Dismissals for cause: The difference that just eight paragraphs can make

We present evidence about the effects of dismissals-for-cause requirements, a specific component of employment protection legislation that has received little attention. We study a quasi-natural experiment generated by a law introduced in Portugal: out of the 12 paragraphs in the law that dictated the costly procedure required for dismissals for cause, eight did not apply to small firms. Using matched employer-employee longitudinal data and difference-in-differences methods, we examine the impact of that differentiated change in firing costs upon several variables over a long period of time. In our results, we do not find robust evidence of effects on job or worker flows, although some estimates suggest a slight increase in hirings. On the other hand, firms that gain flexibility in their dismissals exhibit consistently slower wage growth and sizeable increases in their relative performance. Our findings suggest that reducing firing costs of the type studied here increase workers' effort and reduce their bargaining power.