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

  • David H. Autor


    (Masachusetts Institute of Technology, Department of Economics and NBER)

  • William R. Kerr


    (Harvard Business School, Entrepreneurial Management Unit)

  • Adriana D. Kugler


    (University of Houston, Department of Economics and NBER, CEPR and IZA)

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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Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 07-048.

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Length: 48 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:hbs:wpaper:07-048
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