The labor freedom component is a quantitative measure that considers various aspects of the legal and regulatory framework of a country’s labor market, including regulations concerning minimum wages, laws inhibiting layoffs, severance requirements, and measurable regulatory restraints on hiring and hours worked.
Six quantitative factors are equally weighted, with each counted as one-sixth of the labor freedom component:
- 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 collected in connection with 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.”
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 six 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.
Sources. Unless otherwise noted, the Index relies on the following sources for data on labor freedom, in order of priority: World Bank, Doing Business 2013; Economist Intelligence Unit, Country Commerce, 2009–2012; U.S. Department of Commerce, Country Commercial Guide, 2009–2012; and official government publications of each country.