International: OECD compares employment protection

New research from the Organisation for Economic Co-operation and Development (OECD) examines the extent of employment protection - the rules on individual and collective dismissal and on temporary employment - across Europe. It finds that it is easiest for employers to dismiss employees and adjust their workforce in the UK, and hardest in Turkey.

On this page:
Employment protection
Assessing the strength of employment protection
Employment protection in 2008
Changes since 2003
Table 1: Strictness of employment protection, selected countries, 2008.

Employment protection

The ease with which employers in a particular country can dismiss employees - or, seen from the other perspective, the extent to which workers' employment is protected - is an important issue in employment relations. For employees, dismissal means loss of earnings and benefits and possibly of skills, and a longer or shorter period of unemployment. This brings costs for society, for example through unemployment benefits and assistance in finding a new job. On the other hand, for employers, obstacles to dismissing employees may limit their ability to adjust rapidly to economic, organisational or technological change, and to employ the workforce they consider appropriate. More widely, employment protection is an important element in labour market flexibility, alongside factors such as rules on pay-setting, forms of employment and working time.

International comparison of the relative strictness of employment protection occasionally becomes a high-profile issue. For example, where multinational companies are reducing their workforce internationally, the relative ease with which they can dismiss workers in different countries may influence decisions on where job cuts are to be made. This is an accusation often levelled at by trade unions, which may claim, for example, that a multinational has made employees redundant in the UK because this is easier and cheaper than it would be in Germany. Such debates are rarely informed by comprehensive data. The extent of employment protection is hard to measure and involves a large number of factors.

The OECD has sought since the 1990s to produce estimates of the strictness of national employment protection rules. To do so, it has constructed an indicator that takes account of a wide range of elements relating to dismissal and redundancy procedures and payments, and to temporary employment. In June 2009, OECD published its updated estimates for the first time since 2004, covering 2008 (Legislation, collective bargaining and enforcement: Updating the OECD employment protection indicators, Danielle Venn, OECD Social, Employment and Migration Working Papers 89, 2009 (PDF format, 1.6MB) (on the OECD website)). The findings provide a useful insight into how easy it is for employers to dismiss workers and adjust their workforce across Europe.

Assessing the strength of employment protection

The updated OECD employment protection indicator is compiled from 21 items quantifying the costs and procedures involved in dismissing individuals or groups of workers, or recruiting workers on fixed-term or temporary agency work contracts. The focus is on employment protection as the cost for employers of adjusting employment levels.

The overall indicator is made up of three sub-indicators quantifying different aspects of employment protection. These are:

• Individual dismissal of workers with "regular" (ie open-ended) contracts. This incorporates three aspects of dismissal protection: "procedural inconveniences" that employers face when starting the dismissal process, such as notification and consultation requirements; notice periods and severance pay, which typically vary with the employee's length of service; and the difficulty of dismissal, as determined by the circumstances in which it is possible to dismiss workers, as well as the repercussions for the employer if a dismissal is found to be unfair (such as compensation and reinstatement).
• Additional costs for collective dismissals. This focuses on additional delays, costs or notification procedures when an employer dismisses a large number of workers at one time. This measure includes only additional costs that go beyond those applicable for individual dismissal. It does not reflect the overall strictness of regulation of collective dismissals, which is the sum of costs for individual dismissals and any additional cost of collective dismissals.
• Regulation of temporary contracts. This quantifies regulation of fixed-term and temporary agency work contracts with respect to the type of work for which these contracts are allowed and their duration. This measure also includes rules governing the establishment and operation of temporary work agencies and requirements for agency workers to receive the same pay and/or conditions as equivalent workers in the user company, which can increase the cost of using temporary agency workers relative to recruiting workers on open-ended contracts.

The national data in relation to the various items are weighted (to reflect their relative economic importance when firms are making decisions about recruiting and dismissing workers) to produce scores for the three sub-indicators and for the overall employment protection indicator.

While the main focus is on legislative protection, in the 2008 indicator, for the first time, employment protection provided through collective bargaining has been incorporated for those countries where collective bargaining takes place at the industry, regional or national level and where this is an important source of additional employment protection.

The OECD indicator is controversial and has been criticised by some researchers, notably because of the degree of subjectivity in the measurement and weighting of the various items.

Employment protection in 2008

Table 1 gives the OECD's assessment of the stringency of employment protection in 25 European countries and, for comparison, eight other major global economies. The higher the score, the stricter the country's employment protection rules. The OECD average score is around 2.23.

Considering the European countries only, Turkey has the strongest employment protection, followed by Luxembourg, Spain, Greece, France and Portugal. The country with the least strict provisions is the UK, followed by Ireland and Switzerland. Broadly, southern or "Mediterranean" European countries tend to have the most stringent employment protection, followed by: northern continental European countries; central and eastern European countries; Nordic countries; and "offshore" countries, where the rules are weakest.

Including the non-European countries, the US has the lowest employment protection in the developed world, followed by Canada and then the UK. Japan and Russia also have relatively unrestrictive rules in this area, while Korea and Brazil are around the average and India and China have stringent employment protection.

Breaking down the overall scores into the three sub-indicators:

• In Europe, the strictest regulation of the individual dismissal of workers with regular contracts is found in Portugal, followed by the Czech Republic, Slovenia, Germany and Sweden, while the least stringent rules are in the UK, then Switzerland, Denmark, Ireland and Italy. In terms of all countries considered, Portugal again has the most restrictions, followed by China, while the US has the lowest protection in this area.
• The highest additional costs for collective dismissals in Europe are those in Italy, followed by Belgium, Luxembourg and Switzerland, and the lowest in Portugal, then the Czech Republic, France, Finland, Ireland and Turkey. Overall, including the non-European countries, Italy still has the highest costs, followed by Belgium, while the lowest costs are in Brazil and India.
• Europe's most stringent regulation of temporary contracts is found in Turkey, followed by Luxembourg, Spain, Greece and France, and the least restrictive in the UK, then Switzerland, Ireland, the Slovak Republic and Iceland. Including all the countries examined, the strictest rules are in Turkey, followed by Brazil, and the least restrictive in Canada, followed by the UK and US.

Strict regulation relating to regular contracts is generally accompanied by strict regulation of temporary contracts. According to the OECD, much of the cross-country variation in employment protection is due to differences in the level of regulation on temporary contracts. There are few or no restrictions on the use of temporary contracts in the "Anglo-Saxon" countries (Canada, Ireland, the UK and the US). By contrast, in Turkey, temporary agency work is illegal and fixed-term contracts can be used only in limited circumstances. France, Greece, Luxembourg and Spain also have strict rules on the circumstances where temporary employment is allowed, along with limits on the number of successive contracts and their maximum duration. There is relatively little cross-country variation in the level of additional regulation of collective dismissals.

Changes since 2003

The OECD's previous assessment of employment protection related to 2003. The new report finds that since then there has been little or no change in most countries examined. However, some countries have reformed their employment protection rules since then, most notably Portugal, where wide-ranging changes that came into effect in February 2009 have reduced the overall stringency of legislation on open-ended and temporary contracts and on collective dismissals. For example, administrative procedures have been simplified for individual and collective dismissals, notice periods have been reduced for employees with short service, and the maximum time allowed for employees to make a complaint of unfair dismissal has been cut drastically.

In Sweden, the maximum allowable duration of most types of fixed-term and temporary work agency contracts has been increased, while in France the time limit for temporary agency work contracts has been removed and the probationary period for open-ended contracts increased from 1.5 to two months, with an extension possible for up to two further months. In the Czech Republic, Germany and Poland, increases in the stringency of regulation in some areas have been offset by the relaxation of rules in others:

• in the Czech Republic, dismissal of workers on regular contracts has been made easier, because a requirement for retraining or redeployment has been lifted and notice periods reduced, despite an increase in severance pay. On the other hand, a two-year limit has been introduced for fixed-term and temporary work agency contracts;
• Germany has introduced statutory severance pay for dismissals for business reasons, while increasing the allowable duration of fixed-term contracts where employers launch a new business or recruit older unemployed people; and
• in Poland, a maximum limit of two successive fixed-term contracts has been introduced, while notification periods for collective dismissals have been reduced by more than half.

European Employment Review 429 (EER 429) contents