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Does strict employment protection discourage job creation? Evidence from Croatia

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  • Rutkowski, Jan
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    Abstract

    Employment protection legislation in Croatia is among the most strict in Europe. Firing is difficult and costly, and flexible forms of employment are limited. Is this apparent rigidity reflected-as one would expect based on standard economic theory-in low labor market dynamics? Is job creation low and hiring limited? Is the job security of insiders achieved at the cost of outsiders not being able to enter thelabor market? The author attempts to answer these questions by examining job flows. If the employment protection legislation is binding, then job and worker turnover should be low. He shows that this is indeed the case. Hiring is limited and the average job tenure is very long in Croatia. Job destruction is low, however job creation is still lower. The result is accumulation of unemployment, in large part due to new labor market entrants not being able to find a job. The high degree of job protection also seems to strengthen the bargaining position of insiders and results in relatively high wages. So, wages in Croatia are higher than among its competitors, even after adjusting for productivity. These high labor costs are likely to contribute to limited job creation in existing firms, but also are likely to discourage the entry of-and thus job creation in-new firms. The author presents evidence that firm growth has been indeed limited in Croatia, contributing to the low employment level. The author examines other potential causes of high unemployment in Croatia (the unemployment benefit system, labor taxation, the wage structure, and skill and spatial mismatches). He argues that they do not play a substantial part in accounting for poor labor market outcomes in Croatia. The author concludes that the stringent employment protection legislation is the key labor market institution behind low job creation and high unemployment. Based on this he recommends specific measures aimed at liberalizing the labor market to foster job creation and employment.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3104.

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    Date of creation: 31 Aug 2003
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    Handle: RePEc:wbk:wbrwps:3104

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    Keywords: Labor Management and Relations; Labor Policies; Labor Markets; Environmental Economics&Policies; Trade Finance and Investment; Labor Markets; Labor Management and Relations; Labor Standards; Banks&Banking Reform; Environmental Economics&Policies;

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    References

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    1. Dolado, Juan J. & Garcia-Serrano, Carlos & Jimeno, Juan Francisco, 2001. "Drawing Lessons From the Boom of Temporary Jobs in Spain," CEPR Discussion Papers 2884, C.E.P.R. Discussion Papers.
    2. Lucia Foster & John Haltiwanger & C.J. Krizan, 2002. "The Link Between Aggregate and Micro Productivity Growth: Evidence from Retail Trade," NBER Working Papers 9120, National Bureau of Economic Research, Inc.
    3. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
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    Cited by:
    1. Rutkowski, Jan, 2006. "Labor market developments during economic transition," Policy Research Working Paper Series 3894, The World Bank.
    2. World Bank, 2011. "Employment Protection Legislation and Labor Market Outcomes : Theory, Evidence and Lessons for Croatia," World Bank Other Operational Studies 12902, The World Bank.
    3. repec:wii:bpaper:bowp:049 is not listed on IDEAS
    4. World Bank, 2004. "Serbia and Montenegro : An Agenda for Economic Growth and Employment," World Bank Other Operational Studies 14487, The World Bank.
    5. Rutkowski, Jan, 2004. "Firms, jobs, and employment in Moldova," Policy Research Working Paper Series 3253, The World Bank.
    6. World Bank, 2010. "Croatia : Social Impact of the Crisis and Building Resilience," World Bank Other Operational Studies 2903, The World Bank.
    7. World Bank, 2005. "The Quest for Equitable Growth in the Slovak Republic : A World Bank Living Standards Assessment," World Bank Other Operational Studies 8312, The World Bank.

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