Labour market flexibility and employment protection

Standardised international indices show that the Czech Republic ranks among the countries with the most flexible regulations in the area of employment. Nevertheless, Czech employers believe that the national labour market is too rigid. Recent changes to the labour code have introduced greater flexibility for employees on permanent contracts and more security for those on temporary contracts, but a significant gap remains between these two categories.

Current discussions in the Czech Republic – particularly among employers – point to the fact that the job market is too rigid and that it is necessary to relax the strict protection of jobs, thus making Czech companies more competitive. Yet international comparisons show that the Czech Republic ranks among those countries with the most flexible employment regulations. This raises the question as to whether the Czech job market is really as rigid as it is often deemed to be, or whether it can compete in terms of flexibility with countries such as Denmark and the Netherlands.

Numerical flexibility

Numerical flexibility has two forms: external and internal. External numerical flexibility (ENF) refers to the flexibility of the process of hiring and firing employees. In practice, this is expressed conversely on the basis of the Employment Protection Index (EPI) of the Organisation for Economic Cooperation and Development (OECD) or the Employment Rigidity Index of the World Bank. Meanwhile, internal numerical flexibility (INF) expresses the flexibility rate of employers in organising working hours for employees based on market needs. It is also determined conversely, using the Rigidity of Working Hours Index of the World Bank.

International research carried out in 2004 positioned the Czech Republic in the top half of those OECD countries with lower overall employment protection, that is, with a higher ENF value. The value of its EPI was at a level of 1.9; in comparison, the EPI value of Denmark – regarded as the model country for flexicurity – stood at 1.8 (Figure 1). Flexicurity aims to combine flexibility with employment security, and is currently being promoted by the European Commission, notably in its November 2006 Green Paper Modernising labour law to meet the challenges of the 21st century (77Kb PDF) (EU0701019I).

Figure 1: Total EPI in selection of OECD countries, 2003 (scale of 0–6)

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Note: EPI ranges from 0, representing maximum flexibility, to 6, constituting the maximum extent of employment regulation.

Source: OECD Employment Outlook 2004

Total EPI in selection of OECD countries, 2003 (scale of 0–6)

Tighter employment regulations

Notwithstanding this, changes in employment regulation in recent years have moved the Czech Republic towards those countries with a higher rate of employment protection: in 2007, the country’s EPI stands at a level of 2.1. This development is primarily the result of offering increased protection in relation to temporary forms of employment.

Total or combined EPI, as shown in Figure 1, provides information about the total rate of employment regulation. However, for the specific situation in the Czech Republic, in order to prevent distortion, it is necessary to monitor the partial indices which reveal the level of employment protection of two different groups: permanent and temporary workers.

Regulation of permanent employment

According to the first of the partial indices – which determines flexibility or, more precisely, protection of permanent employment – the Czech Republic, with a value of 3.3 between 1993 and 2003, ranked among the countries with the strictest protection of permanent jobs. Only Slovakia and Portugal provided greater protection, while Denmark’s index value was 1.7 (Figure 2).

Figure 2: Regulation of permanent employment in selection of OECD countries, 1993–2003 (scale of 0–6)

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Source: OECD Employment Outlook 2004

Regulation of permanent employment in selection of OECD countries, 1993–2003 (scale of 0–6)

In 2003, the Labour Code, which acts as the main regulator of permanent employment in the Czech Republic, was amended, leading to greater flexibility and a slightly higher ENF value. The protection index value therefore decreased from 3.3 in 2003 to 3.1 in 2007 – which still leaves the Czech Republic among those countries with the lowest ENF values in the case of permanent jobs.

Regulation of temporary employment

Conversely, according to the second partial index – which measures the level of ENF in the case of temporary employment relations – the Czech Republic stood among the countries with the least regulation. Denmark applied stricter legislation in this case, although it had been reducing protection over the previous 10-year period.

Figure 3: Regulation of temporary employment in selection of OECD countries, 1993–2003 (scale of 0–6)

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Source: OECD Employment Outlook 2004

Regulation of temporary employment in selection of OECD countries, 1993–2003 (scale of 0–6)

However, due to relatively fundamental changes in the regulation of temporary employment, the level of protection of these workers increased from a value of 0.5 in 2003 to 0.9 in 2007. Nevertheless, the Czech Republic remains one of the countries with a higher ENF value in the case of temporary employment. These results are confirmed by the combined Employment Rigidity Index of the World Bank: according to this index, the Czech Republic maintains one of the least regulated labour markets in the case of atypical employment relations.

Commentary

It appears that the challenge in the Czech Republic is not so much inflexible regulation, but rather the disparity between the level of employment protection for permanent staff and that for temporary workers. As almost 91% of employees in the country work on a permanent contract, this results in an assessment of the Czech labour market as being too rigid. The solution should not be to increase employment flexibility in general, but rather to gradually align the working conditions for various forms of employment. In other words, the aim should be to gradually decrease the high level of protection for permanent employees, while significantly increasing the level of protection for workers on more flexible employment contracts.

Bibliography

Doing business in 2006. Employing workers in the Czech Republic, Washington, World Bank, 2006.

OECD Employment Outlook, Paris, OECD, 2004.

OECD Employment Outlook. Boosting jobs and incomes, Paris, OECD, 2006.

Markéta Nekolová, Research Institute for Labour and Social Affairs

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