Employing Workers


Doing Business measures the regulation of employment, spe­cifically as it affects the hiring and firing of workers and the rigidity of working hours. The data on employing workers are based on a detailed survey of employment regulations that is completed by local lawyers and public officials. Employ­ment laws and regulations as well as secondary sources are reviewed to ensure accuracy.

To make the data comparable across countries, several as­sumptions about the worker and the business are used.

Assumptions about the worker

The worker:

  • Is a 42-year-old, nonexecutive, full-time, male employee.
  • Has worked at the same company for 20 years.
  • Earns a salary plus benefits equal to the country’s average wage during the entire period of his employment.
  • Is a lawful citizen who belongs to the same race and religion as the majority of the country’s population.
  • Resides in the country’s most populous city.
  • Is not a member of a labor union, unless membership is mandatory.

Assumptions about the business

The business:

  • Is a limited liability company.
  • Operates in the country’s most populous city.
  • Is 100% domestically owned.
  • Operates in the manufacturing sector.
  • Has 201 employees.
  • Is subject to collective bargaining agreements in countries where such agreements cover more than half the manufac­turing sector and apply even to firms not party to them.
  • Abides by every law and regulation but does not grant workers more benefits than mandated by law, regulation or (if applicable) collective bargaining agreement.

Rigidity of employment index

The rigidity of employment index is the average of 3 subindices: a difficulty of hiring index, a rigidity of hours index and a difficulty of firing index. All the subindices have several components. And all take values between 0 and 100, with higher values indicating more rigid regulation.

The difficulty of hiring index measures (i) whether fixed-term contracts are prohibited for permanent tasks; (ii) the maximum cumulative duration of fixed-term contracts; and (iii) the ratio of the minimum wage for a trainee or first-time employee to the average value added per worker. A country is assigned a score of 1 if fixed-term contracts are prohibited for permanent tasks and a score of 0 if they can be used for any task. A score of 1 is assigned if the maximum cumulative duration of fixed-term contracts is less than 3 years; 0.5 if it is 3 years or more but less than 5 years; and 0 if fixed-term contracts can last 5 years or more. Finally, a score of 1 is assigned if the ratio of the minimum wage to the average value added per worker is 0.75 or more; 0.67 for a ratio of 0.50 or more but less than 0.75; 0.33 for a ratio of 0.25 or more but less than 0.50; and 0 for a ratio of less than 0.25. In the Central African Republic, for example, fixed-term contracts are prohibited for permanent tasks (a score of 1), and they can be used for a maximum of 4 years (a score of 0.5). The ratio of the man­dated minimum wage to the value added per worker is 0.64 (a score of 0.67). Averaging the 3 values and scaling the index to 100 gives the Central African Republic a score of 72.

The rigidity of hours index has 5 components: (i) whether night work is unrestricted; (ii) whether weekend work is un­restricted; (iii) whether the workweek can consist of 5.5 days; (iv) whether the workweek can extend to 50 hours (in­cluding overtime) for 2 months a year to respond to a seasonal increase in production; and (v) whether paid annual vacation is 21 working days or fewer. For each of these questions, if the answer is no, the country is assigned a score of 1; otherwise a score of 0 is assigned. For example, Serbia imposes restrictions on night work (a score of 1) and weekend work (a score of 1), allows 6-day workweeks (a score of 0), permits 50-hour work­weeks for 2 months (a score of 0) and requires paid vacation of 20 working days (a score of 0). Averaging the scores and scal­ing the result to 100 gives a final index of 40 for Serbia.

The difficulty of firing index has 8 components: (i) whether redundancy is disallowed as a basis for terminating workers; (ii) whether the employer needs to notify a third party (such as a government agency) to terminate 1 redundant worker; (iii) whether the employer needs to notify a third party to terminate a group of 25 redundant workers; (iv) whether the employer needs approval from a third party to terminate 1 redundant worker; (v) whether the employer needs ap­proval from a third party to terminate a group of 25 redun­dant workers; (vi) whether the law requires the employer to consider reassignment or retraining options before redun­dancy termination; (vii) whether priority rules apply for re­dundancies; and (viii) whether priority rules apply for reem­ployment. For the first question an answer of yes for workers of any income level gives a score of 10 and means that the rest of the questions do not apply. An answer of yes to question (iv) gives a score of 2. For every other question, if the answer is yes, a score of 1 is assigned; otherwise a score of 0 is given. Questions (i) and (iv), as the most restrictive regulations, have greater weight in the construction of the index.

In Tunisia, for example, redundancy is allowed as grounds for termination (a score of 0). An employer has to both notify a third party (a score of 1) and obtain its approval (a score of 2) to terminate a single redundant worker, and has to both notify a third party (a score of 1) and obtain its approval (a score of 1) to terminate a group of 25 redundant workers. The law mandates consideration of retraining or alternative place­ment before termination (a score of 1). There are priority rules for termination (a score of 1) and reemployment (a score of 1). Adding the scores and scaling to 100 gives a final index of 80.

Nonwage labor cost

The nonwage labor cost indicator measures all social security payments (including retirement fund; sickness, maternity and health insurance; workplace injury; family allowance; and other obligatory contributions) and payroll taxes associated with hiring an employee in fiscal 2006. The cost is expressed as a percentage of the worker’s salary. In Honduras, for example, the taxes paid by the employer amount to 9.5% of the worker’s wages and include 7% for social security, 1% for professional training and 1.5% for the pension contribution.

Firing cost

The firing cost indicator measures the cost of advance notice requirements, severance payments and penalties due when terminating a redundant worker, expressed in weekly wages. If the firing cost adds up to 8 or fewer weeks of salary, a score of 0 is assigned for the purposes of calculating the aggregate ease of doing business ranking. If the cost adds up to more than 8 weeks of salary, the score is the number of weeks. One month is recorded as 4 and 1/3 weeks. In Mozambique, for example, an employer is required to give 90 days’ notice before a redundancy termination, and the severance pay for a worker with 20 years of service equals 30 months of wages. No penalty is levied. Altogether, the employer pays the equiv­alent of 143 weeks of salary to dismiss the worker.

This methodology was developed in Botero and others (2004) and is adopted here with minor changes.