Policy Brief: Employment protection: The costs and benefits of greater job security, September 2004

Deregulating labour markets, for example making it easier for firms to hire and fire employees, is at the heart of the employment debate in many OECD countries. Laws on firing or layoffs and other employment protection regulations are thought by many to be a key factor in generating labour market 'rigidity', as well as one reason for the large differences in labour market performance among OECD countries, notably between the United States and some of the larger European countries. The key point is how to reconcile the demand for flexibility in the labour market expressed by firms with the demand for job security expressed by workers. Less strict rules about hiring and firing may make it easier for employers to hire workers, thus improving the job prospects of new entrants to the work force such as young people, or women returning after time off to raise a family. At the same time, easing restrictions can also make people who already have jobs worry more about the risk of losing them. The role of employment protection legislation in achieving flexible labour markets while maintaining adequate social protection is one theme of the reassessment of the OECD Jobs Strategy called for by OECD employment ministers in 2003 and due to be completed in 2006. But to assess whether and how to reform employment protection legislation, it is crucial to understand what job protection is supposed to achieve and whether more efficient substitutes are available to achieve similar policy goals. This Policy Brief summarises recent OECD work on the role of employment protection legislation as part of a wide menu of policy instruments available to governments to influence domestic labour markets.