The Role of Employment Protection during an Exogenous Shock to an Economy
Tal Shavit () and
Shlomo Yedidia Tarba Additional contact information Mosi Rosenboim: Ben-Gurion University of the Negev and The College of Management Academic Studies
Shlomo Yedidia Tarba: Academic Center of Law and Business and The Open University of Israel
This paper explores the role of employment protection when powerful external crises reduce demand for products. We first present a theoretical framework that shows that employment protection has a U-shaped effect on abnormal unemployment during a negative exogenous shock to an economy. Using data from the 33 OECD countries, we analyze how the level of employment protection affected the stability of unemployment rates during the recent global economic crisis. The results suggest that countries with an intermediate level of employment protection will have more stable unemployment rates during a world crisis. The policy implication of our paper is that countries should seek a medium level of employment protection that may act as an automatic stabilizer of the economy on the macro level.