speri.comment: the political economy blog

Quantifying employment protection

Although it trumpets the benefits of a low employment protection rate, the OECD utilises a flawed methodology for measuring employment protection legislation

Thomas Hastings, Associate Fellow, SPERI, and Lecturer at Sheffield University Management School

Thomas HastingsLast year the Secretary-General of the OECD, Angel Gurria, cited low rates of employment protection governing the UK labour market as pivotal to reducing unemployment and enhancing the economy in the aftermath of the financial crash.  UK figures for unemployment – which have been substantially lower on average than the majority of EU states post-2008 – are increasingly being viewed by right-leaning business groups (BusinessEurope), think-tanks (OECD) and newspapers as evidence that other EU states should follow the UK’s lead in lowering unemployment protection.

In lay terms, this notion draws on the basic tenets of neoliberal ideology: notably the understanding that firms (and thus economies) operate more effectively when free from legal/bureaucratic commitments to the workforce.  In other words, the market is understood to generate additional work, particularly when paired with additional workfare pressures and benefit curtailments designed to corral long-term claimants into increasingly precarious work arrangements.

As an organisation, the OECD possesses considerable (indeed increasing) international clout when it comes to governmental advice and policy influence.  Originally formed in 1948 to further European economic reconstruction and cooperation on the back of the Marshall Plan, its current remit is now broader and aggrandised in scope.  The OECD operates as high-powered research centre, supranational think tank, intergovernmental forum and, often, as a lobbyist of neoliberal ideals.  Through a combination of these roles, the organisation aims to guide and advise member-states (which are mostly free market democracies) on desired economic and political and paths.

It is in this context that the OECD has emerged as the prime agent responsible for appraising the employment protection of its membership (Wikipedia is testament to its authority on this subject), as captured in the OECD employment protection legislation (EPL) index.  Given its increasing influence on the global stage, it remains pivotal that OECD scores for EPL (used as a proxy indicator for labour market flexibility) should accurately reflect directions of regulation change.  Reports utilising EPL scoring include both reviews of country action plans (designed as road-maps for economic reform) and the modestly titled ‘Better Policies’ series which invariably contain policy prescriptions in the form of ‘Key Recommendations’ for governments to adopt.

With its emphasis on right-of-centre statecraft, it is unsurprising that OECD statements should champion political economy models which work to lower EPL scores as captured in the above resource.  What remains unusual – and will be demonstrated here – is the continued use of flawed methodologies by the OECD to generate EPL scores (which, as we have seen, are then used for comparative purposes between states and feed numerous advisory statements).

Moreover, this is not the only area in which the OECD’s methodological rigour has been questioned, with debate recently centring on its ‘Pisa’ methodology to appraise education systems and student performance.  This is not to say that OECD EPL formulas are simplistic.  The methodology used to generate these scores draws upon as many as 16 sub-indicators of EPL (covering temporary, individual and collective worker rights) – detail necessary to capture the wide complement of employment protections necessary in 21st century hyper-flexibilised labour markets.  Nevertheless, fundamental flaws remain in the methodology and thus inevitably undermine both the validity of OECD research (and other bodies/actors utilising the index) and the policy recommendations which the organisation itself covets.

One recent issue encountered by Jason Heyes and myself concerns Ireland’s fluctuating scorecard for the EPL bulk indicator (EPRC_V2) which captures combined scores for individual and collective dismissals.  Our difficulty arose when appraising EPL change prior to the crisis, with Ireland registering enhanced overall protection (i.e. stronger employment protection – specifically, a rise from 1.812 to 1.907) and thus moving even further away in EPL score from its more flexible cousin, the UK.  Only when digging deeper into the legislative change did we discover the cause for this shift.

Ireland’s 2003 Redundancy Payment Act (enforced in 2005) had repealed the obligation to inform ministers of individual redundancy cases.  Oddly, however, this Act gave rise to an increase in the composite EPRC_V2 score.  The reason is as follows: while notification scores correctly lessened in the case of regular individual dismissals, the Act did not remove obligations to inform ministers in the case of collective dismissals.  According to OECD methodology, this correspondingly bolstered sub-indicator (CD2) which concerns ‘additional notification requirements in the case of collective dismissals’.  Thus, while the Act actually enhanced Ireland’s labour market flexibility, the OECD recorded an increase in EPL score in line with a more rigid/protected labour market (based on the sub-indicator rise of 3 to 6 between 2005 and 2006).  While the OECD warns against using the collective index in isolation, this should not apply to the composite mentioned.  Subsequently it presents a wholly contrary picture of the direction of EPL change.

This problem is coupled with other definitional concerns which impact notably on understandings of temporary work.  For instance, the ‘maximum cumulated duration of assignments’ refers not to the ‘protection’ of workers, but the ease by which firms utilise successive fixed-term contracts – an altogether different proposition.  A further problematic is also encountered in the role of collective bargaining, which acts as an additional source of employment protection in many counties and can lead to labour market dualism (as seen in Spain and Greece).  This contrasting and more complex reality (epitomised by a mix of labour market ‘insiders’ within unionised/protected jobs and a majority in precarious work) is not captured in OECD scoring, which focuses on the minority experience of a ‘high protection’ labour market in these cases.  Moreover, institutional arrangements of this sort are only selectively included in the OECD model, depending on the interpretation of collective agreements and their impact.  Even when considered, thanks to a range of exemptions, firms may face different dismissal/hiring costs which impact unevenly on worker livelihoods in ways not indicated by legislation (Venn 2009).

This highlights the further need for supplementary details when appraising employment protection arrangements in a given state – a requirement not helped by the lack of a tracking system on legislative change.  The OECD should surely provide this as justification for its numeric score shifts, given the important role assigned to subjective interpretation when appraising changes to collective bargaining arrangements, scope of coverage and exceptions.

In sum, the difficulties raised here suggest two conclusions.  Firstly, despite being frequently described as the world’s foremost intergovernmental think-tank, the OECD remains questionable, not just on familiar ideological but also on methodological and statistical grounds.  Bearing in mind the key role it has played in advising EU ‘crisis-states’ in the aftermath of the crash (notably Ireland and Portugal), it is somewhat worrying that the body’s own data on employment protection legislation can be exposed by such preliminary digging.  Secondly, it remains imperative that researchers in political economy need always to do that deeper digging when utilising indexes of this sort, notwithstanding the status of the source in question.

As I’ve shown here, when researching EPL, for example, qualitative analysis plays a vital role not only in elaborating on quantitative outputs, but also in verifying the figures themselves.

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Categories: British growth crisis, Economics, Employment, Europe and the EU, Politics and policy, SPERI Comment, Welfare | Tags: , | Leave a comment

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