Employment Protection, Employment and Unemployment Rates in European Union Countries During the Great Recession

For mainstream economics, rigidities in the labour market are the primary determinants of high and persistent long-term unemployment rates, leading to the need to reform labour market institutions and make them more flexible. Flexible labour markets would not only help to smooth normal business cycle fluctuations (implying a small impact of these fluctuations on employment and unemployment) but also to reduce the negative impacts on labour market of structural shocks. If we focus on the labour market performances in the European Union during the Great Recession, we can easily detect the existence of significant differences in the impact of this common structural shock on the domestic labour markets. For mainstream economics, the countries with the best results in terms of unemployment and employment would have been those that had a more flexible labour market at the beginning of the crisis and/or those having implemented reforms to increase this flexibility. The aim of this paper is to determine the validity of this argument, that is, whether labour reforms making the labour market more flexible effectively ensure macroeconomic stability by reducing the impact on the labour market of economic shocks. Using panel data techniques, we investigate whether, as mainstream studies argue, the evolution of employment and unemployment in the EU labour markets is explained, and to what extent, by the levels and changes registered in the indicators of employment protection legislation. Conversely, we examine whether, as heterodox and post-Keynesian studies suggest, this evolution is explained by the changes registered in economic activity (i.e., GDP growth).