Employment protection legislation, labor courts, and effective firing costs

Juan F. Jimeno; Marta Martínez-Matute; Juan S. Mora-Sanguinetti

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Employment protection legislation, labor courts, and effective firing costs

Juan F. Jimeno

Marta Martínez-Matute

and

Juan S. Mora-Sanguinetti

| Mar 30, 2020

IZA Journal of Labor Economics

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

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DOI: https://doi.org/10.2478/izajole-2020-0002

Keywords
employment protection legislation, firing costs, unemployment, labor courts

© 2020 Juan F. Jimeno, Marta Martínez-Matute, and Juan S. Mora-Sanguinetti, published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Layoff procedure in the Spanish labor jurisdiction.Source: Authors’ own elaboration.Notes:a. Out-of-court settlements are resolved in Spain by the “MAC” units (“Mediation, Arbitration and Conciliation Units”). The majority of out-of-court settlements resolved with an agreement between the employer and the employee end up with the effective firing of the employee. Settlements ended without an agreement are the main group of dismissal conflicts which arrive to the labor courts. Following the data of the Ministry of Employment and Social Security, there was a total of 220,095 out-of-court settlements in 2014, of which 101,426 ended with agreement between the employer and the employee.b. In 2014, the number of dismissals resolved at the labor court was 118,225. This amount is calculated by adding the number of pre-trial settlements with agreement, the dismissals finally ruled by a labor court, and the number of cases withdrawn (including tacit withdrawals and voluntary dismissal of action by the parties).c. The number of pre-trial layoff settlements in 2014 was 48,508.d. In 2014, the number of dismissals resolved at the trial level in the labor courts was 42,992, of which a 78% were dismissals ruled as “unfair” (in favor of the employee).e. In 2014, 26,725 dismissals were withdrawn (thus, they were not resolved by a judge in a trial) as a result of formal failures, tacit withdrawals, and voluntary dismissal of action by the parties.

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.

Proportion of magistrates belonging to professional associations.

Dismissals: initiation, settlements and effective firing costs

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

Main descriptive statistics by province

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

Determinants of settlementsRobust standard errors (clustered by provinces) in parenthesis.

	1	2	3	4	5	6 In column (6), Madrid and Barcelona are excluded.
2010 reform	–0.107 p < 0.01 (0.0188)	0.0118 (0.0128)	0.0148 (0.0209)	0.0211 (0.0127)	–0.139 p < 0.01 (0.0372)	–0.129 p < 0.01 (0.0447)
2012 reform	0.208 p < 0.01 (0.0163)	0.118 p < 0.01 (0.0172)	0.261 p < 0.01 (0.0172)	0.124 p < 0.01 (0.0183)	0.244 p < 0.01 (0.0588)	0.201 p < 0.01 (0.0463)
Unemployment rate			–1.274 p < 0.01 (0.132)	–0.467 p < 0.01 (0.166)	–0.849 p < 0.01 (0.156)	–0.696 p < 0.01 (0.156)
2010 reform p < 0.1. Unemployment rate					0.840 p < 0.01 (0.168)	0.777 p < 0.01 (0.183)
2012 reform p < 0.1. Unemployment rate					–0.532 p < 0.05 (0.222)	–0.375 p < 0.1. (0.196)
Profitability			0.0106 (0.0157)	0.439 p < 0.01 (0.0956)	0.466 p < 0.01 (0.0893)	0.475 p < 0.01 (0.0886)
2010 reform p < 0.1. Profitability					–0.107 (0.132)	–0.135 (0.153)
2012 reform p < 0.1. Profitability					–0.699 p < 0.01 (0.197)	–0.625 p < 0.01 (0.155)
Province fixed effects	YES	YES	YES	YES	YES	YES
Other controls 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.	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

Determinants of labor court rulings declaring dismissals/layoffs as fairRobust standard errors (clustered by province) in parenthesis.

	1	2	3	4	5	6 In column (6), Madrid and Barcelona are excluded.
2010 reform 2012 reform	–0.0012 (0.00598) –0.0339 p < 0.01 (0.00526)	0.0376 p < 0.01 (0.00807) –0.0065 (0.00605)	0.0426 p < 0.01 (0.00479) –0.0088 (0.00590)	0.0385 p < 0.01 (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 p < 0.01 (0.0800)	–0.304 p < 0.05 (0.128)	–0.386 p < 0.01 (0.133)	–0.312 p < 0.05 (0.134)
2010 reform p < 0.1. Clustered by province. Unemployment rate					0.137 (0.0836)	0.0680 (0.0776)
2012 reform p < 0.1. Clustered by province. Unemployment rate Profitability			–0.0036 p < 0.01 (0.0009)	–0.0530 (0.0570)	–0.0102 (0.0892) –0.0181 (0.0550)	–0.0161 (0.104) –0.0181 (0.0550)
2010 reform p < 0.1. Clustered by province. Profitability					–0.177 p < 0.05 (0.0817)	–0.234 p < 0.01
						(0.0813)
2012 reform p < 0.1. Clustered by province. Profitability					–0.0317 (0.150)	–0.0250 (0.151)
Province fixed effects	YES	YES	YES	YES	YES	YES
Other controls 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.	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

Severance payments in the theoretical model

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

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	↑	↓
↓

Definitions of variables and sources of data

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

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

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Employment protection legislation, labor courts, and effective firing costs

Published Online: Mar 30, 2020

Page range: -

DOI: https://doi.org/10.2478/izajole-2020-0002

Keywords
employment protection legislation, firing costs, unemployment, labor courts

© 2020 Juan F. Jimeno, Marta Martínez-Matute, and Juan S. Mora-Sanguinetti, published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Figure 1

Figure 2

Figure 3

Figure 4

Figure A1

Dismissals: initiation, settlements and effective firing costs

Main descriptive statistics by province

Determinants of settlementsRobust standard errors (clustered by provinces) in parenthesis.

Determinants of labor court rulings declaring dismissals/layoffs as fairRobust standard errors (clustered by province) in parenthesis.

Severance payments in the theoretical model

Effects of EPL reforms

Definitions of variables and sources of data

Descriptive statistics

Employment protection legislation, labor courts, and effective firing costs

Published Online: Mar 30, 2020

Page range: -

DOI: https://doi.org/10.2478/izajole-2020-0002

Keywordsemployment protection legislation, firing costs, unemployment, labor courts

© 2020 Juan F. Jimeno, Marta Martínez-Matute, and Juan S. Mora-Sanguinetti, published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Figure 1

Figure 2

Figure 3

Figure 4

Figure A1

Dismissals: initiation, settlements and effective firing costs

Main descriptive statistics by province

Determinants of settlementsRobust standard errors (clustered by provinces) in parenthesis.

Determinants of labor court rulings declaring dismissals/layoffs as fairRobust standard errors (clustered by province) in parenthesis.

Severance payments in the theoretical model

Effects of EPL reforms

Definitions of variables and sources of data

Descriptive statistics

Keywords
employment protection legislation, firing costs, unemployment, labor courts