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Does Employment Protection Legislation Induce Structural Unemployment? Evidence from 15 OECD Countries

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  • Afful, Efua Amoonua
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    This paper estimates the Non-Accelerating Inflation Rate of Unemployment (NAIRU) for 15 OECD economies from 1990 to 2012 using an iterative Phillips curve process and tests the relationship between strictness of employment protection and the NAIRU. A possible negative externality of employment protection legislation is a higher level of structural unemployment. Using Prais-winsten estimation correcting for panel-level heteroscedasticity a panel-specific first-order autoregressive process, results indicate that there is no relationship between strictness of protection for individual and collective dismissals for regular contracts and the NAIRU. The effect of strictness of employment protection for regular contracts is sensitive to model specification; the coefficient loses its significance when full controls are used in estimation. An implication is that deregulation is not a necessary policy tool in addressing the problem of structural unemployment.

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    File URL: https://mpra.ub.uni-muenchen.de/56875/1/MPRA_paper_56875.pdf
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    File URL: https://mpra.ub.uni-muenchen.de/57607/3/MPRA_paper_57607.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 56875.

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    Date of creation: 25 Jun 2014
    Handle: RePEc:pra:mprapa:56875
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    1. Belot, Michele & van Ours, Jan C., 2001. "Unemployment and Labor Market Institutions: An Empirical Analysis," Journal of the Japanese and International Economies, Elsevier, vol. 15(4), pages 403-418, December.
    2. John T. Addison & Paulino Teixeira & Jean-Luc Grosso, 2000. "The Effect of Dismissals Protection on Employment: More on a Vexed Theme," Southern Economic Journal, Southern Economic Association, vol. 67(1), pages 105-122, July.
    3. Richard B. Freeman, 2002. "Institutional differences and economic performance among OECD countries," LSE Research Online Documents on Economics 20063, London School of Economics and Political Science, LSE Library.
    4. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 699-726.
    5. Olivier Blanchard & Lawrence F. Katz, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter.
    6. Andrea Bassanini & Romain Duval, 2006. "Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions," OECD Social, Employment and Migration Working Papers 35, OECD Publishing.
    7. Di Tella, Rafael & MacCulloch, Robert, 2005. "The consequences of labor market flexibility: Panel evidence based on survey data," European Economic Review, Elsevier, vol. 49(5), pages 1225-1259, July.
    8. Christian Gianella & Isabell Koske & Elena Rusticelli & Olivier Chatal, 2008. "What Drives the NAIRU? Evidence from a Panel of OECD Countries," OECD Economics Department Working Papers 649, OECD Publishing.
    9. Laurence M. Ball, 2009. "Hysteresis in Unemployment: Old and New Evidence," NBER Working Papers 14818, National Bureau of Economic Research, Inc.
    10. Bjarni G. Einarsson & Jósef Sigurdsson, 2013. "How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland," Economics wp64, Department of Economics, Central bank of Iceland.
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