Excessive Employment Regulation Hinders Economic Development

"Doing Business in 2004: Understanding Regulation," a World Bank-commissioned study by economists Simeon Djankov and Caralee McLiesh on the determinants of private-sector development, reveals that although employment regulation may have been necessary to correct past failures in the labor market, it should be adapted according to the changes in circumstances, technology, and business organization.

Djankov and McLiesh studied the three main components of employment regulation in various jurisdictions around the world: flexibility of hiring (part-time and fixed-term contracts), conditions of employment (flexibility in work time requirements, mandatory payments, minimum wage), and flexibility of firing (grounds and procedures for dismissal, notice periods, and severance payments).

According to the report, although employment regulation tends to increase the tenure and wages of incumbent workers, too-strict regulatory intervention yields four negative results.

World Bank.