The Impact of Employment Protection on the Probability of Job Separation: Evidence from Job Duration Data in South Korea

This study analyzes how firms and workers respond to regulations limiting the use of temporary employment. In 2007, the Korean government introduced a labor market reform that required employers to convert a worker’s contract from a temporary to permanent one in order to continue to employ a worker for more than two years. From the perspective of employers, the new regulation can be thought of as a potential increase in firing costs for temporary workers after two years. Thus, employers have an incentive to improve the screening process to establish better matches and weed out bad matches prior to the increase in firing costs. From the perspective of workers, temporary workers have an incentive to provide greater effort after the policy change because the reform offers a potential path to permanent employment. My results show economically and statistically significant decreases in the probability of job separation in the first five months of tenure after the policy change, which implies that firms responded to the increased protection for temporary workers by improving their recruitment practices. However, based on observed overtime, I find no evidence supporting the view that temporary employees provided greater effort after the new regulation was put into effect.