Labor Market Regulation Methodology
Figure 1 - How flexible are hiring, work scheduling and redundancy rules?
Doing Business measures flexibility in the regulation of employment, specifically as it affects the hiring and redundancy of workers and the rigidity of working hours (figure 1). This year, for the first time, the indicators measuring flexibility in labor market regulations focus on those affecting the food retail industry, using a standardized case study of a cashier in a supermarket. Also new is that Doing Business collects data on regulations applying to employees hired through temporary-work agencies as well as on those applying to permanent employees or employees hired on fixed-term contracts. The indicators also cover additional areas of labor market regulation, including social protection schemes and benefits as well as labor disputes.
Over the period from 2007 to 2011 improvements were made to align the methodology for the labor market regulation indicators (formerly the employing worker indicators) with the letter and spirit of the International Labour Organization (ILO) conventions. Only 6 of the 188 ILO conventions cover areas measured by Doing Business: employee termination, weekend work, holiday with pay and night work, protection against unemployment and medical care and sickness benefits. The Doing Business methodology is fully consistent with these 6 conventions. The ILO conventions covering areas related to the labor market regulation indicators do not include the ILO core labor standards—8 conventions covering the right to collective bargaining, the elimination of forced labor, the abolition of child labor and equitable treatment in employment practices.
Between 2009 and 2011 the World Bank Group worked with a consultative group—including labor lawyers, employer and employee representatives, and experts from the ILO, the Organisation for Economic Co-operation and Development (OECD), civil society and the private sector—to review the methodology for the labor market regulation indicators and explore future areas of research (1). A full report with the conclusions of the consultative group, along with the methodology it proposed, is available on Doing Business website.
Doing Business 2015 presents the data for the labor market regulation indicators in an annex. The report does not present rankings of economies on these indicators or include the topic in the aggregate distance to frontier score or ranking on the ease of doing business. Detailed data collected on labor market regulations are available on the Doing Business website. The data on labor market regulations are based on a detailed questionnaire on 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 economies, several assumptions about the worker and the business are used.
Assumptions about the worker
- Is a cashier in a supermarket or grocery store.
- Is a full-time employee.
- Is not a member of the labor union, unless membership is mandatory.
Assumptions about the business
- Is a limited liability company (or the equivalent in the economy).
- Operates a supermarket or grocery store in the economy’s largest business city. For 11 economies the data are also collected for the second largest business city.
- Has 60 employees.
- Is subject to collective bargaining agreements if such agreements cover more than 50% of the food retail sector and they apply even to firms that are not party to them.
- Abides by every law and regulation but does not grant workers more benefits than those mandated by law, regulation or (if applicable) collective bargaining agreements.
Rigidity of employment
Rigidity of employment covers 3 areas: difficulty of hiring, rigidity of hours and difficulty of redundancy (table 1).
Difficulty of hiring covers 4 areas: (i) whether fixed-term contracts are prohibited for permanent tasks; (ii) the maximum cumulative duration of fixed-term contracts; and (iii) the minimum wage for a cashier, age 19, with 1 year of work experience; and (iv) the ratio of minimum wage to the average value added per worker (2).
Table 1 - What do the labor market regulation indicators include?
Rigidity of hours covers 7 areas: (i) whether the workweek can extend to 50 hours or more (including overtime) for 2 months in a year to respond to a seasonal increase in workload; (ii) the maximum number of days allowed in the workweek; (iii) the premium for night work (% of hourly pay); (iv) the premium for work on a weekly rest day (% of hourly pay); (v) whether there are restrictions on night work; (vi) whether there are restrictions on weekly holiday work; and (vii) whether the average paid annual leave for workers with 1 year of tenure, 5 years of tenure and 10 years of tenure.
Difficulty of redundancy looks at 9 questions: (i) what is the length in months of the maximum probationary period; (ii) whether redundancy is disallowed as a basis for terminating workers; (iii) whether the employer needs to notify a third party (such as a government agency) to terminate 1 redundant worker; (iv) whether the employer needs to notify a third party to terminate a group of 9 redundant workers; (v) whether the employer needs approval from a third party to terminate 1 redundant worker; (vi) whether the employer needs approval from a third party to terminate a group of 9 redundant workers; (vii) whether the law requires the employer to reassign or retrain a worker before making the worker redundant; (viii) whether priority rules apply for redundancies; and (ix) whether priority rules apply for reemployment.
Redundancy cost measures the cost of advance notice requirements, severance payments and penalties due when terminating a redundant worker, expressed in weeks of salary. The average value of notice requirements and severance payments applicable to a worker with 1 year of tenure, a worker with 5 years and a worker with 10 years is considered. One month is recorded as 4 and 1/3 weeks.
Social protection schemes and benefits
Doing Business collects data on the existence of unemployment protection schemes as well as data on whether employers are legally required to provide health insurance for employees with permanent contracts.
Doing Business assesses the mechanisms available to resolve labor disputes. More specifically, it collects data on what courts would be competent to hear labor disputes and whether the competent courts are specialized in resolving labor disputes.
The methodology was developed by Doing Business 2015 does not present rankings of economies on the indicators.
1 -For the terms of reference and composition of the consultative group, see World Bank, “Doing Business Employing Workers Indicator Consultative Group,” http://www.doingbusiness.org.
2- The average value added per worker is the ratio of an economy’s GNI per capita to the working-age population as a percentage of the total population.