Mapping Employment Dismissal Law : A Leximetric Investigation of EPL Stringency and Regulatory Style

A vast economic literature investigates how employment protection laws (EPL) affect employment, labor-force participation, unemployment, and other important economic outcomes. This paper challenges the widespread assumption that a unidimensional, additive index can accurately capture the variation among nations' laws. Our principal contribution is to introduce common factor analysis and multidimensional scaling (MDS) as new methods for identifying patterns of labor regulation, and we apply these techniques to the ILO's recently released EPLex dataset on individual dismissal laws. Our findings call into question the widespread practice of aggregating EPL components into a single aggregate index. The underlying structure of the EPLex data reveals at least two dimensions in the law of individual dismissal alone, and we are able to identify specific legal provisions that align with these two common factors. Thus, the conventional aggregation strategy arguably mismeasures EPL—potentially distorting empirical results and producing misleading recommendations for policy makers. We also engage prior work on “legal origins” that associates distinctive patterns of regulation (and resulting economic outcomes) with the historical legal family from which a country derived its legal institutions. Our MDS plots suggest a possible association between the historical origin of a country's legal system and the location of that country's individual dismissal laws in EPL policy space. However, further investigation will be needed to determine whether that association merely reflects colonial history (see Klerman et al. 2011) or instead supports a “strong” legal origins hypothesis