Labor Market Regulations

Labor market institutions in Europe are less flexible compared to those in the USA (Siebert 1997). For example, the USA stands out as the least regulated country based on indicators for dismissals of individual workers on permanent contracts.

The success of the USA in terms of entrepreneurial activity has been attributed to less regulated labor market institutions. Among the European countries, however, there is a large variation in the extent to which labor market regulations are stringent.

Similar to the USA context, the UK have fairly unrestrictive individual dismissal regulations. By contrast, regulations in France and Germany are far stricter than the

26 S. Dilli OECD average (Scarpetta2014: 3). These differences were also highlighted in the VoC literature. Labor markets have been deregulated with relatively unrestrictive individual dismissal regulations in LME economies such as UK and the USA. Since 1990, EMEs also tend to have more flexible labor market regulations compared to the Nordic countries and the continental European countries, such as the Netherlands, Germany, and Belgium, characterized by a moderate employment protection. In the MMEs, notably France, Italy, and Spain, it is far more difficult to dismiss employees, especially from public service, compared to the other contexts (Dilli2019). Some of these cross-national differences characterizing Europe today can be traced back in the past of these economies.

The twentieth century witnessed an important move towards flexibility in labor market institutions across Europe. But the extent of this change differs across European countries. This is visible in the study of Aleksynska and Schmidt (2014), which sheds light on the current-day differences in labor market institutions by looking at the origin and evolution of these labor market regulations for a selected number of European countries. Some of the rules on employment protection, such as prohibited grounds for dismissals, have roots going back as far as the late nineteenth century (Aleksynska and Schmidt2014). Such labor protection laws often emerged to address the social consequences of early industrialization. The issues of equity and equality, dignity and decent incomes, set the scene for emerging national frameworks of regulating work and work relationships. France was the first country to regulate unemployment insurance, fixed-term contracts, and compensation for unfair dismissal in 1890. Greece and Italy pioneered generous notice periods and severance pay. Spain was the first country to explicitly regulate the use and the termination of fixed-term contracts with respective provisions put in place in 1926. These three Mediterranean economies also introduced regulations similar to France on the notice period and regulations on fixed contracts during the 1920s. These economies are known to have more stringent labor market regulations to this day. In Portugal, in contrast to the other Mediterranean economies, many of the rules on unemployment and employment protection were only introduced in the late 1960s and early 1970s, whereas in the UK, the rules on employment protection legislation developed mainly in the second half of the twentieth century (Aleksynska and Schmidt2014).

In the second half of the century, there is more systematic evidence available on the differences between countries in terms of the employment protection legislation (EPL). This allows me to trace the change in labor market regulations over time in a comparative way. The OECD has developed the EPL index—a commonly used indicator to capture the regulation of the labor markets—based on 21 items such as laws protecting workers with regular contracts, those affecting workers with fixed−term (temporary) contracts or contracts with temporary work agencies, and regulations applying specifically to collective dismissals.⁴ A higher score on the

4More information on the method of OEC in constructing the EPL index and the latest version of the index can be accessed athttps://www.oecd.org/els/emp/oecdindicatorsofemploymentprotection.

htm.

2 A Historical Perspective on the Evolution of Finance … 27

Fig. 2.5 Employment protection legislation (EPL), since 1950.SourceAllard (2005)

index indicates stricter labor market regulations. Allard (2005) extends this EPL index back to 1950. Using his information, Fig.2.5displays the differences across a selected number of European countries and the USA since 1950.

According to Fig.2.5, in the 1950s, the labor market was relatively unregulated compared to today though the cross-sectional differences between the cluster of countries were already visible in the mid-50s. The typical LME countries, UK and USA, had the lowest employment protection by far throughout this period. Starting from the 1970s onwards, the regulations on employment protection started to become stricter in many countries (e.g., Germany, France). During this period, the EPL increased in the UK as well, though it still remained the least regulated European country. This is because in the 1960s and 1970s, a number of legislations (i.e., the Contracts of Employment Act 1963 and the Industrial Relations Act 1971) were introduced to protect employees against unfair dismissals in the UK. The CMEs Germany and the Netherlands (as well as France, which can either be classified in the Coordinated or in the Mixed Market category) show moderate levels of employment protection. In the early 1970s, however, Germany introduced further legislation to increase employment protection reaching levels similar to Italy.

The late 1970s and beginning of the 1980s witnessed deregulation of the labor market in a number of countries. A deregulation process is visible in the UK, from the late 1970s onwards followed by the Netherlands, and Germany in the late 1980s and early 1990s. In the early 1980s, economic deregulation was the principal labor market policy of the Thatcher government. During the Thatcher government, a significant

28 S. Dilli amount of legislation (i.e., Employment Acts of 1980, 1982, and 1988) was passed, turning back the individual employee rights introduced in the 1960s and 1970s (Capon2004). In Germany, the major step relaxing the conditions concerning fixed-term employment contracts was the introduction of the Employment Promotion Act (Beschäftigungsförderungsgesetz) in 1985 (Schettkat2002).⁵It is also important to note that in all the European countries, the number of temporary contracts noticeably increased in the 1990s (Amable2003). Labor market liberalization over the 1990s effectively shows that the bulk of the adjustment was borne by temporary contracts.

The decline in employment protection for that group is especially remarkable in Italy.

While employment protection for regular contracts seems to have been fairly stable over time, the EPL showed clear reductions for temporary workers over the same period. Nevertheless, the extent of this deregulation process differed substantially across the European societies and is reflected in the cross-national differences in the labor market institutions.