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Relaxation of employment protection and its effects on labour reallocation

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  • Liina Malk

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Abstract

Flexibility of employment protection is considered to be essential for rapid adjustments in the workforce to changing economic conditions and for the reallocation of labour towards more productive activities. This was one of the main arguments for the new Employment Contracts Act in Estonia, which eased employment protection by reducing the costs of terminating employment relationships. Since such substantial changes in employment protection legislation (EPL) are quite rare, this reform provides a good chance to examine the outcomes of the relaxation of employment protection. This paper evaluates the effects of this institutional change on labour reallocation. Exploiting the microdata of the Labour Force Surveys for the years 2007–2011, we analyse worker flows and employ the difference in differences approach to identify the effects of the EPL reform, using Lithuanians as a control group for Estonians. Subsequent to the reform, labour flows out of and into employment increased in Estonia relative to Lithuania. However, from the regression analysis, a statistically significant impact of the EPL reform was identified only on the former of these two types of flows. Both the assessment of aggregate flows and the estimation of difference in differences effects for transition probabilities indicate that the reform of employment protection resulted in lower job-to-job flows while the overall effect on labour reallocation was positive.

Suggested Citation

  • Liina Malk, 2013. "Relaxation of employment protection and its effects on labour reallocation," Bank of Estonia Working Papers wp2013-4, Bank of Estonia, revised 04 Jun 2013.
  • Handle: RePEc:eea:boewps:wp2013-4
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    References listed on IDEAS

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    More about this item

    Keywords

    employment protection legislation; labour reallocation; policy evaluation; difference in differences estimation;

    JEL classification:

    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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