Employment protection and entrepreneurship: Unpacking the effects of employment protection legislation on the allocation of entrepreneurial activity in society

Abstract

Labor market institutions enable and constrain particular behaviors on the labor market and beyond. We take a closer look on employment protection legislation (EPL), and its unintended effects on entrepreneurial activity. We unpack the effects of EPL by disentangling the two mechanisms of the severance pay and notice period, and analyze the effects of these mechanisms on the allocation of entrepreneurial activity across employment and self-employment. This study uses multilevel analyses to examine the separate effect of the two main elements of EPL on an individual’s occupational status. In general, the severance pay is found to be negatively related to entrepreneurial employees, whereas the notice period shows a positive relationship. The opposite is true for the effects on self-employed individuals.