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Does strict employment protection discourage job creation? Evidence from Croatia

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  • Rutkowski, Jan

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.

Suggested Citation

  • Rutkowski, Jan, 2003. "Does strict employment protection discourage job creation? Evidence from Croatia," Policy Research Working Paper Series 3104, The World Bank.
    • Handle: RePEc:wbk:wbrwps:3104
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    Cited by:

    1. World Bank, 2010. "Croatia : Social Impact of the Crisis and Building Resilience," World Bank Publications - Reports 2903, The World Bank Group.
    2. World Bank, 2004. "Serbia and Montenegro : An Agenda for Economic Growth and Employment," World Bank Publications - Reports 14487, The World Bank Group.
    3. Maja Micevska, 2008. "The Labour Market in Macedonia: A Labour Demand Analysis," LABOUR, CEIS, vol. 22(2), pages 345-368, June.
    4. International Monetary Fund, 2004. "Republic of Croatia: Selected Issues and Statistical Appendix," IMF Staff Country Reports 2004/251, International Monetary Fund.
    5. Tyrowicz, Joanna & van der Velde, Lucas, 2018. "Labor reallocation and demographics," Journal of Comparative Economics, Elsevier, vol. 46(1), pages 381-412.
    6. Rutkowski, Jan, 2006. "Labor market developments during economic transition," Policy Research Working Paper Series 3894, The World Bank.
    7. Mejra Festic & Dejan Romih, 2007. "Flexicurity As A Forward-Looking Model: Evidence From Nms-12," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 2(1(2)_Fall).
    8. World Bank, 2005. "The Quest for Equitable Growth in the Slovak Republic : A World Bank Living Standards Assessment," World Bank Publications - Reports 8312, The World Bank Group.
    9. Maja Micevska, 2004. "Unemployment and Labour Market Rigidities in Southeast Europe," wiiw Balkan Observatory Working Papers 49, The Vienna Institute for International Economic Studies, wiiw.
    10. World Bank, 2011. "Employment Protection Legislation and Labor Market Outcomes : Theory, Evidence and Lessons for Croatia," World Bank Publications - Reports 12902, The World Bank Group.
    11. Rutkowski, Jan, 2004. "Firms, jobs, and employment in Moldova," Policy Research Working Paper Series 3253, The World Bank.
    12. Alexander Krauss, 2015. "Creating and destroying jobs across East Asia Pacific: a country-level analysis on wages, exports, finance, regulation and infrastructure," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-24, December.
    13. Joanna Tyrowicz & Lucas van der Velde, 2014. "Can We Really Explain Worker Flows in Transition Economies?," Working Papers 2014-28, Faculty of Economic Sciences, University of Warsaw.

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