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