The Consequences of Employment Protection Legislation for the Youth Labour Market

Abstract

Understanding the causes of unemployment and job insecurity among young people remains a central concern for social scientists and policy makers. This study focuses on one potential institutional cause of high youth unemployment, employment protection legislation (EPL). While many are sceptical of a link between EPL and high aggregate unemployment rates, a consensus has emerged linking EPL to high youth unemployment in particular. The review of theoretical and empirical research conducted here challenges this consensus. Search and matching theoretic explanations have difficulty making unambiguous predictions about the effects of EPL on youth unemployment and empirical research has undertaken little effort to uncover its causal effects. The empirical analysis tests for the existence of aggregate employment effects of EPL across youth labour markets using aggregate data from affluent OECD countries (1985–2007) and individual data from labour force surveys for 15 Western European countries and the U.S. (1992–2007). It conducts conventional regression analyses and also imple-ments a Difference-in-Difference design. Neither conventional nor Difference-in-Difference analyses yield any robust evidence whatsoever linking either dimension of EPL to inferior youth labour market performance, for any of the education groups or institutional conditions tested. Altogether, this study rejects the view that strict EPL is or has been the cause of high youth unemployment rates or low youth employment rates, at least for the sample of countries tested here