Is employment protection legislation a driver or an inhibitor of entrepreneurship? The interaction between stringency and enforcement

Abstract

Purpose This study aims to revisit the relationship between the stringency of employment protection legislation and entrepreneurship at the macro-level using time series data from 28 OECD countries.

Design/methodology/approach To address model uncertainty, a Bayesian model averaging methodology is employed, overcoming issues related to predictor selection. Additionally, the study delves into the interaction between employment protection legislation and the rule of law, considering potential unintended consequences and overlapping effects. Heterogeneity within self-employment is explored, making a distinction between solo self-employment and employer entrepreneurship.

Findings The findings reveal that the impact of employment protection legislation, both for regular and temporary employment, on aggregate solo self-employment rates is contingent upon the level of practical regulatory compliance. The legislation can either stimulate or hinder entrepreneurship, highlighting the nuanced nature of its influence on macro-level entrepreneurial activities.

Practical implications The results of this study provide valuable insights for policymakers and regulators by emphasizing the complexity of the relationships under consideration. Understanding the potential interactions between employment protection legislation, rule of law and practical regulatory compliance is crucial for designing an effective and conducive regulatory environment for entrepreneurship.

Originality/value This research offers a unique contribution to the literature in three distinct ways: by addressing model uncertainty through Bayesian model averaging, examining the interaction between employment protection legislation and the rule of law and differentiating between solo self-employment and employer entrepreneurship. These distinctive elements enhance the originality and value of the study, providing a more nuanced understanding of the intricate relationship between legal frameworks and macro-level entrepreneurship.