Labor Market Regulation Indicators Prove Valuable Despite Absence in Doing Business Report

Until 2012, a measure of the rigidity of labor regulation had been reflected in the World Bank’s Doing Business Report, but has since been removed in its associated index. The Lithuanian Free Market Institute (LFMI) believes that there is a vast body of research to support the importance of these employment regulation indicators, and so, it developed the Employment Flexibility Index for the European Union (EU) and the Organization for Economic Co-operation and Development (OECD).

Based on the World Bank’s data on labor regulation and methodology used to compile the Rigidity of Employment Index, the new Employment Flexibility Index covers indicators on hiring, working hours, and redundancy costs.

“By launching this index we aim to promote a broader discussion on the importance of flexible rules of employing people for promoting growth and prosperity,” said Aneta Vaine, programs and development director at LFMI. “There is ample evidence that excessively rigid regulation of hiring, employment contracts, minimum wages, working hours or dismissals have adverse effects on employment dynamics, productivity and business growth. Despite that, labour market reforms geared towards greater flexibility tend to confront a great deal of resistance. The Employment Flexibility Index provides an effective tool for cross-country comparison.”

Excessively rigid regulation reduces labor force participation, increases unemployment, and displaces workers, but flexible legislation facilitates job creation and is key for new businesses to grow. Flexible economies can also adjust to economic shocks, business cycles, and long-term structural shifts in the economy more easily than economies with high levels of employment protection.

“The index is not intended to measure all aspects of labour regulation,” said Employment Flexibility Index co-author Jurgita Čyžiūtė. “It measures the flexibility of regulation that determines the efficiency of the labour market. Regulations have their costs and those should be taken into account if we want to assess the impact of regulatory interventions on economic outcomes. Employment flexibility is measured against a particular assumption-based business case in order to ensure comparability across countries. Its narrow scope is a deliberate consideration and should be taken into account when interpreting the data.”

In the European Union, the most flexible regulations are in Denmark, the United Kingdom and Ireland, all of which allow fixed-term contracts for permanent tasks and do not restrict redundancies and working time. The least flexible are found in France, Luxembourg and Portugal.

LFMI produced the index in cooperation with the Institute of Market Economics (Bulgaria), the Center for Economic and Market Analyses (the Czech Republic), the Civil Development Forum (Poland) and the Institute of Economic and Social Studies (Slovakia), and the Academy of Liberalism (Estonia).

Vaine expanded on how several other indices systematically rely on the datasets of the World Bank’s labour market regulation indicators as one of their main sources, such as “the World Economic Forum (the Global Competitiveness Index), the Institute for Management Development (the Government Efficiency and its Labour Regulation components), the Fraser Institute (the Labour Market Regulation Index), and the Heritage Foundation (the Index of Economic Freedom, Labour Freedom).”

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