Authors : Seungwon Kim(the Bank of Korea)
This paper examines the impacts of employment protection legislation(EPL) on the labor market duality, considering multiple perspectives such as the temporary employment rate, job tenure, and wage decile ratio. Our empirical analysis also focuses on the relationship between EPL and labor productivity to evaluate the effect of employment protection on economic efficiency.
The results from the panel data analysis of OECD countries show that, first, a relaxation of EPL for the regular employment lowers temporary employment rate and increases job tenure, whereas it has no significant effect on the wage decile ratio. Second, strengthening EPL for the non-regular employment lowers temporary employment rate, increases job tenure, and reduces the wage gap within the regular employment. Third, EPL for the regular employment enhances the rate of labor productivity growth until it reaches its upper bound, beyond which EPL rather diminishes the growth rate. Fourth, labor market duality is more severe in Korea than in any other OECD countries.
Our empirical results show that it is necessary to continue to reduce the gap between EPL for the regular and non-regular employment in order to resolve labor market duality. It should also be noted that either too-strict or too-loose employment protection can negatively affect labor productivity. Finally, further studies are needed to investigate the causes of labor market duality in Korea and find solutions.