Evolution, Effects, Winners and Losers
Chapter 3: What are the Conceivable Effects of Employment Protection Legislation?
The effects of employment protection discussed in this chapter are taken solely from theoretical reasoning and are not based on empirical evidence, which will be presented in Chapters 4 and 5. The immediate consequences of employment protection are that the employer’s costs rise for adjusting the size of the work force and its composition. The need to adjust the size of the work force is determined by the demand for the company’s products and services, while the composition may need to be changed if the employee’s competence or work effort is seen as insufﬁcient. The adjustment costs can also give rise to a number of sequential effects on, for example, employment, unemployment, structural change, productivity and growth. Firing costs not only decrease the employer’s inclination to lay off an employee, but also his or her willingness to hire new recruits. The latter effect is due to the fact that the ﬁrm incorporates potential future costs in the case of a lay-off already in the hiring decision. With higher ﬁring costs, greater uncertainty regarding the factors which 57 PSkedinger_03_Finals.indd 57 1/27/2010 3:57:13 PM 58 Employment protection legislation determine the size of the work force will make the company more reluctant to hire someone. For instance, it can be difﬁcult to determine in advance how a new employee will ﬁt in to a work group or an organization and how this employee will manage the company’s routines, especially if the employee in question lacks earlier work...
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