The labor freedom component is a quantitative measure that looks into various aspects of the legal and regulatory framework of a country's labor market. It provides cross-country data on regulations concerning minimum wages; laws inhibiting layoffs; severance requirements; and measurable regulatory burdens on hiring, hours, and so on.
Six quantitative factors are equally weighted, with each counted as one-sixth of the labor freedom component:[1]
- Ratio of minimum wage to the average value added per worker,
- Hindrance to hiring additional workers,
- Rigidity of hours,
- Difficulty of firing redundant employees,
- Legally mandated notice period, and
- Mandatory severance pay.
Based on data from the World Bank's Doing Business study, these factors specifically examine labor regulations that affect "the hiring and redundancy of workers and the rigidity of working hours."[2]
In constructing the labor freedom score, each of the six factors is converted to a scale of 0 to100 based on the following equation:
where country i data are calculated relative to the world average and then multiplied by 50. The six factor scores are then averaged for each country, yielding a labor freedom score.
The simple average of the converted values for the six factors is computed for the country's overall labor freedom score. For example, even if a country has the worst rigidity of hours in the world with a zero score for that factor, it could still get a score as high as 83.3 based on the other five factors.
For the eight countries that are not covered by the World Bank's Doing Business study, the labor freedom component is scored by looking into labor market flexibility based on qualitative information from other reliable and internationally recognized sources.[3]
Sources. Unless otherwise noted, the Index relies on the following sources for data on labor freedom, in order of priority: World Bank, Doing Business 2010; Economist Intelligence Unit, Country Report, Country Commerce, and Country Profile, 2006-2009; U.S. Department of Commerce, Country Commercial Guide, 2006-2009; and official government publications of each country.
[1]The labor freedom assessment in the 2009
Index expanded its factors to six from the four used in previous editions. This refinement was applied equally to past editions' labor freedom scores to maintain consistency. The method for labor freedom assessment dates to the 2005
Index because of the limited availability of the quantitative data.
[2]For more detailed information on the data, see "Employing Workers" in World Bank, Doing Business, at http://www.doingbusiness.org/MethodologySurveys/EmployingWorkers.aspx.
[3]Eight countries are not covered by the World Bank's Doing Business study: Barbados, Burma, Cuba, North Korea, Libya, Macao, Malta, and Turkmenistan. The methodology for business freedom dates to the 2006 Index because of the limited availability of quantitative data. For the 1995 through 2005 editions, we used a subjective assessment with a score of 1-5. Those earlier scores have been converted by means of a simple formula to make them comparable. Observations with the top score were converted to 100, the next best to 85, and so on. This conversion formula is different from the one used for other subjective factors, but it is unique because those other factors are not bridging to a new, data-driven methodology.