isolate the

impact of EPL from other factors – but is the data robust and can we really control for other factors?

• Surveys – gathering the views of interested parties on the impact of EPL – but they may be biased and/or we may not know how well informed they are – though perceptions may guide actions

What about the UK evidence?

• Change in qualification period potential source of variation

• No evident signs of change in employment levels around changes in qualification period or in employment of temporary workers

• Possible reasons:• Other variables much more important

• Employer behaviour not greatly affected by qualification period:

• Formalised procedures in most medium to large businesses

• Many employees can seek other routes for redress (e.g. discrimination)

How does EPL affect employers?

Cost of making changes to terms and conditions, practices etc.

Cost of keeping up with law, training, briefing etc.

Cost of options foreclosed

Risk of litigation, uncertainty etc. (Peck et al. (2012))

Regulation can be a ‘dynamic force’ for change in SMEs (Kitching, Hart and Wilson (2013)) –‘constraining, enabling and motivating’ (Blackburn (2012))

Interacts with product and labour market strategies

External and internal reputation

Burd

en o

n b

usin

ess

Dyn

am

ic fo

rce

EPL is not a major factor holding back small businesses(% of SMEs identifying these as main obstacle to growth)

ASBS 200/07 ASBS 2007/08 SBS2010 SBS2012

The economy 10 16 33 38

Tax, VAT etc. 12 12 8 12

Cashflow 10 9 11 10

Competition 15 14 10 10

Obtaining finance 3 3 8 7

Regulation, of which: 14 12 7 8

H&S 37 32 35 24

Tax-related 15 17 20 17

Sector-specific 12 13 16 18

Employment 16 17 14 15

Environment 11 10 7 7

Planning 7 5 7 7

Source: BIS Small Business Surveys.

Disciplinary and grievance procedures are almost universal

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980 1984 1990 1998 2004 2011 1998 2004 2011

Disciplinary procedure Grievance procedure

Workplaces with 25+ employees Workplaces with 10+ employees

Source: WERS survey series.

International comparisons• OECD compute scores to reflect ‘strength’ of

certain types of regulation including EPL

• Based on judgement – take into account measurable factors (e.g. amount of compensation, length of time process takes) and qualitative factors (uncertainty over outcome)

• Create a panel dataset (cross-section and time series) – but time series variation in practice very small – results driven by cross-section variation

• Latest review (OECD (2013)) concluded there may be marginal negative impact on employment

OECD scoring of protection from individual dismissal, 2013

0

0.5

1

1.5

2

2.5

3

3.5

US

A

Canad

a

UK

New

Ze

ala

nd

Hunga

ry

Irela

nd

Sw

itze

rla

nd

Austr

alia

Jap

an

Esto

nia

Slo

va

kia

Me

xic

o

OE

CD

ave

rag

e

Spain

Icela

nd

Belg

ium

Denm

ark

Austr

ia

Gre

ece

Pola

nd

Turk

ey

Norw

ay

Isra

el

Lu

xem

bou

rg

Kore

a

Fin

lan

d

Slo

ve

nia

Ita

ly

Sw

ed

en

Ch

ile

Fra

nce

Germ

any

Neth

erl

and

s

Czech

Rep.

Port

ug

al

Source: OECD EPL database.

EPL and employment-population ratios across selected OECD countries, 2013

Employment protection indicator covers individual and collective dismissals.

R = -0.066

Source: CIPD (2015).

0

10

20

30

40

50

60

70

80

90

0 0.5 1 1.5 2 2.5 3 3.5

Em

plo

yment-

popula

tion r

ato

i(%

)

OECD employment protection indicator

EPL and average job tenure across selected OECD countries, 2011

0

2

4

6

8

10

12

14

16

0 0.5 1 1.5 2 2.5 3 3.5

Ave

rag

e job

te

nu

re (

ye

ars

)

OECD employment protection indicator

Employment protection indicator covers individual and collective dismissals.

R = 0.58

Source: CIPD (2013).

EPL and the long-term unemployment ratio across selected OECD countries, 2013

Employment protection indicator covers individual and collective dismissals.

R = 0.133

Source: CIPD (2013).

0

10

20

30

40

50

60

70

80

0 0.5 1 1.5 2 2.5 3 3.5

Lo

ng-t

erm

unem

plo

yment

as %

of

tota

l

OECD employment protection indicator

What can we conclude?

• Existence of EPL has effect on how businesses conduct themselves

• But impact on employment levels difficult to detect –likely to be small either way

• Marginal changes therefore unlikely to have much impact

• More evidence that EPL affects structure of employment and unemployment:

• Less dynamic labour market• Disadvantages groups with less labour market power (e.g.

young people)• Can lead to more temporary employment and/or self-

employment• Could be dysfunctional in a few South European labour

markets (e.g. Spain, Italy, Greece) – especially when these are hit by major demand shocks.

References• Beecroft report (2011)

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31583/12-825-report-on-employment-law-beecroft.pdf

• Bentolila and Bertola (1990) Firing Costs and Labour Demand: How Bad is Eurosclerosis? The Review of Economic Studies, Vol. 57, No. 3 (Jul., 1990), pp. 381-402

• Blackburn, R. (2012) Segmenting the SME market and implications for service provision: a literature review. (Technical Report) London, UK : Advisory, Conciliation and Arbitration Service. 35 p. ISBN 9781908370204

• CIPD (2013) Has job turnover slowed down? http://www.cipd.co.uk/hr-resources/research/megatrends-job-turnover-slowed-down.aspx

• CIPD (2015) Employment regulation and the labour market http://www.cipd.co.uk/binaries/Employment-regulation-and-the-labour-market_2015.pdf

• OECD employment protection legislation database http://www.oecd.org/els/emp/oecdindicatorsofemploymentprotection.htm

• OECD (2013) Protecting jobs, enhancing flexibility: A new look at employment protection legislation, Chapter 2 of “Employment Outlook” http://www.keepeek.com/Digital-Asset-Management/oecd/employment/oecd-employment-outlook-2013/protecting-jobs-enhancing-flexibility-a-new-look-at-employment-protection-legislation_empl_outlook-2013-6-en#page3

• Peck, F. et al (2012) Business perceptions of regulatory burdenhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31595/12-913-business-perceptions-of-regulatory-burden.pdf

• Kitching, J, Hart, M & Wilson, N 2013, 'Burden or benefit? Regulation as a dynamic influence on small business performance' International small business journal, vol Early online., 10.1177/0266242613493454