Introduction

Employment security and the impacts of legal restrictions on employment terminations by firms have been a regularly recurring theme and controversial issue in the labour market policy debates of most Western industrialized countries.

In the 1980s, such criticism, though frequently rooted in abstract notions rather than firm empirical evidence about the functioning of labour markets, spurred several European governments to introduce new legislation selec­tively relaxing legal dismissal and lay-off restraints and/or widening legal ‘loopholes’ allowing a circumvention of statutory dismissal protection, for instance, through facilitating the use of temporary workers or encouraging early retirement of older workers. Despite these changes, which have left the basic systems of statutory dismissal protection largely intact, the debate about the allegedly adverse employment and labour market impacts of em­ployment security regulation has continued with undiminished intensity, receiving additional fuel from the substantial labour shedding during the latest recession of the early 1990s. This is witnessed by the fact that the OECD’s Employment Outlook for 1993 (OECD, 1993, pp. 95ff.) and the 1993 edition of the EU Commission’s Employment in Europe report (see Commission of the European Communities, 1993, pp.

The debate on employment security has stimulated a great deal of research effort during the past two decades. However, most attempts to determine the actual labour market impacts of existing employment security regimes have produced highly conflicting results. According to the present findings, strict employment protection regulation has hardly had any impact on the global level of unemployment. However, the results provide certain evidence that the composition of unemployment can change if regulation is stricter. Unemploy­ment among prime-age men would be lower, though at the expense of younger workers. The level of employment is not really affected, either, according to the result. What is more significant here too, however, are the structural effects, since strict employment protection obviously improves the employment pros­pects of prime-age men and worsens those of younger workers and of prime-age women. With respect to the flow values there are clearer links. Thus a high level of employment security reduces the fluctuation on the labour market (and raises the stability of employment), lowers the risk of becoming unemployed but simultaneously increases the duration of unemployment when it does occur (see, for example, OECD 1999). In particular, most previous research has not been well grounded in theoretical terms, lacking a clear-cut notion of the specific nature of modern employment relationships and the potential source of market failure inherent therein, as well as about the differential impacts and implications of contrasting regulatory approaches and legal approaches.