Employment protection and labour demand

This paper analyses the impact of employment protection on labour demand. The approach taken is to estimate a dynamic labour demand function which allows for the effect of changes in a measure of employment protection. This measure is derived from a series of surveys of employers carried out by the European Commission. The estimation uses pooled time series data on seven European countries, Great Britain, Germany, France, Italy, Netherlands, Belgium and Greece for the 1980s and early 1990s. The possibility that restrictions on firms' ability to shed labour may affect both the long run level and dynamic response of labour demand is allowed for. The results suggest that employment protection can have significant effects in slowing down the dynamic adjustment of labour demand. We also find evidence that firing costs can increase the average level of employment.

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