Talk to London Metropolitan University economic students on employment protection law and impact on jobs

1. Does employment
protection law protect
jobs?
Mark Beatson
Chief Economist, CIPD
Honorary Visiting Professor, London Metropolitan University

2. Context
• EPL at centre of policy debates on regulation and
the labour market.
• Domestically:
• ‘Burdens on business’/’over-regulation’
• Beecroft report
versus
• Exploited, insecure workers
• Need for more regulation
• Internationally:
• European social legislation (UK resistance to extending
EU competence, repatriation of powers)
• Trade agreements
• How can economics contribute to the debate?

3. Coverage of this talk
• EPL narrowly defined – regulations governing
individual dismissals both for economic and
other reasons (conduct, performance etc.)
• Impact on employment and unemployment
(levels, structure, distribution)
• Will not be covering:
• Effects of EPL on other economic variables (e.g.
productivity, well-being)
• Other labour market regulation (e.g. National
Minimum Wage, working time regulations,
equalities legislation, flexible working etc.)

4. Brief history of EPL in the UK
• Statutory redundancy payments introduced in 1965.
• First legislation of individual dismissals in 1971.
• Employment Tribunals created to hear cases in 1974.
• Law consolidated in 1978 and 1996 (introduction of
written statement of terms and conditions).
• Qualifying period has varied:
• 1971 – 2 years
• 1974 – 1 year
• 1975 – 6 months
• 1979 – 1 year
• 1980 – 2 years (if <21 employees)
• 1985 – 2 years (all)
• 1999 – 1 year
• 2012 – 2 years

5. How does EPL work in the UK?
(Highly simplified!)
• Employer only terminates an employee’s job lawfully if they follow
a fair procedure, act reasonably and have a fair reason:
• Conduct
• Capability/performance
• Economic circumstances (redundancy)
• Legal restriction
• Some other justifying reason
• Individual who feels they have been dismissed unfairly can take
their case to an Employment Tribunal (now required to go through
conciliation first)
• Tribunal will judge whether employer followed fair procedure and
whether decision was in range of reasonable responses
• If employee wins, can be re-instated (rare) or (more likely)
compensation paid (according to earnings, length of service but
with an upper limit)
• Some types of dismissal automatically unfair (e.g. during
pregnancy, for exercising range of legal rights) – though Tribunal
may still need to determine facts

6. Why do we have EPL?
• Original motivations:
• Facilitate industrial restructuring
• Reduce number of strikes
• Fair treatment/natural justice
• Imbalance of power between employer and
employee
• UK law does not treat employment contracts as
sacrosanct even if entered into voluntarily

7. What does economics say about
the likely effects of EPL? (Recap)
• Severance payments to laid-off workers
increase the adjustment cost of lay-offs
• Discourage firms from hiring new workers
during economic expansion
• Affects workers’ level of effort

8. What does economics say
about the likely effects of EPL?
• Bentolila and Bertola (1990): adjustment costs
affects firing (slightly) more than hiring with
plausible assumptions about costs, discount rates
etc. – net (small) positive effect on employment.
• Unemployment: if EPL reduces flow into and out of
employment and if hysteresis exists (where time
spent unemployed itself reduces chance of getting
another job because of skills atrophy or employer
discrimination) will this over time push up overall
unemployment?
• Worker effort: EPL reduces ‘fear factor’ but long-
term commitment also incentivises investment in
the employment relationship (training,
commitment)

9. Can we make testable
predictions?
• Other things being equal:
• Effect of EPL on level of employment and
unemployment: ambiguous in theory.
• EPL reduces job turnover (entries and exits) and
flows into and out of unemployment => higher
share of unemployment is long-term unemployed.
• EPL increases share of employment outside its
scope (self-employment – in many countries
temporary employment, short-duration employment
etc.)

10. What are we testing?
• EPL has been in place in the UK for over 40 years
• EPL is widespread among advanced economies – no OECD
or EU member has complete absence
• So in practice we cannot test EPL versus no EPL – which
may not be a viable political option in any case
• Economic arguments and policy debate are typically
between different forms of EPL – ‘stronger’ versus ‘weaker’
across a number of possible dimensions:
• Qualification period
• Size of compensation payments
• Definitions of reasonable grounds for dismissal
• Process involved in deciding whether a dismissal was legal (e.g.
whether applies before or after termination, whether adjudicating
body can ‘second guess’ employer, time taken to reach decision,
possibilities for appeal)
• Degree of certainty in process

11. What methods can we use?
• Time series – ‘before and after’ comparisons of
changes in EPL
• Cross-section – comparisons between
countries with different EPL systems
• Types of analysis:
• Econometric – regression analysis to isolate the
impact of EPL from other factors – but is the data
robust and can we really control for other factors?
• Surveys – gathering the views of interested parties
on the impact of EPL – but they may be biased
and/or we may not know how well informed they
are – though perceptions may guide actions

12. What about the UK evidence?
• Change in qualification period potential source of
variation
• No evident signs of change in employment levels
around changes in qualification period or in
employment of temporary workers
• Possible reasons:
• Other variables much more important
• Employer behaviour not greatly affected by qualification
period:
• Formalised procedures in most medium to large businesses
• Many employees can seek other routes for redress (e.g.
discrimination)

13. How does EPL affect
employers?
Cost of making changes
to terms and conditions,
practices etc.
Cost of keeping up with
law, training, briefing etc.
Cost of options
foreclosed
Risk of litigation,
uncertainty etc. (Peck et
al. (2012))
Regulation can be a
‘dynamic force’ for
change in SMEs
(Kitching, Hart and
Wilson (2013)) –
‘constraining, enabling
and motivating’
(Blackburn (2012))
Interacts with product
and labour market
strategies
External and internal
reputation
Burdenonbusiness
Dynamicforce

14. EPL is not a major factor
holding back small businesses
(% of SMEs identifying these as main obstacle to growth)
ASBS 200/07 ASBS 2007/08 SBS2010 SBS2012
The economy 10 16 33 38
Tax, VAT etc. 12 12 8 12
Cashflow 10 9 11 10
Competition 15 14 10 10
Obtaining finance 3 3 8 7
Regulation, of which: 14 12 7 8
H&S 37 32 35 24
Tax-related 15 17 20 17
Sector-specific 12 13 16 18
Employment 16 17 14 15
Environment 11 10 7 7
Planning 7 5 7 7
Source: BIS Small Business Surveys.

15. Disciplinary and grievance
procedures are almost universal
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1980 1984 1990 1998 2004 2011 1998 2004 2011
Disciplinary procedure Grievance procedure
Workplaces with 25+ employees Workplaces with 10+ employees
Source: WERS survey series.

16. International comparisons
• OECD compute scores to reflect ‘strength’ of
certain types of regulation including EPL
• Based on judgement – take into account
measurable factors (e.g. amount of compensation,
length of time process takes) and qualitative
factors (uncertainty over outcome)
• Create a panel dataset (cross-section and time
series) – but time series variation in practice very
small – results driven by cross-section variation
• Latest review (OECD (2013)) concluded there may
be marginal negative impact on employment

17. OECD scoring of protection
from individual dismissal, 2013
0
0.5
1
1.5
2
2.5
3
3.5
USA
Canada
UK
NewZealand
Hungary
Ireland
Switzerland
Australia
Japan
Estonia
Slovakia
Mexico
OECDaverage
Spain
Iceland
Belgium
Denmark
Austria
Greece
Poland
Turkey
Norway
Israel
Luxembourg
Korea
Finland
Slovenia
Italy
Sweden
Chile
France
Germany
Netherlands
CzechRep.
Portugal
Source: OECD EPL database.

18. EPL and employment-population ratios
across selected OECD countries, 2013
Employment protection indicator covers individual and collective dismissals.
R = -0.066
Source: CIPD (2015).
0
10
20
30
40
50
60
70
80
90
0 0.5 1 1.5 2 2.5 3 3.5
Employment-populationratoi(%)
OECD employment protection indicator

19. EPL and average job tenure across
selected OECD countries, 2011
0
2
4
6
8
10
12
14
16
0 0.5 1 1.5 2 2.5 3 3.5
Averagejobtenure(years)
OECD employment protection indicator
Employment protection indicator covers individual and collective dismissals.
R = 0.58
Source: CIPD (2013).

20. EPL and the long-term unemployment ratio
across selected OECD countries, 2013
Employment protection indicator covers individual and collective dismissals.
R = 0.133
Source: CIPD (2013).
0
10
20
30
40
50
60
70
80
0 0.5 1 1.5 2 2.5 3 3.5
Long-termunemploymentas%oftotal
OECD employment protection indicator

21. What can we conclude?
• Existence of EPL has effect on how businesses
conduct themselves
• But impact on employment levels difficult to detect –
likely to be small either way
• Marginal changes therefore unlikely to have much
impact
• More evidence that EPL affects structure of
employment and unemployment:
• Less dynamic labour market
• Disadvantages groups with less labour market power (e.g.
young people)
• Can lead to more temporary employment and/or self-
employment
• Could be dysfunctional in a few South European labour
markets (e.g. Spain, Italy, Greece) – especially when these
are hit by major demand shocks.

22. References
• Beecroft report (2011)
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31583/12-825-
report-on-employment-law-beecroft.pdf
• Bentolila and Bertola (1990) Firing Costs and Labour Demand: How Bad is Eurosclerosis? The
Review of Economic Studies, Vol. 57, No. 3 (Jul., 1990), pp. 381-402
• Blackburn, R. (2012) Segmenting the SME market and implications for service provision: a
literature review. (Technical Report) London, UK : Advisory, Conciliation and Arbitration
Service. 35 p. ISBN 9781908370204
• CIPD (2013) Has job turnover slowed down? http://www.cipd.co.uk/hr-
resources/research/megatrends-job-turnover-slowed-down.aspx
• CIPD (2015) Employment regulation and the labour market
http://www.cipd.co.uk/binaries/Employment-regulation-and-the-labour-market_2015.pdf
• OECD employment protection legislation database
http://www.oecd.org/els/emp/oecdindicatorsofemploymentprotection.htm
• OECD (2013) Protecting jobs, enhancing flexibility: A new look at employment protection
legislation, Chapter 2 of “Employment Outlook” http://www.keepeek.com/Digital-Asset-
Management/oecd/employment/oecd-employment-outlook-2013/protecting-jobs-enhancing-
flexibility-a-new-look-at-employment-protection-legislation_empl_outlook-2013-6-en#page3
• Peck, F. et al (2012) Business perceptions of regulatory burden
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31595/12-913-
business-perceptions-of-regulatory-burden.pdf
• Kitching, J, Hart, M & Wilson, N 2013, 'Burden or benefit? Regulation as a dynamic influence
on small business performance' International small business journal, vol Early
online., 10.1177/0266242613493454