The Impact Of Employment Protection Legislation On Labor Market Outcomes

The intent of Employment protection legislation (EPL) is to enhance job security by regulating hiring and firing. The relation between EPL and the rigidity of European labor market has motivated a large body of international research. In China, the passing of Labor Contract Law has generated debate on the positive and negative effects of EPL. In order to understand the economic effects of EPL, the paper studies on the impact of EPL on Chinese labor market outcomes, and gives labor market policy recommendations.The paper comparatively analyzes the EPL of OECD countries, and describes the EPL of China. It introduces the component of EPL and the evaluation indicators of EPL. To study the economic effects of EPL, the paper analyzes the effects of EPL on labor demand based on the assumption that the wage is exogenous, and then it relaxes the assumption, and studies the effects of EPL on wages.The paper uses dynamic panel data model to study the effects of EPL on dynamic labor demand. The estimation is based on a panel of regional industrial data for the period of 1996-2006. It shows that EPL has significant negative effects on the speed of employment adjustment and labor market flexibility. It may intensify the long-term unemployment and the youth unemployment problem. The paper uses Chinese Household Income Project data to study the wage differentials between indefinite-term and fixed-term contracts. It shows that the wage effects of EPL are consistent with compensating wage differential theory. Workers are willing to accept lower wages in exchange for more secured jobs.The paper uses new classical model to analyze the welfare effects of EPL. It suggests that employment protection policy should be combined with unemployment insurance and active labor market policies to realize the balance between security and flexibility.