2012 Index of Economic Freedom

Labor Freedom

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:4

  • 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 report, these factors specifically examine labor regulations that affect “the hiring and redundancy of workers and the rigidity of working hours.”5

In constructing the labor freedom score, each of the six factors is converted to a scale of 0 to 100 based on the following equation:

Factor Scorei= 50 × factoraverage/factori

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 had 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 report, the labor freedom component is scored by looking into labor market flexibility based on qualitative information from other reliable and internationally recognized sources.6

Sources. Unless otherwise noted, the Index relies on the following sources for data on labor freedom, in order of priority: World Bank, Doing Business 2012; Economist Intelligence Unit, Country Report and Country Commerce, 2008–2011; U.S. Department of Commerce, Country Commercial Guide, 2008–2011; and official government publications of each country.

4 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 assessment of labor freedom dates from the 2005 Index because of the limited availability of quantitative data before that time.

5 For more detailed information on the data, see “Employing Workers” in World Bank, Doing Business, at http://www.doingbusiness.org/MethodologySurveys/EmployingWorkers.aspx. Reporting only raw data, the Doing Business 2011 study discontinued all of the sub-indices of Employing Workers: the difficulty of hiring index, the rigidity of hours index, and the difficulty of redundancy index. For the labor freedom component of the 2012 Index, the three indices were reconstructed by Index authors according to the methodology used previously by the Doing Business report.

6 See note 4.

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