Employment protection legislation and entrepreneurial activity

What is it about?

We estimate the separate impact of two main elements of country-level employment protection legislation (EPL) - that is, redundancy pay and the notice period for employers - on an individual's involvement in independent entrepreneurship (or, self-employment) and entrepreneurial employee activity. Redundancy pay and the notice period for employers reflect labour market friction, opportunity cost, search time and liquidity constraint mechanisms. The notice period for employers is found to be positively related to an individual‘s involvement in entrepreneurial employee activity, yet negatively related to self-employment. We do not find consistent effects of redundancy pay upon entrepreneurial activity.

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Photo by Marten Bjork on Unsplash

Photo by Marten Bjork on Unsplash

Why is it important?

We offer a three-fold contribution to the extant literature. First and foremost, entrepreneurial employees are only recently acknowledged and internationally measured as a separate category of entrepreneurially active individuals. As such, we are able to take a closer look at the allocation of entrepreneurial activity across employed and self-employed individuals. Second, we investigate the effects of country-level EPL on individual-level occupational status given most studies focus upon macro effects, such as changes in unemployment, employment and/or self-employment levels. Accordingly, we answer a recent call for more multilevel research on entrepreneurial decision-making. Third, we estimate the separate effects of the two main elements of EPL. Composite indices have been used to measure a nation’s entire system of provisions regarding employment protection. Given the complex multidimensional nature of EPL, we provide a more fine-grained analysis enabling the separation of four key mechanisms in the explanation of the effects of EPL on entrepreneurial activity, viz. labour market frictions, opportunity costs, search time and liquidity constraints.