The Labor Market Regulation

Introduction

Persistent unemployment and rising wage differences at the expense of low-skilled workers characterize the labor market in most Western countries, particularly those in Europe. These, with the exception of England, are deemed to be rigid in terms of public policies considered generous for workers and binding for firms.

Moreover, since the last financial crisis in 2008, countries such as France, noted the difficulty of their institutions to quickly adapt to changes caused by the economic situation. In this sense, some studies have pointed out that a dual labor market, where the insiders are protected from much larger job than outsiders would generate negative externalities on job creation (Kirat, 2006). Thus, under the recommendations of the Organisation for Economic Co-operation and Development (OECD), more rigid economies have started a process of reforms aimed at increasing the flexibility of the labor market and reducing persistent inequalities, so questioning the rigid nature of the employment protection legislation (EPL).

This article aims to provide an analytical and critical reading of the state of knowledge on legislation relating to employment protection (EPL) and its impacts on unemployment, jobs creation, productivity and more generally efficiency of the labor market. We show that the construction of indicators of EPL adopted by the OECD is incomplete and does not take into account local specificities of each labor market. We also show that the dominant idea among liberals that any regulations impeding freedom of the labor market generates unemployment and loss of effectiveness is not so obvious to verify empirically and can even be contradicted. In this analysis, we rely on a critical review of theoretical and empirical studies which have examined the effects of EPL. We also discuss some alternatives such as bonus-malus system or the single contract that have been put forward to address the limitations of a relatively strict EPL.