Does Strict Employment Protection Discourage Job Creation? Evidence from Croatia
Employment protection legislation in Croatia is among the most strict in Europe. Firing is difficult and costly, and flexible forms of employment are limited. Is this apparent rigidity reflected-as one would expect based on standard economic theory...
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| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2003/08/2487581/strict-employment-protection-discourage-job-creation-evidence-croatia http://hdl.handle.net/10986/18129 |
| Summary: | Employment protection legislation in
Croatia is among the most strict in Europe. Firing is
difficult and costly, and flexible forms of employment are
limited. Is this apparent rigidity reflected-as one would
expect based on standard economic theory-in low labor market
dynamics? Is job creation low and hiring limited? Is the job
security of insiders achieved at the cost of outsiders not
being able to enter the labor market? The author attempts to
answer these questions by examining job flows. If the
employment protection legislation is binding, then job and
worker turnover should be low. He shows that this is indeed
the case. Hiring is limited and the average job tenure is
very long in Croatia. Job destruction is low, however job
creation is still lower. The result is accumulation of
unemployment, in large part due to new labor market entrants
not being able to find a job. The high degree of job
protection also seems to strengthen the bargaining position
of insiders and results in relatively high wages. So, wages
in Croatia are higher than among its competitors, even after
adjusting for productivity. These high labor costs are
likely to contribute to limited job creation in existing
firms, but also are likely to discourage the entry of-and
thus job creation in-new firms. The author presents evidence
that firm growth has been indeed limited in Croatia,
contributing to the low employment level. The author
examines other potential causes of high unemployment in
Croatia (the unemployment benefit system, labor taxation,
the wage structure, and skill and spatial mismatches). He
argues that they do not play a substantial part in
accounting for poor labor market outcomes in Croatia. The
author concludes that the stringent employment protection
legislation is the key labor market institution behind low
job creation and high unemployment. Based on this he
recommends specific measures aimed at liberalizing the labor
market to foster job creation and employment. |
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