Employing Workers Methodology

Doing Business measures the regulation of employment, specifically as it affects the hiring and redundancy of workers and the rigidity of working hours. In 2007 improvements were made to align the methodology for the employing workers indicators with the relevant International Labour Organization (ILO) conventions. In Doing Business 2010, additional changes to the methodology of this indicator were made as detailed below. In addition, a Consultative Group including representatives from the ILO (as the international standard setting body) was formed to serve as an important source of advice on revising this indicator and on the establishment of a new worker protection indicator. In this context, the employing workers indicators were removed as a guidepost to the World Bank Country Policy and Institutional Assessment questionnaire (CPIA) and are not to be used as a basis for policy advice.

This year further changes were made to the methodology for the employing workers indicators. First, the standardized case study was changed to refer to a small to medium-size company with 60 employees rather than 201. Second, restrictions on night and weekly holiday work are taken into account if they apply to manufacturing activities in which continuous operation is economically necessary. Third, legally mandated wage premiums for work performed on the designated weekly holiday or for night work are scored on the basis of a 4-tiered scale. Fourth, economies that mandate 8 or fewer weeks of severance pay and do not offer unemployment protection do not receive a better score. Finally, the calculation of the minimum wage ratio was modified to ensure that an economy would not benefit in the scoring from lowering the minimum wage to below $1.25 a day, adjusted for purchasing power parity. This level is consistent with recent adjustments to the absolute poverty line.
 
Note: In April 2009, the World Bank released the following note on revisions to the Employing Workers Indicator. This was followed up with a guidance note to staff.

Only 4 of the 188 ILO conventions cover areas measured by Doing Business: employee termination, weekend work, holiday with pay and night work. The Doing Business methodology is fully consistent with these 4 conventions. It is possible for an economy to receive the best score on the ease of employing workers and comply with all relevant ILO conventions (specifically, the 4 related to Doing Business)—and no economy can achieve a better score by failing to comply with these conventions.

The ILO conventions covering areas related to the employing workers 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.

In the past year Doing Business conducted research on implementation (by adoption in national law) of 2 ILO conventions on child labor. This year’s report includes preliminary findings for 102 countries (see annex on worker protection). Doing Business does not measure or rank ratification or compliance with ILO conventions.

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 economies, 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 economy’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 economy’s population.
  • Resides in the economy’s largest business 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 economy’s largest business city. 
  • Is 100% domestically owned.
  • Operates in the manufacturing sector. 
  • Has 60 employees.
  • Is subject to collective bargaining agreements in economies 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 redundancy 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 fixedterm contracts; and (iii) the ratio of the minimum wage for a trainee or first-time employee to the average value added per worker.4 An economy 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 Benin, for example, fixed-term contracts are not prohibited for permanent tasks (a score of 0), 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 0.59 (a score of 0.67). Averaging the 3 values and scaling the index to 100 gives Benin a score of 39.

The rigidity of hours index has 5 components: (i) whether there are restrictions on night work; (ii) whether there are restrictions on weekly holiday work;(iii) whether the workweek can consist of 5.5 days; (iv) whether the workweek can extend to 50 hours or more (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 questions (i) and (ii), when restrictions other than premiums apply, a score of 1 is given. If the only restriction is a premium for night work and weekly holiday work, a score of 0, 0.33, 0.66 or 1 is given according to the quartile in which the economy’s premium falls. If there are no restrictions, the economy receives a score of 0. For questions (iii), (iv) and (v), when the answer is no, a score of 1 is assigned; otherwise a score of 0 is assigned.

For example, Honduras imposes restrictions on night work (a score of 1) but not on weekly holiday work (a score of 0), 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 20 for Honduras.

The difficulty of redundancy 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 9 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 9 redundant workers; (vi) whether the law requires the employer to reassign or retrain a worker before making the worker redundant; (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 9 redundant workers. The law mandates 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.

Redundancy cost

The redundancy cost indicator measures the cost of advance notice requirements, severance payments and penalties due when terminating a redundant worker, expressed in weeks of salary. If the redundancy cost adds up to 8 or fewer weeks of salary and the worker can benefit from unemployment protection, a score of 0 is assigned for the purposes of calculating the aggregate ease of doing business ranking. If the redundancy cost adds up to 8 or fewer weeks of salary and the worker cannot benefit from any type of unemployment protection, a score of 8.1 weeks is assigned for the purpose of calculating the aggregate ease of doing business. 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 Mauritania, for example, an employer is required to give 1 month’s notice before a redundancy termination, and the severance pay for a worker with 20 years of service equals 6.25 months of wages. No penalty is levied. Altogether, the employer pays the equivalent of 31.4 weeks of salary to dismiss the worker.

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