Employment protection in Latvia: rigid de jure, flexible de facto?
OECD did a great job on compiling and comparing employment protection legislation of all its members and accession countries, rather than relying on questionnaire completed by government authorities as in their previous labour market reports. It should be stressed, however, that Chapter 2.2 of "OECD Employment Outlook - 2013" assesses nothing more or less than employment protection legislation (EPL); and its conclusions should not be extended to broader concepts, in which economists perhaps are more interested in - for instance actual employment protection or degree of labour market rigidity. EPL tells us little about how a particular dispute might be resolved in practice, given labour market stance and trade union density in a particular country. In fact, strict EPL may even be a try to achieve at least moderate actual employment protection if a country has puny one.
Consider my own country Latvia, for which OECD report says EPL in some dimensions is one of the highest in Europe. Particularly, EPL index for Latvia exceeds the OECD average in the following dimensions: 1) procedural inconveniences that employers face when starting the dismissal process, such as notification and consultation requirements; 2) dismissal notice periods and severance pay; 3) additional restrictions for collective dismissals.
Let's discuss each in turn.
1. Procedural inconveniences
Section 110 of the Labour Law prohibits an employer from terminating an employment contract with a trade union member without a prior consent of the relevant trade union (and if trade union does not agree, only court can dismiss an employee). Sounds very strictly, but in fact only ~16% employees in Latvia are members of trade unions (it is one of the lowest trade union densities in the EU). Moreover, trade unions mostly cover the public sector while being almost nonexistent in the private sector. Thus, given a country environment, this EPL measure is in fact relatively mild in terms of employment protection.
2. Notice periods and severance pay
Section 112 of the Labour Law states that employer should provide a severance pay to dismissed employee (one monthly wage if job tenure was less than five years, two monthly wages when job tenure is 5-10 years, three monthly wages if job tenure was 10-20 year long and four monthly wages if job tenure exceeds 20 years). Again, someone may regard this as a strict employment protection, but in practice, especially in the private sector, an employer may classify job separation as "misconduct" and pay nothing, or force employee to quit job at his "free will". This may be tricky when labour markets are tight, but in times of high unemployment it can make labour markets more flexible (not that I personally regard this as the preferred option of how to introduce more labour market flexibility).
3. Additional restrictions for collective dismissals
Although there are special regulations in case of collective dismissals (consultations with State Employment Agency and municipalities; for which OECD report penalizes Latvia's score), it should be noted regarding collective dismissal that it 1) has no additional direct costs for employers; 2) no way how government institutions can impede it. And in case of weak (or non-existent) employee representatives, even a rather broad definition of collective dismissals (for which Latvia's score is again penalized: at least 5 workers during one month when employment is 20-50 persons, at least 10 when it is 50-100, at least 10% when it is 100-300 and at least 30 when it is larger than 300) "consultations" or in fact 45-60 day long "advance notice" of collective dismissal is not likely to be a serious burden on employers.
To summarize, the recent OECD report allows us to compare employment protection legislation across its members and accession countries, which is a great step forward. However, a much wider scope is indeed necessary to assess the cross-country differences in actual employment protection, which is far more important indicator for both economic consequences and political recommendations.