Does Labour Market Intervention Lead to Unemployment? What the Data Show

Abstract

In the perspective of dominant orthodox standpoint against state-intervention to protect the interest of labour, this paper examines a longitudinal dataset on various aspects of labour law for four OECD countries (UK, USA, France and Germany) over a long time span 1970-2006. It supports the contention of the legal-origin theory that UK and USA (common law countries) intervene less in the labour market and grant less protection to labourers. It also supports the proposition that the problem of unemployment is more acute in the civil law countries (France and Germany). But it finds no evidence that labour regulation has short-term or long-term effect on unemployment irrespective of whether we consider youth unemployment or long-term unemployment. Studying the impact of various aspects of labour regulation it is observed that labour regulation relating to alternative employment contracts, industrial action and dismissal has no long-term effect on unemployment irrespective of whether we consider youth unemployment or long-term unemployment. It is also observed that labour regulation relating to working time reduces unemployment in the long-run.