The Impact of Employment Protection Legislation on the Unemployment Rate in Selected OECD Countries

The findings of the existing literature on the relationship between employment protection legislation and the unemployment rate are mixed. This study analyzes the relationship between employment protection legislation measured by the OECD Employment Protection Index and the unemployment rate between 2001 and 2008. After controlling country fixed effects, I find that more stringent employment protection legislation may not be a significant factor for higher a unemployment rate. The estimated model included output gap, government size, openness of the economy, real minimum wages, urbanization rate, population density, population, unemployment benefit generosity, and tax wedge as explanatory variables. I find that the output gap, as a measure of business cycle, and government size are significant factors determining the unemployment rate in selected 15 OECD countries. These findings suggest that employment protection legislation, especially in developed countries, may not be affective policy instrument for policy makers when combating unemployment.