Employment consequences of changes in dismissal protection: Evidence from a 2004 German reform

This paper empirically analyzes the impact of a change in dismissal protection on employment dynamics and temporary employment patterns in small establishments. The identification strategy relies on a quasi-experimental change in the German Protection Against Dismissal Act (PADA) in 2004. Due to a raise of the minimum firm size threshold determining coverage by the PADA, dismissal protection was relaxed for some establishments. Using matched employer-employee administrative data linked to establishment survey data, we estimate the causal effect of the reform on worker and job flow rates and the use of temporary employment. We find evidence for a short-term increase in overall worker flow rates which does, however, not persist in the medium-term. Reestimation by gender suggests that the effect on the hiring rate is driven by women while the effect on the separation rate is driven by men. There is no robust evidence for an effect on the overall job flow rate and the share of employees on fixed-term contracts or temporary agency workers.