When protection becomes exploitation: The impact of firing costs on Naïve Employees

This paper identifies a new channel through which employment protection laws can harm workers: they enable employers to exploit naïve present-biased employees. The theoretical mechanism through which firing costs enable exploitation is built upon a widespread career structure. Employers frequently offer career trajectories with an unattractive entry phase (e.g., with low pay or high effort), an even less attractive mid-career stage, and high rewards promised in a final career phase. Naïve employees accept such contracts, expecting to complete the high-reward track. They, however, eventually drop out or sort into alternative paths mid-career when costs loom large and rewards remain distant. As a result, employers avoid paying the promised rewards while capturing surplus from early-career phases. Firing costs give employers more leeway to exploit workers with such contracts: they reduce the employees’ expected risk of dismissal and make long-term rewards appear more credible. Employers can then exploit employees even more—for example, by lowering early-career wages—knowing that employees will still accept such steeper contracts despite not following through. Our model aligns with career patterns in fields such as healthcare, academia, or accounting. It also yields testable predictions on wage structures, attrition, and how firing costs and labor market conditions shape contract design.