Employment regulations are necessary for the proper functioning of labor markets. They are needed to protect workers from arbitrary or unfair treatment and to ensure efficient contracting between employers and workers. Labor market regulations can help correct market imperfections, support social cohesion and encourage economic efficiency.
Labor market regulations cover a wide spectrum, from rules governing arrangements for individual contracts to mechanisms for collective action. Evidence from global studies shows that labor market regulation can potentially have an impact on informality, aggregate job flows and the speed of adjustment to shocks. The challenge for governments is to avoid the extremes of over- and under-regulation by balancing labor flexibility with worker protection (1).
Doing Business measures several aspects of labor market regulation - hiring, working hours, redundancy rules and cost as well as a number of job quality aspects (such as the availability of unemployment protection, maternity leave and gender non-discrimination at the workplace).
1- World Bank. 2012. World Development Report 2013: Jobs. Washington, DC: World Bank.