Do seniority rules protect older workers? Age composition effects of the last-in-first-out principle

Employment protection legislation is often motivated by the need to increase security for older workers. Sweden has even implemented a last-in-first-out principle (LIFO), stipulating that the last hired employee should be dismissed first in the case of lay-offs. A reform in 2001 made it possible for firms with fewer than 11 employees to exclude two workers from the LIFO principle. If the LIFO regulation is serving its purpose, the reform should lead to a weakened labor market position for older workers. This study analyzes the effect of the reform on labor market flows for different age groups – with a special focus on the effects for older workers – using a difference-in-difference regression model. The results show that firms with 7-9 employees increased their recruitment from unemployment and from outside the workforce due to the reform, while the reform had no effect on separations. The increased hires came mostly from workers younger than 25 who were previously not in the workforce or were unemployed, meaning that the reform lowered youth unemployment. There is some indication of workers aged 55-64 moving to another workplace but not leaving the workforce or becoming unemployed, suggesting that the reform did not weaken the labor market position of older workers.