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Does Employment Protection Inhibit Labor Market Flexibility? Lessons from Germany, France, and Belgium

In: Social Protection versus Economic Flexibility: Is There a Trade-Off?

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  • Katharine G. Abraham
  • Susan N. Houseman

Abstract

Laws in most Western European countries give workers strong job rights, including the right to advance notice of layoff and the right to severance pay or other compensation if laid off. Many of these same countries also encourage hours adjustment in lieu of layoffs by providing prorated unemployment compensation to workers on reduced hours. This paper compares the adjustment of manufacturing employment and hours in West Germany, France and Belgium, three countries with strong job security regulations and well-established short-time compensation systems, with that in the United States. Although the adjustment of employment to changes in output is much slower in the German, French and Belgian manufacturing sectors than in U.S. manufacturing, the adjustment of total hours worked is much more similar. The short-time system makes a significant contribution to observed adjustment in all three European countries. In addition, we find little evidence that the weakening of job security regulations that occurred in Germany, France and Belgium during the 1980s affected employers' adjustment to changes in output. These findings suggest that. given appropriate supporting institutions. strong job security need not inhibit employer adjustment to changing conditions.

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This chapter was published in:

  • Rebecca M. Blank, 1994. "Social Protection versus Economic Flexibility: Is There a Trade-Off?," NBER Books, National Bureau of Economic Research, Inc, number blan94-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11255.

    Handle: RePEc:nbr:nberch:11255

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    1. Soltwedel, Rudiger, 1988. "Employment problems in West Germany - the role of institutions, labor law, and government intervention," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 28(1), pages 153-219, January.
    2. Burdett, Kenneth & Wright, Randall, 1989. "Unemployment Insurance and Short-Time Compensation: The Effects on Layoffs, Hours per Worker, and Wages," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(6), pages 1479-96, December.
    3. Katharine G. Abraham & Susan N. Houseman, 1993. "Job Security in America: Lessons from Germany," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, W.E. Upjohn Institute for Employment Research, number kagsnh1993.
    4. Anderson, Patricia M, 1993. "Linear Adjustment Costs and Seasonal Labor Demand: Evidence from Retail Trade Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(4), pages 1015-42, November.
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