Employment protection legislation, labor courts, and effective firing costs

Variable	Definition	Scale/Unit	Period	Source
Court rulings	Percentage of labor court judgments ruling that the dismissal was fair or justified	%	By court, 2004–2015	CGPJ
D1 (Reform 2010)	Period of enforcement of the 2010 labor market reform	Dummy	2004–2015	Self elaboration
D2 (Reform 2012)	Period of enforcement of the 2012 labor market reform	Dummy	2004–2015	Self elaboration
Unemployment rate	Percentage of total workforce which is unemployed and is looking for a paid job (in differences from the average)	%	By province, 2004–2014	Spanish National Statistics Institute (INE)
Profitability	Return on assets (ROA) for the 10% of firms with a lower ROA	%	By province, 2004–2013	Banco de España
Temporary employment rate	Percentage of total workforce which has a fixed-term contract	%	By province, 2004–2014	Spanish National Statistics Institute (INE)
Log of the number of workers under collective dismissals	Logarithm of the number of workers affected by collective dismissals	Logarithm	By province, 2004–2014	Ministry of Employment and Social Security
Proportion of companies with more than 200 employees	Proportion of companies with more than 200 employees over the total number of companies	%	By province, 2004–2014	Spanish National Statistics Institute (INE)
Employment share of services	Percentage of total workforce working on services sector	%	By province, 2004–2014	Spanish National Statistics Institute (INE)
Employment share of industry	Percentage of total workforce working on services sector	%	By province, 2004–2014	Spanish National Statistics Institute (INE)
Employment share of construction	Percentage of total workforce working on services sector	%	By province, 2004–2014	Spanish National Statistics Institute (INE)
Proportion of dismissal lawsuits analyzed (+) by	Percentage of labor court judgments ruling that the dismissal was fair or justified	%	By court, 2004–2015	CGPJ
professional judges over total	by professional judges over all the dismissal lawsuits analyzed by all judges
Proportion of days with temporary	Proportion of days per 365-days a year with positions	Fraction	By court, 2004–2014	CGPJ
positions at the labor courts per year Judicial congestion rate (dismissals lawsuits)	at the labor courts held by interim judges Ratio between the sum of pending cases in a labor court plus new cases and the cases resolved in the same quarter	Fraction	By court, 2004–2014	CGPJ
Judicial congestion rate (pre-trial settlements)	Ratio between the sum of pending settlements in a labor court plus new settlements and the settlements resolved in the same quarter	%	By court, 2010–2015	CGPJ
Out-of-court settlements ratio	Ratio of the number of out-of- court settlements divided by the sum of those settlements and the total number of dismissal lawsuits	%	By court, 2004–2015	CGPJ

[i] Source: Authors’ own elaboration.

Table 2

Descriptive statistics

Variable	Before 2010					2010–2012					After 2012
	Obs	Mean	Std. Dev.	Min	Max	Obs	Mean	Std. Dev.	Min	Max	Obs	Mean	Std. Dev.	Min	Max
Court rulings	7,444	0.2730	0.1362	0	1	4,025	0.2582	0.1180	0	0.8182	3,390	0.2268	0.1144	0	1
Unemployment rate (in differences)	8,328	–0.0517	0.0496	–0.1364	0.1397	4,164	0.0570	0.0638	–0.0859	0.2372	2,429	0.091	0.0658	–0.0271	0.2711
Profitability	8,328	0.0398	0.0903	0	0.8100	4,164	0.0076	0.0338	0	0.3763	1,388	0.141	12527	0	13.5382
Temporary employment rate	8,328	0.3089	0.0811	0.1628	0.5949	4,164	0.2480	0.0619	0.1315	0.4863	2,429	0.2387	0.0611	0.1325	0.5088
Log of the number of workers under collective dismissals	6,940	7.9281	1.7189	2.8332	11.7512	4,164	9.2074	1.2555	5.464	11.2039	3,470	8.9239	1.3714	3.9890	10.9548
Proportion of companies with more than 200 employees	8,578	0.0017	0.0009	0	0.0040	4,164	0.0015	0.0008	0.0003	0.0032	2,776	0.0016	0.0008	0.0002	0.0032
Employment share of services	8,328	0.6685	0.0734	0.438	0.844	4,164	0.7400	0.0719	0.536	0.8890	2,429	0.7606	0.0705	0.584	0.888
Employment share of industry	8,328	0.1626	0.0635	0.044	0.369	4,164	0.1404	0.0553	0.032	0.3420	2,429	0.1367	0.0557	0.031	0.279
Employment share of construction	8,328	0.1206	0.0276	0.058	0.239	4,164	0.0773	0.0177	0.041	0.1670	2,429	0.0589	0.0117	0.033	0.109
Proportion of dismissal lawsuits analyzed (+) by professional judges over total	8,328	0.9023	0.1767	0	1	4,164	0.8036	0.2736	0	1	3,470	0.8474	0.2509	0	1
Proportion of days with temporary positions at the labor courts per year	8,232	0.0083	0.0408	0	0.5	4,116	0.0130	0.0516	0	0.2556	2,744	0.0056	0.0342	0	0.2556
Judicial congestion rate (dismissals lawsuits)	8,328	2.0486	0.4877	1	13	4,164	2.6038	0.8173	1.0444	8.1958	0
Judicial congestion rate (pre-trial settlements)	8,328	15	0	15	15	4,164	6.6414	12.7790	0	285	3,470	6.4727	5.0171	0.544	45.5116
Out-of-court settlements ratio	8,328	0.5422	0.1822	0	0.9310	4,164	0.4444	0.1672	0	0.8662	1,388	0.6719	0.142	0	0.9021

[i] Source: Authors' own elaboration.

Table 3

Main descriptive statistics by province

	Court rulings	Unemployment ratea	Profitability	Temporary employment rate	Log number workers under collective dismissals	Proportion of companies with more than 200 employees	Out-of-court settlements ratio
National (full period)	0.2603	0.1630	0.0398	0.2805	8.5692	0.0016	0.5258
Provincial deviations from the mean
ALMERIA	–0.0499	0.0651	–0.0398	0.1884	–2.2744	–0.0003	–0.1314
CADIZ	0.0138	0.1045	–0.0398	0.0734	–0.8296	–0.0008	0.0163
CORDOBA	0.0464	0.0797	0.0112	0.1339	–1.8571	–0.0008	–0.0626
GRANADA	0.0008	0.0719	–0.0218	0.1137	–1.7881	–0.0008	–0.0729
HUELVA	–0.0256	0.0708	0.0082	0.1877	–2.4510	–0.0005	–0.0397
JAEN	0.0378	0.0734	0.1524	0.0942	–1.2823	–0.0010	–0.0181
MALAGA	–0.0025	0.0671	–0.0398	0.0617	–0.7456	–0.0008	–0.1051
SEVILLA	0.0059	0.0594	–0.0105	0.0997	–0.5248	–0.0002	0.0468
HUESCA	0.0138	–0.0616	–0.0013	–0.0300	–1.9673	–0.0010	–0.4078
TERUEL	0.0904	–0.0592	0.0579	–0.0414	–1.7696	–0.0008	–0.4256
ZARAGOZA	–0.0450	–0.0350	–0.0340	–0.0355	0.6255	0.0001	–0.3313
ASTURIAS	0.0599	–0.0184	–0.0168	–0.0185	0.5581	–0.0004	–0.1168
ILLES BALEARS	–0.0159	–0.0128	–0.0398	–0.0033	–1.1640	–0.0004	–0.2505
LAS PALMAS	–0.0479	0.0682	–0.0349	0.0565	–0.8650	0.0000	0.0090
SANTA CRUZ DE TENERIFE	–0.0740	0.0469	–0.0268	0.0523	–1.0567	–0.0003	0.0172
CANTABRIA	0.0009	–0.0396	–0.0171	–0.0321	0.0364	–0.0004	–0.1808
AVILA	–0.1109	0.0036	0.1450	–0.0120	–2.4403	–0.0012	0.0710
BURGOS	0.0685	–0.0400	–0.0141	–0.0599	–0.4829	–0.0001	0.0105
LEON	–0.0226	–0.0167	0.0074	–0.0229	–0.6166	–0.0010	–0.1287
PALENCIA	0.1060	–0.0307	0.0070	–0.0552	–1.2430	–0.0006	–0.1260
SALAMANCA	0.0079	–0.0132	0.0365	–0.0260	–1.9131	–0.0009	–0.1264
SEGOVIA	0.0425	–0.0445	–0.0300	–0.0474	–2.6397	–0.0009	–0.0417
SORIA	0.0364	–0.0647	–0.0183	–0.0622	–2.4441	–0.0006	0.0631
VALLADOLID	0.0287	–0.0293	0.0131	–0.0296	0.1799	–0.0002	–0.0310
ZAMORA	–0.0164	–0.0067	0.3171	–0.0001	–2.7065	–0.0013	–0.1014
ALBACETE	–0.0105	0.0239	0.0635	0.0158	–1.3802	–0.0009	–0.1099
CIUDAD REAL	0.0180	0.0287	1.4123	0.0313	–2.0382	–0.0011	–0.0253
CUENCA	0.0355	–0.0104	0.2768	–0.0016	–2.7461	–0.0012	0.0532
GUADALAJARA	–0.0221	–0.0247	0.0173	–0.0453	–2.3618	–0.0004	–0.0141
TOLEDO	–0.0784	0.0195	0.1394	0.0290	–1.4898	–0.0010	–0.0018
BARCELONA	–0.0314	–0.0210	–0.0398	–0.0822	2.0148	0.0006	0.2197
GIRONA	0.0312	–0.0114	–0.0398	–0.0461	–0.6995	–0.0006	0.0870
LLEIDA	0.0426	–0.0583	–0.0378	–0.0818	–1.6490	–0.0008	0.1113
TARRAGONA	0.0388	–0.0122	–0.0398	–0.0108	–0.8174	–0.0004	0.0428
ALICANTE	–0.0915	0.0230	–0.0379	0.0601	–0.0219	–0.0010	–0.0450
CASTELLON	0.0361	0.0104	–0.0379	0.0072	–0.0495	0.0006	0.0519
VALENCIA	–0.0322	0.0102	–0.0021	0.0143	0.9955	0.0000	–0.0730
BADAJOZ	0.0351	0.0639	0.0258	0.1115	–1.5900	–0.0009	–0.0961
CACERES	0.0551	0.0350	0.0244	0.0670	–2.0785	–0.0011	0.1215
A CORUÑA	–0.0189	–0.0285	0.0163	–0.0031	–0.1954	–0.0002	0.0172
LUGO	0.0170	–0.0549	0.0226	–0.0118	–1.9468	–0.0011	–0.0427
OURENSE	–0.0377	–0.0228	–0.0017	–0.0188	–1.9869	–0.0008	–0.0868
PONTEVEDRA	0.0148	–0.0013	–0.0015	0.0235	0.1738	–0.0005	0.0079
MADRID	0.0421	–0.0391	–0.0398	–0.0663	1.4811	0.0018	0.0787
MURCIA	0.0015	0.0148	–0.0145	0.0802	–0.6336	–0.0001	–0.0656
NAVARRA	0.0138	–0.0608	0.0626	–0.0328	0.6025	0.0010	0.0541
ARABA/ALAVA	0.0759	–0.0559	–0.0044	–0.0537	–0.0310	0.0006	0.0205
GIPUZKOA	0.0417	–0.0756	0.1014	–0.0405	0.3829	0.0000	0.0660
BIZKAIA	0.0111	–0.0425	–0.0398	–0.0265	0.6434	0.0007	–0.0242
LA RIOJA	–0.0189	–0.0416	–0.0177	–0.0561	–1.0135	–0.0009	0.0848

Source: Authors' own elaboration.

a Unemployment rate (national value) shows the average rate of unemployment for the full period. Provincial values represent differences from that national average.

Table 4

Determinants of settlementsa

	1	2	3	4	5	6b
2010 reform	–0.107*** (0.0188)	0.0118 (0.0128)	0.0148 (0.0209)	0.0211 (0.0127)	–0.139*** (0.0372)	–0.129*** (0.0447)
2012 reform	0.208*** (0.0163)	0.118*** (0.0172)	0.261*** (0.0172)	0.124*** (0.0183)	0.244*** (0.0588)	0.201*** (0.0463)
Unemployment rate			–1.274*** (0.132)	–0.467*** (0.166)	–0.849*** (0.156)	–0.696*** (0.156)
2010 reform*Unemployment rate					0.840*** (0.168)	0.777*** (0.183)
2012 reform*Unemployment rate					–0.532** (0.222)	–0.375* (0.196)
Profitability			0.0106 (0.0157)	0.439*** (0.0956)	0.466*** (0.0893)	0.475*** (0.0886)
2010 reform*Profitability					–0.107 (0.132)	–0.135 (0.153)
2012 reform*Profitability					–0.699*** (0.197)	–0.625*** (0.155)
Province fixed effects	YES	YES	YES	YES	YES	YES
Other controlsc	NO	YES	NO	YES	YES	YES
Observations	13,880	10,976	13,880	10,976	10,976	8,192
R-squared	0.201	0.521	0.340	0.543	0.573	0.535
# labor courts	347	343	347	343	343	256

a Robust standard errors (clustered by provinces) in parenthesis.

b In column (6), Madrid and Barcelona are excluded.

*** p < 0.01

* p < 0.1.

*** p < 0.01

* p < 0.1.

** p < 0.05

* p < 0.1.

*** p < 0.01

* p < 0.1.

*** p < 0.01

c Other controls include: temporary employment rate, sectoral distribution of employment, logarithm of the number of workers affected by collective dismissals, proportion of companies with more than 200 employees, proportion of dismissal lawsuits analyzed by professional judges, days of temporary positions at the labor courts per year, and judicial congestion rate.

Table 5

Determinants of labor court rulings declaring dismissals/layoffs as faira

	1	2	3	4	5	6b
2010 reform 2012 reform	–0.0012 (0.00598) –0.0339*** (0.00526)	0.0376*** (0.00807) –0.0065 (0.00605)	0.0426*** (0.00479) –0.0088 (0.00590)	0.0385*** (0.0080) 0.00003 (0.0065)	0.0120 (0.0197) 0.00126 (0.0214)	0.0288 (0.0187) 0.00138 (0.0278)
Unemployment rate			–0.467*** (0.0800)	–0.304** (0.128)	–0.386*** (0.133)	–0.312** (0.134)
2010 reform*Unemployment rate					0.137 (0.0836)	0.0680 (0.0776)
2012 reform*Unemployment rate Profitability			–0.0036*** (0.0009)	–0.0530 (0.0570)	–0.0102 (0.0892) –0.0181 (0.0550)	–0.0161 (0.104) –0.0181 (0.0550)
2010 reform*Profitability					–0.177** (0.0817)	–0.234***
						(0.0813)
2012 reform*Profitability					–0.0317 (0.150)	–0.0250 (0.151)
Province fixed effects	YES	YES	YES	YES	YES	YES
Other controlsc	NO	YES	NO	YES	YES	YES
Observations	14.181	10.202	12.825	10.202	10.202	7.586
R-squared	0.017	0.055	0.036	0.058	0.060	0.056
# labor courts	343	339	343	339	339	255

a Robust standard errors (clustered by province) in parenthesis.

b In column (6), Madrid and Barcelona are excluded.

*** p < 0.01

** p < 0.05

*** p < 0.01

** p < 0.05

* p < 0.1. Clustered by province.

*** p < 0.01

* p < 0.1. Clustered by province.

** p < 0.05

*** p < 0.01

* p < 0.1. Clustered by province.

Proportion of economic dismissals over all dismissals.
*Source*: Spanish Ministry of Employment.

Percentage of labor court judgments ruling that the dismissal is fair.
*Source*: Authors’ own elaboration based on data provided by the CGPJ.

Marginal effect of reforms, unemployment, and profitability on labor court rulings declaring dismissals/layoffs as fair.

Table A1

Severance payments in the theoretical model

	FEP	WEG
Economic Truthful dismissals	$X_{e}^{r} (π, μ) C^{f} + [1 - X_{e}^{r} (π, μ)] C^{u} + τ^{r}$	$X_{w}^{r} (μ) C^{f} + [1 - X_{w}^{r} (μ)] C^{u}$
Disguised as disciplinary	$c^{u} + τ^{d}$	$c^{u}$
Disciplinary layoffs
Truthful	$[1 - X_{e}^{d} (μ)] c^{u} + τ^{d}$	$[1 - X_{w}^{d} (μ)] c^{u}$
Disguised as economic	$c^{u} + τ^{r}$	$c^{u}$

[i] FEP, firms expects to pay; WEG, worker expects to get.

Table A2

Dismissals: initiation, settlements and effective firing costs

	Truthful dismissals		Disguised
	Economic	Disciplinary	As economic
Initiated	$1 + β^{r} (π, μ) δ^{r} >$	Always	$1 + β^{r} (π, μ) δ^{r} \leq$
	$> \frac{τ^{r} - r^{d}}{(c^{u} - c^{f}) X_{e}^{r} (π, μ)}$		$\leq \frac{τ^{r} - τ^{d}}{(c^{u} - c^{f}) X_{e}^{r} (π, μ)}$
Settlement	$X_{e}^{r} (μ) < X_{w}^{r} (μ)$	$X_{e}^{d} (μ) < X_{w}^{d} (μ)$	Always
Effective firing costs			$c^{u} + τ^{d}$
If settled	$X_{w}^{r} (μ) c^{f} + [1 - X_{w}^{r} (μ)] c^{u} + τ^{r}$	$[1 - X_{w}^{d} (μ)] c^{u} + τ^{d}$
At labor court	$X_{e}^{r} (π, μ) c^{f} + [1 - X_{e}^{r} (π, μ)] c^{u} + τ^{r}$	$[1 - X_{e}^{d} (μ)] c^{u} + τ^{d}$

Table A3

Effects of EPL reforms

	Economic	dismissals	Disciplinary	Settlements	Firing costs	Fair ruling
	Truthful	Disguised
Severance payments/
court costs
Fair dismissals ↓	↑	↓	unchanged	unchanged	↓	↑
Unfair dismissals ↓	↓	↑	unchanged	unchanged	↓	↓
Cause of economic dismissals ↑	↑	↓	unchanged	↓	↓	↑
Downturns
Firm profitability ↓	↑	↓	unchanged	↓	↓	↑
Local labor market conditions	↓	↑	↓	unchanged	↑	↓
↓

[i] EPL, employment protection legislation.

Proportion of magistrates belonging to professional associations.

References

Authors

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Articles in this issue

DOI: https://doi.org/10.2478/izajole-2020-0002 | Journal eISSN: 2193-8997

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Language: English

Published on: Mar 30, 2020

Published by: Sciendo

In partnership with: Paradigm Publishing Services

Keywords:

employment protection legislation,

firing costs,

unemployment,

labor courts

JEL:

J52,

J53,

K31,

K41

Related subjects:

Business and economics,

Mathematics and statistics for economists,

Econometrics

© 2020 Juan F. Jimeno, Marta Martínez-Matute, Juan S. Mora-Sanguinetti, published by Sciendo
This work is licensed under the Creative Commons Attribution 4.0 License.

Volume 9 (2020): Issue 1 (March 2020)

Employment protection legislation, labor courts, and effective firing costs

Figures & Tables

Figure 1

Table 1

Table 2

Table 3

Table 4

Table 5

Figure 2

Figure 3

Figure 4

Table A1

Table A2

Table A3

Figure A1

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