Employment protection legislation (EPL) includes all types of employment protection measures, whether grounded primarily in legislation, court rulings, collectively bargained conditions of employment, or customary practice. The term is common among circles of economists. Employment protection refers both to regulations concerning hiring (e.g. rules favouring disadvantaged groups, conditions for using temporary or fixed-term contracts, training requirements) and firing (e.g. redundancy procedures, mandated prenotification periods and severance payments, special requirements for collective dismissals and short-time work schemes).

There exist various institutional arrangements that can provide employment protection: the private market, labour legislation, collective bargaining arrangements and not the least, court interpretations of legislative and contractual provisions. Some forms of de facto regulations are likely to be adopted even in the absence of legislation, simply because both workers and firms derive advantages from long-term employment relations.

According to Barone (2001) with the acronym EPL economists refer to the entire set of regulations that place some limits to the faculties of firms to hire and fire workers, even if they are not grounded primarily in the law, but originate from the collective bargaining of the social partners, or are a consequence of court rulings. In particular, provisions favouring the employment of disadvantaged groups in society, determining the conditions for the use of temporary or fixed-term contracts, or imposing training requirements on the firm, affect hiring policies, while redundancy procedures, mandated pre-notification periods and severance payments, special requirements for collective dismissals and short-time work schemes influence firing decisions. The nature of these restrictions on the firms’ freedom to adjust the labour input is quite similar in all OECD countries, but the actual procedural details and the overall degree of stringency implied by them varies considerably. These provisions are enforced through the worker’s right to appeal against his lay-off.

Some aspects of these regulations, like the length of advance notices or the dimension of severance payments can be measured with precision. Other important features of EPL, like for example the willingness of labour courts to entertain appeals by fired workers, or how judges interpret the concept of “just cause” for termination, are much more difficult to quantify.

One of the more frequently used measures of the strictness of the EPL in each country and through different years is the so-called Employment Protection Legislation Index elaborated by the OECD. This index is calculated along 18 basic items, which can be classified in three main areas:

The 18 first-digit inputs are then expressed in either of the following forms:

Then, these different scoring is converted into cardinal scores that are normalized to range from 0 to 6, with higher scores representing stricter regulation. Therefore, each of the different items is normalized according to weighted averages, thus constructing three sets of summary indicators that correspond to successively more aggregated measures of EPL strictness.

The last step of the procedure involves computing, for each country, an overall summary indicator based on the three subcomponents: