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Do Employment Protections Reduce Productivity? Evidence from U.S. States

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Author Info
William Kerr
Adriana Kugler
David Autor

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Abstract

Theory predicts that mandated employment protections may reduce productivity by distorting production choices. Firms facing (non-Coasean) worker dismissal costs will curtail hiring below efficient levels and retain unproductive workers, both of which should affect productivity. These theoretical predictions have rarely been tested. We use the adoption of wrongful discharge protections by U.S. state courts over the last three decades to evaluate the link between dismissal costs and productivity. Drawing on establishment-level data from the Annual Survey of Manufacturers and the Longitudinal Business Database, our estimates suggest that wrongful discharge protections reduce employment flows and firm entry rates. Moreover, analysis of plant-level data provides evidence of capital deepening and a decline in total factor productivity following the introduction of wrongful discharge protections. This last result is potentially quite important, suggesting that mandated employment protections reduce productive efficiency as theory would suggest. However, our analysis also presents some puzzles including, most significantly, evidence of strong employment growth following adoption of dismissal protections. In light of these puzzles, we read our findings as suggestive but tentative.

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Publisher Info
Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 07-04.

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Length: 48 pages
Date of creation: Mar 2007
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Handle: RePEc:cen:wpaper:07-04

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Web page: http://www.ces.census.gov

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Related research
Keywords: Dismissal Costs Employment Fluctuations Entry and Exit Labor Productivity TFP Entrepreneurship

Other versions of this item:

Find related papers by JEL classification:
J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends and Forecasts
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J61 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Geographic Labor Mobility; Immigrant Workers

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August. [Downloadable!] (restricted)
  2. Max Schanzenbach, 2003. "Exceptions to Employment at Will: Raising Firing Costs or Enforcing Life-Cycle Contracts?," American Law and Economics Review, Oxford University Press, vol. 5(2), pages 470-504, August.
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  4. Justin Wolfers, 2005. "Measuring the Effects of Employment Protection on Job Flows: Evidence from Seasonal Cycles," Computing in Economics and Finance 2005 98, Society for Computational Economics. [Downloadable!]
  5. Aghion, Philippe & Hermalin, Benjamin, 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 381-409, Fall.
    Other versions:
  6. Miles, Thomas J, 2000. "Common Law Exceptions to Employment at Will and U.S. Labor Markets," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(1), pages 74-101, April.
  7. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
    Other versions:
  8. Kugler, Adriana D. & Pica, Giovanni, 2005. "Effects of Employment Protection on Worker and Job Flows: Evidence from the 1990 Italian Reform," CEPR Discussion Papers 5256, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. David H. Autor & John J. Donohue III & Stewart J. Schwab, 2004. "The Employment Consequences of Wrongful-Discharge Laws: Large, Small, or None at All?," American Economic Review, American Economic Association, vol. 94(2), pages 440-446, May. [Downloadable!] (restricted)
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    Other versions:
  11. James E. Prieger, 2004. "The Impacts of the Americans with Disabilities Act on the Entry and Exit of Retail Firms," Econometric Society 2004 North American Winter Meetings 589, Econometric Society. [Downloadable!]
    Other versions:
  12. Adriana Kugler & Juan F. Jimeno & Virginia Hernanz, . "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labor Market Reforms," Working Papers 2003-14, FEDEA. [Downloadable!]
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  13. Levine, David I, 1991. "Just-Cause Employment Policies in the Presence of Worker Adverse Selection," Journal of Labor Economics, University of Chicago Press, vol. 9(3), pages 294-305, July. [Downloadable!] (restricted)
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  15. Amil Petrin & Jagadeesh Sivadasan, 2006. "Job Security Does Affect Economic Efficiency: Theory, A New Statistic, and Evidence from Chile," NBER Working Papers 12757, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Winfried Koeniger & Julien Prat, 2006. "Employment Protection, Product Market Regulation and Firm Selection," IZA Discussion Papers 1960, Institute for the Study of Labor (IZA). [Downloadable!]
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  17. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-83, May. [Downloadable!] (restricted)
  18. Wasmer, Etienne, 2002. "Interpreting Europe and US labor markets differences: the specificity of human capital investments," Arbetsrapport 2003:9, Institute for Futures Studies. [Downloadable!]
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  19. David H Autor & John J Donohue & Stewart J Schwab, 2006. "The Costs of Wrongful-Discharge Laws," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 211-231, 08. [Downloadable!] (restricted)
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  20. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June. [Downloadable!] (restricted)
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  21. Adriana D. Kugler & Gilles Saint-Paul, 2004. "How Do Firing Costs Affect Worker Flows in a World with Adverse Selection?," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages iv-29, July. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bassanini, Andrea & Nunziata, Luca & Venn, Danielle, 2008. "Job Protection Legislation and Productivity Growth in OECD Countries," IZA Discussion Papers 3555, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Marco Leonardi & Giovanni Pica, 2007. "Employment protection legislation and wages," Working Paper Series 778, European Central Bank. [Downloadable!]
    Other versions:
  3. Markus Poschke, 2007. "Employment Protection, Firm Selection, and Growth," IZA Discussion Papers 3164, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Simon Deakin & Prabirjit Sarkar, 2008. "Assessing the Long-Run Economic Impact of Labour Law Systems: A theoretical Reappraisal and Analysis of New Time Series Data," ESRC Centre for Business Research - Working Papers wp367, ESRC Centre for Business Research. [Downloadable!]
  5. Winfried Koeniger & Julien Prat, 2007. "Employment Protection, Product Market Regulation and Firm Selection," Working Papers 07-03, Utrecht School of Economics. [Downloadable!]
    Other versions:
  6. van der Wiel, Karen M., 2008. "Better Protected, Better Paid: Evidence on How Employment Protection Affects Wages," IZA Discussion Papers 3352, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Glenn Ellison & Edward L. Glaeser & William R. Kerr, 2007. "What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns," Working Papers 07-064, Harvard Business School. [Downloadable!]
    Other versions:
  8. Yu-Fu Chen & Michael Funke, 2007. "Threshold Effects of Dismissal Protection Regulation and the Emergence of Temporary Work Agencies," Discussion Papers 207, University of Dundee, Economic Studies. [Downloadable!]
  9. W. Bentley MacLeod & Voraprapa Nakavachara, 2006. "Legal Default Rules: The Case of Wrongful Discharge Laws," IZA Discussion Papers 1970, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  10. Olsson, Martin, 2007. "Employment Protection and Sickness Absence," Working Paper Series 717, Research Institute of Industrial Economics. [Downloadable!]
  11. Pedro S. Martins, 2007. "Dismissals for Cause: The Difference That Just Eight Paragraphs Can Make," IZA Discussion Papers 3112, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  12. Amil Petrin & Jagadeesh Sivadasan, 2006. "Job Security Does Affect Economic Efficiency: Theory, A New Statistic, and Evidence from Chile," NBER Working Papers 12757, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Tito Boeri & Pietro Garibaldi, 2007. "Two Tier Reforms of Employment Protection: A Honeymoon Effect?," Carlo Alberto Notebooks 37, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
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