Does strict employment protection discourage job creation? Evidence from Croatia

Jan Rutkowski

No 3104, Policy Research Working Paper Series from The World Bank

Abstract: Employment protection legislation in Croatia is among the most strict in Europe. Firing is difficult and costly, and flexible forms of employment are limited. Is this apparent rigidity reflected-as one would expect based on standard economic theory-in low labor market dynamics? Is job creation low and hiring limited? Is the job security of insiders achieved at the cost of outsiders not being able to enter thelabor market? The author attempts to answer these questions by examining job flows. If the employment protection legislation is binding, then job and worker turnover should be low. He shows that this is indeed the case. Hiring is limited and the average job tenure is very long in Croatia. Job destruction is low, however job creation is still lower. The result is accumulation of unemployment, in large part due to new labor market entrants not being able to find a job. The high degree of job protection also seems to strengthen the bargaining position of insiders and results in relatively high wages. So, wages in Croatia are higher than among its competitors, even after adjusting for productivity. These high labor costs are likely to contribute to limited job creation in existing firms, but also are likely to discourage the entry of-and thus job creation in-new firms. The author presents evidence that firm growth has been indeed limited in Croatia, contributing to the low employment level. The author examines other potential causes of high unemployment in Croatia (the unemployment benefit system, labor taxation, the wage structure, and skill and spatial mismatches). He argues that they do not play a substantial part in accounting for poor labor market outcomes in Croatia. The author concludes that the stringent employment protection legislation is the key labor market institution behind low job creation and high unemployment. Based on this he recommends specific measures aimed at liberalizing the labor market to foster job creation and employment.

Keywords: Labor Management and Relations; Labor Policies; Labor Markets; Environmental Economics&Policies; Trade Finance and Investment; Labor Markets; Labor Management and Relations; Labor Standards; Banks&Banking Reform; Environmental Economics&Policies (search for similar items in EconPapers)
Date: 2003-08-31
New Economics Papers: this item is included in nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... d/PDF/multi0page.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:3104

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().