EMPLOYMENT PROTECTION LEGISLATION AND PROFITS: EVIDENCE FROM EUROPEAN COUNTRIES

The objective of the paper is to examine the relationship between employment protection regulations and pro ts in the European economies. Using regression analysis on the panel of 18 European countries over the period 1998-2008, we study the effect of EPL index on net operating surplus of mixed income (a measure of pro ts). Our ndings con rm a statistically signi cant negative relation between EPL index and pro ts at the level of economies, implying that more rigid employment legislation, and by that higher hiring and ring costs, hinder an ef cient allocation of resources, resulting in lower ef ciency of companies and in decline of pro ts. Although the effect is small, we believe that further exibilization of employment protection regulation presents an important determinant not only for labor market performance and productivity, but also for companies’ pro ts and therefore for the competitiveness of the European countries.