Reforming Employment Protection

There may be no labor market institution more controversial than employment protection regulation--the complex set of laws and procedures that govern how firms hire and fire workers.

Firms complain not only about the direct cost, but also about the complexity and the uncertainty introduced by such regulation. They argue that regulatory constraints make it difficult for them to adjust to changes in technology and product demand, and that this in turn lowers their efficiency, raises their costs and, as a result, deters job creation.

Workers, on the other hand, focus on the pain of unemployment, and argue that such pain should be taken into account by firms when they consider closing a plant or laying off a worker.

Under pressure from firms to decrease protection, and from workers to maintain it, European governments have navigated carefully, looking for politically acceptable reforms. In most countries, reforms have included extending the scope for temporary contracts.