Measuring Employment Security in Europe Using Surveys of Employers

MeasuringMORGAN, Employment GENRE, AND Security WILSON in Europe Measuring Employment Security in Europe Using Surveys of Employers

JULIAN MORGAN, VERONIQUE GENRE, and CAROLINE WILSON*

Using results from surveys in which employers were questioned about their freedom to shed staff, we develop a measure of employment security in Europe. We seek to identify which institutional factors are correlated with the responses of employers and find that they appear to reflect the strength of legal restrictions and trade unions and the prevalence of atypical employment. Our results are used to compile an index of employment security that has both a temporal and a cross-country dimension.

THE ROLE THAT EMPLOYMENT SECURITY MAY HAVE PLAYED in the seemingly inexorable rise in European unemployment over the last 25 years has been the focus of considerable attention. However, work in this area has been hampered significantly by a paucity of measures of employment security. This article seeks to address this issue by develop- ing a measure based on surveys of employers for 10 European countries. However, it is important to be clear about what is meant by employment security. The focus of this article is on what Buechtemann (1993) calls microeconomic employment security (henceforth referred to as just employment security). This refers to the prospect that an individual can

*The authors’ current affiliations are, respectively, Research Directorate, European Central Bank, Eco- nomics Directorate, European Central Bank, and Queen Mary Intellectual Property Research Institute, Queen Mary College, University of London. The views expressed represent the opinions of the authors and do not necessarily reflect those of the European Central Bank. The article was prepared while the authors were affiliated with the National Institute of Economic and Social Research, London. We are grateful to the Leverhulme Trust, who funded the research, and to Ray Barrell and three anonymous referees for helpful comments on earlier drafts. Direct correspondence should be addressed to Julian Morgan.

INDUSTRIAL RELATIONS, Vol. 40, No. 1 (January 2001). © 2001 Regents of the University of California Published by Blackwell Publishers, 350 Main Street, Malden, MA 02148, USA, and 108 Cowley Road, Oxford, OX4 1JF, UK.

54 Measuring Employment Security in Europe /55 maintain employment within a particular firm or organization.1 This repre- sents a broad definition, much wider than that typically given to employment protection, which almost invariably refers to legal regulations alone. We believe that this difference is important and that by reducing the definition to only the analysis of legislation, we ignore many important influences on the employment decision. These influences may, for example, stem from the role of unions or the availability of atypical forms of employment that can provide a means of circumventing legal restrictions on standard contracts. One existing data source should, in principle, give information on this broader definition of employment security. There is some survey evidence on European employers’ assessments of whether they have suffi- cient flexibility to “hire and fire” (Commission 1986, 1991, 1995). The results from these surveys have already been used in empirical analysis (Morgan 1996a; Grubb and Wells 1993). However these data have some shortcomings in that they have only been published at 4- to 5-year intervals, and it is not clear what factors have been important in determining firms’ responses. In this article we address these issues by using regression analysis to identify which institutional factors appear to be important in explaining the survey results. The regression analysis also tells us what weight we should assign to each factor. These results are then used, with annual data on the various institutional factors, to create a composite annual measure of employment security. The article begins by briefly considering which labor market institutions may have a role to play in determining employment security. Next, the article examines the approaches that have been taken to measure employment security and outlines our approach. It then discusses how we quantify the institutional factors for use in our empirical analysis. The final part of the article describes our estimation results and how we determine a new composite index of employment security reflecting the institutional factors that have been identified as important.

What Affects Employment Security? Considerable attention has been focused on the impact of dismissal restraints imposed by law (e.g., Abraham and Houseman 1995; Addison

1 As Buechtemann (1993) points out, there are also other closely related concepts to microeconomic employment security. For example, job security is more narrowly linked to the prospect of holding onto a particular job within a firm, whereas the more broad macroeconomic employment security relates to the probability of having a job throughout a worker’s career. 56 / MORGAN, GENRE, AND WILSON and Grosso 1996; Burgess 1988, 1994; Lazear 1990). Statute laws typically involve rules covering unfair dismissal, lay-offs, severance payments, minimum notice periods, and requirements to negotiate with trade unions. Statutory employment security regimes vary considerably across countries, having evolved from different labor market conditions, sociopolitical environments and legal traditions. However, there are many other institutional factors that also may have a bearing on the employment decision. First, unions not only negotiate wages but also seek to influence, inter alia, fringe benefits, work conditions, and employment security. This latter role has been rather over- looked, but as Booth and MacCulloch (1996) show, unions can have a significant role in bargaining over redundancy pay. Union influence may emerge through collective agreements covering the whole industry or firm or plant-level bargaining. Unions also may have influence in con- junction with legislation if they are given statutory consultation or negoti- ation rights (or as in Spain, for example, the right to participate in labor courts that assess firms’ redundancies). The structure of employment also may matter. If firms can make use of self-employed or temporary workers, they may be able to circumvent legal or collective restrictions. For example, Spanish employers, who face very stringent legislative restrictions on dismissals of permanent employees, take on around a third of their workers on temporary contracts (Morgan 1996b). Other institutions, which may be specific to individual countries, also can affect the employment decision. The Italian Cassa Integrazione Guadagni (CIG) is a wage compensation fund for workers on layoff or temporary work reductions (Tronti 1993). The CIG does not limit the employer’s power directly but helps to prevent collective dismissals because it allows payment of wage supplements to firms in difficulties.

Measuring Employment Security There are a number of potential sources of data on the strength of employment security. The most widely used approach has been to create country rankings based on legislation (e.g., Bertola 1990; OECD 1995). However, such an approach inevitably involves a large element of subjec- tivity given the complexity of devising rankings that fully reflect the interaction of laws and institutions. An alternative approach is to derive measures directly based on legal requirements. Lazear (1990) develops two measures (NOTICE and SEV) that are the legal requirements for notice periods and severance pay for a blue-collar worker with tenure of Measuring Employment Security in Europe /57

10 years. However, the limited scope of these measures means that it is unlikely that they will capture the strength of the whole system of legal regulation.2 Burgess (1988) uses data on average unfair dismissal and redundancy payments. However, these are also limited in scope, and measures based on legal settlements are difficult to interpret because a very strong and unambiguous law may result in few legal challenges and hence total compensation payments may be low. A more fundamental disadvantage of all the legal-based measures of protection is that they do not allow for the role that unions or other institutions have in influencing layoffs. In particular, the existence of legislation may reflect a lack of protection from other institutions. Clearly, an ideal measure would be some form of composite indicator that embodied all institutional influences on the ability of firms to shed labor. Morgan (1996a) used a measure of the strength of employment security based on three European Union surveys of employers (Commission 1986, 1991, 1995). These three European Union surveys were undertaken for the European Commission by the national institutes in charge of the Euro- pean Union Monthly Business Surveys. These national institutes, which were either an economic research institute, a survey organization, or a national statistical office, selected a representative sample of industrial and retail firms to answer a comprehensive questionnaire. The sample size was very large because, in the 1994 survey, a total of around 23,000 industrial firms and 10,000 retail firms were selected. The combined workforce of the firms covered by the surveys was 9.3 million. For the industrial survey, the results were weighted by size (less than 200 employees, 200 to 499 employees, 500 to 999 employees, and 1000 employees and more) and by main industrial category. The survey did not cover the informal sector of the economy. In each survey employers were given a list of possible factors that could be an obstacle to employing more people and were asked to say whether each one was “very important,” “important,” or “not (so) important.” One of the factors was “insufficient flexibility in shedding staff,” and a summary of responses to this question from the 1994 survey is shown in Table 1.3 The survey was conducted for both the industrial and retail sectors, allowing us to differentiate between the two. However, the

2 Also as Bertola, Boeri, and Cazes (1999) discuss, the actual enforcement of legal regulations is an important issue that is not taken into account in such measures. 3 The alternatives were competition, wage and salary levels, nonwage labor costs, other costs, insufficient flexibility in training staff, lack of adequately skilled applicants, lack of production capacity, and other reasons. 58 / MORGAN, GENRE, AND WILSON

TABLE 1 EMPLOYERS’ASSESSMENTS ON WHETHER INSUFFICIENT FLEXIBILITY IN SHEDDING STAFF ISANOBSTACLE TO EMPLOYING MORE PEOPLE IN INDUSTRY (1994)

Very important, % Important, % Not (so) important, %

Belgium 32 42 26 Germany 30 34 35 Greece 23 47 31 France 30 35 35 Ireland 33 35 32 Italy 28 40 32 Netherlands 24 31 45 UK 12 21 67

SOURCE: Commission. 1995. European Economy, Performance of the European Union Labour Market: Results of an ad hoc Labour Market Survey Covering Employers and Employees, Table 5a, p. 78. Proportions recalculated to exclude nonrespondents. question relating to obstacles to employment was only asked of retailers in the latter two surveys, and hence no results for the retail sector are available for the 1985–1986 survey. Morgan (1996a), following Beatson (1995), created an employment security index ES using a simple scoring system assigning a score of 2 to a reply of “very important,” 1 to a reply of “important,” and 0 otherwise. The resulting index seemed plausible because, for example, it revealed that in the view of firms, effective employment security was significantly lower in the United Kingdom than in any of the other countries. For the most part, the index also showed a good correlation with other measures of security (Morgan 1996a).4 However, although the survey-based index has many intrinsic advan- tages over the alternatives in terms of its coverage and its comparability over time and across countries, it is only available for the three survey observations, each separated by 4 to 5 years. To address this problem, we have set out to identify the underlying determinants of the firms’ responses recorded in these surveys and use this information to generate information for years in which no surveys took place. This involves test- ing the significance of various institutional factors, such as union strength, laws, and atypical employment in explaining the survey-based measure. We then use the results of this work to derive a composite index

4 A concern raised by Bertola and Ichino (1995) is that responses may be linked to the state of the economic cycle. Firms may regard firing costs as a greater issue when they are about to reduce their workforce than when they are expanding. However, we investigated this possibility and found that there is little correlation between the ES measure, two measures of the output gap, and some data on firms’ expected change in employment that were drawn from the same surveys. Measuring Employment Security in Europe /59 of employment security for 10 EU countries for the period 1980–1995. The essential rationale for this approach is that we allow the data on firms’ responses to the surveys to determine the composition and weight- ing pattern of the institutional factors in the security measure. In our model we have firms’ assessments of employment security ES being determined by labor market institutions as in

ES = f (L, U, A, O) (1) where L covers legal restrictions, U covers the influence of trade unions, A covers the prevalence of atypical employment, and O covers the influence of other institutions. We now briefly discuss the variables we use to proxy the effects of these institutions.

Capturing the Influence of European Institutions Clearly, there are many ways in which the legal environment matters for employment security, and a comprehensive account of the legal position in European countries can be found in Blanpain (1996) and Barnard, Clark, and Lewis (1995). Legal provisions largely can be divided into those which relate to dismissals with cause (implying some fault on the part of the employee) and redundancies (implying no fault). These provisions can provide definitions of the just-cause dismissals and establish procedures for employers to follow. In the case of redundancies, there can be requirements to provide notice periods and severance pay and requirements to consult or negotiate with trade unions. In both with-cause and without-cause dismissals, where procedures are not followed, an employee may have the right to claim that the dismissal was unfair and require reinstatement or more usually some financial recompense from the employer. European employers generally face an array of detailed rules governing dismissal procedures, although there is considerable variation among countries.5 Except in cases of serious misconduct, individual redundancy normally requires a term of notice and, in some cases, financial

5 Employers have to justify terminating employment contracts in France, Italy, Germany, and the Neth- erlands. In France, for example, the dismissal must be supported by “real and serious reasons,” which are defined as “any cause serious enough to make the continuation of employment without damage to the company impossible.” In Italy, a dismissal is legitimate only if supported by just cause, such as serious violations of the worker’s contractual obligations, or by “objective” reasons, such as the organization of work in the firm. There is a legal obligation to inform and consult work councils about dismissals in 60 / MORGAN, GENRE, AND WILSON compensation. Italy and Portugal are the only countries in the European Union not to require a notice period.6 The length of the notice period and the value of redundancy payment vary considerably among countries, generally being related to age and seniority.7 As a simple example (following Lazear 1990), we looked at the case of a 40-year-old blue-collar worker with 10 years experience and identified the statutory notice period and months of severance pay that they would be given in six countries in 1994. These figures are presented in Table 2.8 Most countries allow a trial period before standard employment regulations come into force. During this period, the contract can be terminated by either party without justification and, in some cases, without notice. Probationary periods vary widely among countries and are sometimes longer for white-collar workers than for blue-collar workers. The United Kingdom clearly stands out as requiring employees to wait 2 years before being granted their employment rights (this was progressively raised from 6 months between 1980 and 1985). This compares with Belgium (3.3 months), the Netherlands (2 months), France and Germany (1.2 months), and Italy (0.8 months). However, despite having considerable freedom during the trial period, employers generally are required to com- ply with antidiscrimination legislation. We use two variables to capture the effects of legislation (L). These are the total number of months of notice period and severance pay (Legisla- tion)9 for a 40-year-old blue-collar worker with 10 years of service and

Germany and the Netherlands. In Germany, there is an additional requirement that a dismissal must be socially justified. This means that the dismissal will still be illegal, even with a valid reason, if the employee can be transferred to a comparable job with comparable working conditions, either immediately or after further training. In Belgium and the United Kingdom, there is no statutory obligation for the employer to justify dismissals. However, Belgian workers can request a justification for the dismissal in terms of their aptitude or conduct or the economic or technological necessities of the company. In the United Kingdom, every employee, subject to completing a trial period, has the right not to be “unfairly” dismissed by the employer. 6 In the Netherlands, compensation, although not a statutory requirement, is usual and can be enforced if any case-law precedence exists. In the United Kingdom, statutory redundancy payments are subject to an upper earnings limit (currently £210 per week). The value of this limit in relation to earnings declined sub- stantially in the 1980s and 1990s so that by 1997 only 10 percent of eligible workers earned less than it. 7 Some countries allow differences in notice periods and redundancy pay between white- and blue-collar workers. 8 Special rules exist concerning collective dismissals. These have been aligned largely on the 1975 Council Directive (75/129/EEC). This requires that the administrative authorities have to be informed about details of collective dismissals, and it also requires that social partners are informed and consulted before dismissals occur. Collective dismissals require notice to be given and generate redundancy pay, generally higher than for individual redundancy. In Germany and France, the firm is also required to draw up a social plan. 9 To take account of the declining relative value of the upper wage limit in the United Kingdom, we adjusted the number of months of severance pay in the United Kingdom to reflect the fact that it was not Measuring Employment Security in Europe /61

TABLE 2 NOTICE PERIOD AND SEVERANCE PAY REQUIREMENTS FOR A 40-YEAR-OLD BLUE-COLLAR WORKER WITH 10 YEAR’S SERVICE IN 1994

Statutory notice period Statutory severance pay Country (months) (months of pay) Belgium 1 0 France 2 1 Germany 4 (2 before 1993) 0 Italy 0 9 The Netherlands 2 ½ 0 United Kingdom 2 ½ 2 ½ (subject to earnings limit) the number of months of trial period before eligibility for the main employment rights (QualifyingPeriod). To proxy the influence of trade unions, we use two variables. The first is the trade union density rate (UnionDensity), which is the proportion of employees who are members of a trade union. The second is the proportion of employees covered by collective-bargaining agreements (Cover- age). There can be large differences between union density and the coverage rates. For example, the density rate in France is below 10 percent, yet the coverage rate is above 90 percent. Atypical forms of employment may provide a route by which employers can circumvent statutory restrictions that apply to standard employment contracts. Various forms of temporary employment through temporary work agencies (TWAs), the use of fixed-term contracts, or casual labor are available to firms. However, in many cases significant legal obstacles exist that prevent firms from fully using these more flexible forms of employment.10 In some industries, notably retailing, there may be a large number of very small enterprises where the owner is the sole employee (these tend to have very high creation and failure rates) (OECD 1991). In other industries, notably construction in the United Kingdom, employers use self-employed labor for particular contracts, and this provides a

paid at full earnings. The adjustment factor was calculated as the ratio between average earnings and the upper wage limit. 10 In some countries, such as Italy, TWAs are forbidden, whereas in others, significant restrictions, typically on the maximum length of temporary contracts, can exist. The limits on duration of temporary contracts vary from 3 months in Belgium to 6 months in Germany and the Netherlands and 2 years in France, whereas there is no limit in the United Kingdom. In Germany and the Netherlands, temporary work agencies are completely forbidden in the building sector. With regard to fixed-term contracts, in many countries such contracts are allowed only for the performance of specific tasks, and there are restrictions on duration and renewal. In France and Italy, an allowance is payable at the end of the contract. 62 / MORGAN, GENRE, AND WILSON means of circumventing general employment regulation. Clearly, the self-employed are likely to experience less employment security. We use data on the proportion of employment that is either self-employment or temporary employment (TemporarySelf). We would expect that an increased use of both these forms of employment would be associated with a lower level of employment security for any given legal environment or union bargaining position. However, one caveat with using these data is that there is the potential problem of reverse causality. Firms may choose to hire more workers on “atypical” contracts if there are significant restrictions on their use of “standard” contracts. Therefore, rather than being an indicator of increased flexibility for firms, a high use of temporary or self- employment actually may indicate a lack of flexibility in standard forms of employment. To some extent this issue can be addressed by including the measures of legal restrictions on standard contracts that have already been discussed, but these are unlikely to fully capture all the restrictions that exist. It is therefore important to keep in mind the potential problem of reverse causality when interpreting the results reported in the next section. We also tested the significance of another variable, the proportion of employees who received in-house training (Training), drawn from the same surveys used for the ES variable. The motivation for including this variable was that once employers have provided training, they have more of an incentive to retain workers, regardless of other influences such as legal restrictions or trade unions. For this reason, we might expect Training to have a negative coefficient because firms who had provided training to a large proportion of their workforce would not be so concerned about a lack of flexibility to shed staff. We also included a dummy variable (Qdummy) to allow for a change in the survey question between the first two surveys and the final survey in 1994. In the earlier surveys, firms were asked whether there was “insufficient flexibility in hiring and shedding labor,” whereas in the 1994 survey they were asked if there was “insufficient flexibility in shedding staff.” It is clearly possible that a small number of firms in the first two surveys were concerned about a lack of flexibility in hiring staff but were not concerned about a lack of flexibility shedding staff. Hence the change in the question may lead to a slightly inflated value for the dependent variable in the first two surveys. To address this potential problem, we included a dummy variable that was coded as 1 for the first two surveys and 0 for the 1994 survey. The expected sign on this dummy would be positive, but it was not known a priori whether it would be significant. Measuring Employment Security in Europe /63

Empirical Results Our approach in this article has been to examine the role of the preceding institutional factors in explaining firms’ assessments of the obstacles that they face in shedding labor. To this end, we examined the relationship between our measure of employment security (ES), which was derived from the attitudinal surveys described earlier, and the institutional measures described in the preceding section. This involved estimating the following OLS regression for both the industrial and retail sectors11:

ES=b0 +b1UnionDensity + b2TemporarySelf + b3Legislation +

b4QualifyingPeriod + b5Coverage + b6Training + b7Qdummy (2)

We estimated equation (2) on a panel data set for all the countries in the survey years, giving three time observations separated by 4 and 5 years, respectively, for the industrial sector and two time observations separated by 5 years for the retail sector. We estimated a separate equation for the retail sector because firms in this sector may take a different view of the factors that they consider important in determining employment. The countries surveyed were Germany, France, Italy, the United Kingdom, Spain, the Netherlands, Belgium, Greece, Ireland, and Portugal. How- ever, not every country was covered in each of the surveys, since, for example, there were no data for Spain and Portugal in the 1985–1986 industrial survey because these countries were still in the process of join- ing the European Union at that time. Nevertheless, given the limited number of survey observations available, it was important to include every piece of available data because we had only 28 observations for the industrial sector and 16 observations for the retail sector with which to estimate our employment security relationship. The results of the estimation are shown in Table 3 for the industrial sector and Table 4 for the retail sector. In the regression for the industrial sector we found a role for a number of variables that capture the effects of the legal environment. The coefficient on Legislation was positive and significant, suggesting that, as expected, our measure of employment security (ES) is positively correlated with the length of notice period and the number of months of redundancy pay required. We found a very significant role for the qualifying period for employment rights (QualifyingPeriod) with a negative coefficient. This suggests that a longer qualifying period

11 In estimation, all the independent variables were lagged 1 year to reduce potential endogeneity problems. TABLE 3 PANEL RESULTS OF AN OLS REGRESSION OF EMPLOYMENT SECURITY (ES) IN INDUSTRY ON INSTITUTIONAL DETERMINANTS FOR 10 EUROPEAN COUNTRIES 1985, 1989, 1995a

(1) (2) Estimated coefficient Estimated coefficient Intercept 83.994*** 49.663 [12.992] [70.657] Union density 0.719** 0.720** [0.328] [0.343] Temporary-self −0.354 −0.287 [0.326] [0.372] Legislation 2.936** 3.558* [1.480] [2.081] Qualifying period −3.059*** −2.499** [0.529] [1.297] Coverage 0.381 [0.801] Training −0.142 [7.466] Qdummy 7.856 8.680 [6.842] [7.233] Observations 28 28 R2 0.654 0.658 aStandard errors given in parentheses; variable definitions are given in text. *Significant at the 0.10 level. **Significant at the 0.05 level. ***Significant at the 0.01 level. TABLE 4 PANEL RESULTS OF AN OLS REGRESSION OF EMPLOYMENT SECURITY (ES) IN THE RETAIL SECTOR ON INSTITUTIONAL DETERMINANTS FOR 10 EUROPEAN COUNTRIES 1989 AND 1995a

(1) (2) (3) Estimated coefficient Estimated coefficient Estimated coefficient Intercept 142.570*** 109.624 164.538*** [22.343] [99.362] [19.855] Union density 0.629 0.741 0.760* [0.533] [0.449] [0.431] Temporary-self −0.467 −0.622* −0.602* [0.485] [0.409] [0.392] Legislation −6.907*** −4.431 −5.936*** [2.511] [3.411] [2.048] Qualifying period −3.007*** −2.138 −3.152*** [0.940] [1.959] [0.756] Coverage 0.654 [1.157] Training −1.129* −0.845** [0.608] [0.330] Qdummy −0.638 4.874 3.056 [10.174] [9.195] [8.281] Observations 16 16 16 R2 0.786 0.881 0.876 aStandard errors given in parentheses; variable definitions are given in text. *Significant at the 0.10 level. **Significant at the 0.05 level. ***Significant at the 0.01 level. Measuring Employment Security in Europe /65 for employment rights is associated with a lower level of measured employment security. We also found a role for trade union influence in determining firms’ assessments of the strength of employment security. Union density (UnionDensity) was a significant variable with a positive coefficient, suggesting that where union membership is high, firms consider that they face more obstacles to laying off workers. However, as column (2) of Table 3 shows, we did not find a role for the coverage of collective bargaining (Coverage). We did detect some influence from the use of atypical forms of employment. We found a potential role for the prevalence of self and temporary employment (TemporarySelf). This variable was found to have a negative coefficient, suggesting that the use of such forms of employment can offset the effects of legislation and unions on employment security, although this variable was only accepted at the 0.15 significance level. However, as has already been discussed, there is a potential problem of reverse causality because a high use of atypical forms of employment may indicate a lack of flexibility in the use of standard contracts. If there is some degree of reverse causality, then this may be a factor that weakens the significance of the TemporarySelf variable in our regression. Finally, as column (2) of Table 3 shows, we did not find a role for the in-house training variable (Training). In the regression for the retail sector shown in column (3) of Table 4, it is notable that in many respects the results were very similar. We again found a role for union density (UnionDensity) and the qualifying period for employment rights (QualifyingPeriod) and a weakly significant role for the temporary and self-employment variable (TemporarySelf). Fur- thermore, as column (2) of Table 4 shows, the coverage of collective bargaining (Coverage) also was not a significant variable in the retail-sector equation. However, there were two important differences between the results reported in Tables 3 and 4. The first difference was that the sign on the legislation variable (Legis- lation) in the retail-sector equation was negative. This implies that higher levels of legislated severance pay and longer notice periods actually were associated with lower employment security. This is clearly a finding that is difficult to explain and sheds doubt on the reliability of the results for the retail sector, which are based on a much smaller sample than was available for the industrial sector. The second difference is that as col- umns (2) and (3) of Table 4 show, the proportion of employees who had received in-house training (Training) was found to be significant in the retail sector. 66 / MORGAN, GENRE, AND WILSON

It is of interest to consider which of the preceding factors are the most important in influencing firms’ assessments of the restrictions they face. Using the results for the industrial sector (Table 3, column 1), we have drawn up a table of the magnitude of changes in each variable that would have the same impact as a change in statutory notice periods of 1 month (Table 5). The implication of these results is that the qualifying period for employment rights is a very important variable in determining firms’ responses. Union density, although significant, is less important because a 12 percentage point fall in the union density rate would be equivalent to a rise in the qualifying period of around 3 months.

A New Measure of Employment Security The estimated coefficients on the institutional variables for the industrial sector enable us to create a composite indicator of firms’ assessments of obstacles to shedding workers. We can use annual data on the institutional factors and our estimation results to create fitted values for the ES series on an annual basis (to overcome the problem that the survey has been conducted at 4- to 5-year intervals). Using data on the independent variables for the period 1980–1995, we have generated fitted values for the ES series based on the results for the industrial sector because the results for the retail sector were not thought to be reliable enough for this purpose. The fitted values for Germany, France, the Netherlands, and Belgium are shown in Figure 1, and those for the United Kingdom are shown in Figure 2. The fitted values of the ES measure indicate notable differences between countries and developments over time. Our results suggest that within industry, the survey-based measure of employment security is now broadly similar for Germany, France, the Netherlands, and Belgium, with the United Kingdom standing out with a much lower score and Italy with

TABLE 5 CHANGE IN INSTITUTIONAL VARIABLES THAT GENERATES AN EQUIVALENT IMPACT ON EMPLOYMENT SECURITY—BASED ON THE RESULTS IN TABLE 3, COLUMN 1

Change in institutional variable

Notice period 1 month Severance pay 1 month Qualifying period 0.96 months Union density rate 4.08 percentage points Self-employment rate 8.29 percentage points Temporary employment rate 8.29 percentage points Measuring Employment Security in Europe /67

FIGURE 1

FITTED VALUES FOR ES IN THE INDUSTRIAL SECTOR (GERMANY,FRANCE,NETHERLANDS AND BELGIUM)

FIGURE 2 FITTED VALUES FOR ES IN THE INDUSTRIAL SECTOR (UNITED KINGDOM)

a higher score. The country to show the major movement over this time period was the United Kingdom, where the employment security measure declined markedly from 1980 to 1985, reflecting the rise in the qualifying period for employment rights from 6 to 24 months.12 Over the whole period, the index also was lowered by the fall in trade union density, the

12 The period 1980–1984 is outside the estimation period, so we should avoid drawing strong conclusions. 68 / MORGAN, GENRE, AND WILSON fall in the relative value of redundancy pay as the real value of the upper earnings limit declined, and the increased use of atypical employment. The movements in the other countries have been more modest. Employ- ment security has fallen gradually in France, reflecting declining union density and an increased use of temporary employment. In Germany, there has been little discernible trend, apart from a slight pickup in 1993 when there was a rise in minimum notice periods for blue-collar workers. It is of interest to compare the results of our work with existing measures of employment security. Table 6 summarizes the results for all the countries in the survey for 1994 and compares these with the widely used rankings of Bertola (1990), which were extended to cover a larger number of countries in the OECD Jobs Study.13 Comparing the two measures is quite revealing. The ES estimate of employment security in Spain (91) is well below that of Portugal (121). This is markedly different from the rankings prepared by Bertola-OECD, which show both countries to have very similar levels of employment protection. In terms of purely legal regulation, this is true because both countries have relatively strict regulations with significant legal requirements for severance pay and notice periods and a comparatively short qualifying period for employment rights. However, Spain has a low trade union density rate (18½ percent) and a widespread use of temporary employment (33½ percent). Portugal, on the other hand, has a higher trade union density ratio (26 percent) and a

TABLE 6 FITTED EMPLOYMENT SECURITY MEASURE COMPARED WITH OECD/BERTOLA RANKINGS

ES measure OECD/Bertola implied ranking Country (0–200) in 1994 (1990–1995) UK 39.2 4 Ireland 84.8 6 France 87.7 8 Spain 91.0 10 Germany 91.4 6 Netherlands 95.0 3 Belgium 101.3 9 Greece 107.0 9.1 Italy 119.4 10 Portugal 121.1 9.5

SOURCE: OECD/Bertola Ranking taken from OECD (1995), Table 6.7, p. 74.

13 These rankings use the figures in Bertola (1990) for the countries covered in his work. Greece, Ireland, Portugal, and Spain were not included in this work, so rankings for these countries were prepared by the OECD to be consistent with Bertola’s figures. Measuring Employment Security in Europe /69 lower use of temporary employment (9 percent). Unlike the existing rankings, the ES measure can capture the effects of these institutions on employment security.

The Relationship Between ES and Changes in Structural Unemployment A detailed empirical application of the new employment security measure is beyond the scope of this article. However, it is interesting to note that there appears to be some correlation between changes in the employment security measure and changes in estimates of structural unemployment in the 1990s. Figure 3 plots the change in the OECD’s estimate of structural unemployment for European countries between 1990 and 1997 against the change in the ES measure between the second and third survey dates (1989–1994). There appears to be a clear positive relationship, and the correlation coefficient between the two series is 0.58. Excluding Ger- many from the analysis, because of potential biases due to reunification, reduces the correlation coefficient to 0.35. There are, of course, many important caveats to make about the preceding analysis. Not least, the concept of structural unemployment is not uni- versally accepted, and any particular set of estimates is likely to be subject to wide error bands. It also would be preferable to test for the effects of employment security in a more general model that allows a role for other factors, such as minimum wage provisions and unemployment FIGURE 3 CHANGE IN EMPLOYMENT SECURITY MEASURE (ES) AND STRUCTURAL UNEMPLOYMENT (OECD ESTIMATE) IN THE 1990s

SOURCE: OECD estimates for the change in structural unemployment between 1990–1997 are taken from OECD, 1998, p. 174. 70 / MORGAN, GENRE, AND WILSON benefit replacement ratios, to affect structural unemployment (see, e.g., Scarpetta 1996; Nickell 1997). However, it is apparent that the opportu- nity to test empirically the effects of cross-country and temporal varia- tions in employment security could prove useful in future work.

Conclusions Clearly, it is difficult to draw strong conclusions with a relatively small sample, but our results seem generally supportive of the notion that it is not just laws that matter for employment security. For the industrial sector, we have found that firms’ assessments of the restrictions they face appear to reflect the influence of legal restrictions (qualifying period for unfair dismissal, statutory notice periods, and redundancy payments), trade union strength (union density), and although with less significance, the prevalence of atypical employment (temporary and self-employment). The results for the retail sector revealed a similar role for the qualifying period for unfair dismissal, trade union density, and the use of atypical employment. However, the coefficient on the severance pay and notice period variable did not have the expected sign. Using the results for the industrial sector, we have compiled some new indices of the strength of employment security for 10 European countries for the period 1980–1994. Although these measures are based on a limited sample, they have the advantage of being considerably broader in scope than most existing series because they allow for other institutions such as trade unions and the use of atypical employment to affect employment security. Another advantage of the new employment security indices is that they are available on an annual basis over a reasonable time horizon. For this reason, they may provide a suitable basis for further empirical work on the effects of employment security.14

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14 Another advantage with the new measure is that it overcomes the potential “errors in variables” problem that arises when using survey results in regression analysis. This work can be seen as identifying the instrument set that is used to overcome this problem. Measuring Employment Security in Europe /71

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Appendix: Glossary and Data Sources

ES Employment security measure based on surveys of employers (Commission 1986, 1991, 1995). Legislation Months of statutory severance pay plus the months of statutory notice period required for a 40-year-old blue-collar worker with 10 years service [both Blanpain (1996) and earlier editions]. QualifyingPeriod Months of service required before eligibility for main employment rights (OECD 1995; Beatson 1995). Coverage Coverage of collective bargaining. TemporarySelf Temporary employment as a proportion of total employment plus self-employment as a proportion of total employment (OECD Employment Outlook, various editions). UnionDensity Union density (employed members divided by employees in employment) (OECD 1991; ILO 1997; Visser 1989; German Statistical Yearbook 1980–1995; Centro di Studi Sociali e Sindicali annual reports; Netherlands Central Bureau of Statistics; Cully and Woodland 1997; GB Labour Force Surveys). For all countries, employees in employment figures are from Eurostat.