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Table 11 Fraser Economic Freedom of the World: labour market regulation components and methodology

From: Composite indicators of labour market regulations in a comparative perspective

Year of the report issue

2001

2002–2006

2007–2009

2010–2012

Latest year of the reported data

2000

2000–2004

2005–2007

2008–2010

Number of countries

58

123–130

141

141–144

Components

1) Minimum wages

2) Hiring and Firing

3) Collective bargaining

4) Unemployment Benefits

5) Conscription

6) Top marginal tax rate

1) Minimum wages*

2) Hiring and Firing

3) Collective bargaining*

4) Unemployment Benefits*

5) Conscription*

1) Minimum wages

2) Hiring and Firing

3) Collective bargaining

4) Mandated cost of hiring*

5) Mandated cost of worker dismissal*

6) Conscription

1) Hiring regulations and minimum wages*

2) Hiring and Firing

3) Collective bargaining

4) Hours Regulations*

5) Mandated cost of worker dismissal

6) Conscription

Aggregation methodology: LM index

Simple average; reported for components 1–6 (labour market regulations) and for components 1–4 (Labour market flexibility)

Simple average of components 1–5

Simple average of components 1–6

Simple average of components 1–6

Aggregation methodology: overall index

Simple average of 7 topical areas, labour market regulations being one of them

Simple average of 5 topical areas, divided into 21 subcomponents, labour market regulations being one of them. These are further divided into 38 components.

Simple average of 5 topical areas, divided into 23 subcomponents, labour market regulations being one of them. These are further divided into 42 components.

Simple average of 5 topical areas, divided into 23 subcomponents (24 in 2012), labour market regulations being one of them. These are further divided into 42 components.

  1. Variables in italics and with asterisks are those for which definitions changed in a reported period
  2. Variables’ definitions and sources, 2001
  3. Minimum wages: survey question: “The minimum wage, set by law, has little impact on wages because it is too low or not obeyed”. Answers: 1 = strongly disagree, 7 = strongly agree. Source: Global Competitiveness Report 2000, World Economic Forum (2000)
  4. Hiring and Firing: survey question: “Hiring and firing of workers is … 1=impeded by regulations, 7=flexibly determined by employers”. Source: Global Competitiveness Report 2000, World Economic Forum (2000). The wording of this question varied slightly over the years
  5. Collective bargaining: 2001–2005: “Share of labour force whose wages are set by centralized collective bargaining” This particular component was not presented in the GCR publication due to space constraints, but the data were provided directly by the World Economic Forum. From 2006 onwards: “Wages in your country are set by a centralized bargaining process (= 1) or up to each individual company (= 7).” World Economic Forum, Global Competitiveness Report (various issues)
  6. Unemployment Benefits: survey question: “The unemployment insurance program strikes a good balance between social protection and preserving work incentives”. Answers: 1 = strongly disagree, 7 = strongly agree. Source: Global Competitiveness Report 2000, World Economic Forum (2000)
  7. Conscription: Data on the use and duration of military conscription were used to construct rating intervals. Countries with longer conscription periods received lower ratings. A rating of 10 was signed to countries without military conscription. When the length of conscription was 6 months or less, countries were given a rating of 5. When the length of conscription was more than 6 months but not more than 12 months, countries were rated at 3. When the length of conscription was more than 12 months but not more than 18 months, countries were assigned a rating of 1. When conscription periods exceeded 18 months, countries were rated 0. Source: International Institute for Strategic Studies, The Military Balance (various issues)
  8. Top marginal tax rate: Countries with higher marginal tax rates that take effect at lower income thresholds received lower ratings based on the matrix below. The income threshold data were converted from local currency to 1982/1984 US dollars (using beginning-of-year exchange rates and the US Consumer Price Index). The figures included subnational rates if applicable. Source: Price Waterhouse, Individual Taxes: A Worldwide Summary (various issues)
  9. Variables’ definitions and sources, changes over time
  10. Minimum wages (from 2002 to 2005): survey question: “The minimum wage set by law in your country is… 1=never enforced; 7=strongly enforced”. Source: Global Competitiveness Reports, World Economic Forum (various issues)
  11. Minimum wages (from 2006 onwards): This component is based on the World Bank’s Ease of Doing Business data for the ratio of mandated minimum wage to the average value added per worker, a component that is part of the “Difficulty of Hiring Index”. Countries with higher mandated minimum wages relative to average value added per worker are given lower ratings. The formula used to calculate the 0-to-10 ratings for this component was as follows: (Vmax − Vi)/(Vmax − Vmin) multiplied by 10. Vi represents the minimum wage to average value added per worker ratio. The values for Vmax and Vmin were set at 79 % (1.5 standard deviations above average) and 0 %, respectively. Countries where the minimum wage was more than 79 % of the average value added per worker were given a rating of 0. Countries with no minimum wage were given a rating of 10. Source: World Bank, Doing Business (various issues)
  12. Unemployment Benefits (2004): based on two survey questions: (1) IMD survey question “Unemployment legislation”. Answers: 1 = does not provide an incentive to look for work; 6 = provide an incentive to look for work. Source: International Institute for Management Development (IMD), World Competitiveness Yearbook (various issues). (2) GCR survey question “The unemployment insurance program strikes a good balance between social protection and preserving work incentives”. Answers: 1 = strongly disagree; 7 = strongly agree. Source: Global Competitiveness Reports, World Economic Forum (various issues)
  13. Unemployment Benefits (2005, 2006): based on IMD survey question “Unemployment legislation”. Answers: 1 = does not provide an incentive to look for work; 6 = provide an incentive to look for work. Source: International Institute for Management Development (IMD), World Competitiveness Yearbook (various issues)
  14. Conscription (from 2006 onwards): source: International Institute for Strategic Studies, The Military Balance (various issues); War Resisters International, “Refusing to Bear Arms: A World Survey of Conscription and Conscientious Objection to Military Service,” <http://www.wri-irg.org/co/rtba/index.html>
  15. Mandated cost of hiring: This subcomponent is based on the World Bank’s Ease of Doing Business data on the cost of all social security and payroll taxes and the cost of other mandated benefits including those for retirement, sickness, health care, maternity leave, family allowance, and paid vacations and holidays associated with hiring an employee. The formula used to calculate the 0-to-10 ratings was as follows: (Vmax − Vi)/(Vmax − Vmin) multiplied by 10. Vi represents the hiring cost (measured as a percentage of salary). The values for Vmax and Vmin were set at 33 % (1.5 standard deviations above average) and 0 %, respectively. Countries with values outside of the Vmax and Vmin range received ratings of either 0 or 10 accordingly. Source: World Bank, Doing Business (various issues)
  16. Mandated cost of worker dismissal (from 2007 onwards). This subcomponent is based on the World Bank’s Ease of Doing Business data on the cost of the advance notice requirements, severance payments, and penalties due when dismissing a redundant worker. The formula used to calculate the 0-to-10 ratings was as follows: (Vmax − Vi)/(Vmax − Vmin) multiplied by 10. Vi represents the dismissal cost (measured in weeks of wages). The values for Vmax and Vmin were set at 108 weeks (1.5 standard deviations above average) and 0 weeks, respectively. Countries with values outside of the Vmax and Vmin range received ratings of either 0 or 10 accordingly. Source: World Bank, Doing Business (various issues)
  17. Hiring regulations and minimum wages (from 2010 onwards). This subcomponent is based on the World Bank’s Doing Business, Difficulty of Hiring index, which is described as follows: “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. 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.” Countries with a higher difficulty of hiring are given lower ratings. This component previously measured only the minimum wage subcomponent of the Difficulty of Hiring index. From 2010, the data have been revised back to 2002. Source World Bank, Doing Business (various issues)
  18. Hours Regulations (from 2010 onwards): This subcomponent is based on the World Bank’s Doing Business, Rigidity of Hours index, which is described as follows: “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 work-week can consist of 5.5 days; (iv) whether the work-week 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.” Countries with less rigid work rules receive better scores in this component. This component was previously named “Mandated cost of hiring a worker”. Because of the pressure from ILO, this indicator was dropped from Doing Business. In order to maintain as much consistency over time as possible, the data have been revised back to 2002 with these data replacing the previous values. Source World Bank, Doing Business (various issues)
  19. Source: Fraser Institute 2013
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