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The Effect of Employment Protection Rules on Firm Productivity - A Natural Experiment

  • Bjuggren, Carl Magnus

    ()

    (HUI Research)

In this paper I study the effect of employment protection rules on firm productivity using micro data on Swedish firms. A reform of the employment protection rules in 2001 made it possible for small firms to exempt two employees from the last-in-first-out rules. The reform targeted only firms with less than 11 employees, representing a natural experiment. I exploit this using a difference-in-differences framework to estimate the reform's effect on labor productivity. By using firm register data I am able to get a precise estimate of labor productivity for all firms in the economy. The results indicate that the reform increased labor productivity by 2.5 percent for the treatment group of small firms compared to the control group of larger firms. This is shown to be economically significant. The results appear to be driven by the smallest firms and firms that were downsizing. When restricting the sample to include only firms that were downsizing and firms that stayed within the group of treatment and control throughout the whole time period, the estimated increase in labor productivity reaches 6 percent. This effect is likely due to a combination of a decrease in moral hazard behavior and an increased possibility for small firms to retain or lay o personnel based on the worker's idiosyncratic productivity.

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Paper provided by HUI Research in its series HUI Working Papers with number 82.

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Length: 45 pages
Date of creation: 25 Mar 2013
Date of revision: 30 Oct 2013
Handle: RePEc:hhs:huiwps:0082
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  1. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
  2. Cingano, Federico & Leonardi, Marco & Messina, Julián & Pica, Giovanni, 2009. "The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU Countries," IZA Discussion Papers 4158, Institute for the Study of Labor (IZA).
  3. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
  4. Michele Belot & Jan Boone & Jan Van Ours, 2007. "Welfare-Improving Employment Protection," Economica, London School of Economics and Political Science, vol. 74(295), pages 381-396, 08.
  5. David S. Lee & Thomas Lemieux, 2009. "Regression Discontinuity Designs in Economics," NBER Working Papers 14723, National Bureau of Economic Research, Inc.
  6. Lindbeck, Assar & Palme, Mårten & Persson, Mats, 2006. "Job Security and Work Absence: Evidence from a Natural Experiment," Working Paper Series 660, Research Institute of Industrial Economics.
  7. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June.
  8. Olsson, Martin, 2007. "Employment Protection and Sickness Absence," Working Paper Series 717, Research Institute of Industrial Economics.
  9. Koeniger, Winfried, 2005. "Dismissal costs and innovation," Economics Letters, Elsevier, vol. 88(1), pages 79-84, July.
  10. Micco, Alejandro & Pagés, Carmen, 2006. "The Economic Effects of Employment Protection: Evidence from International Industry-Level Data," IZA Discussion Papers 2433, Institute for the Study of Labor (IZA).
  11. Eric J. Bartelsman & John Haltiwanger & Stefano Scarpetta, 2004. "Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries," Tinbergen Institute Discussion Papers 04-114/3, Tinbergen Institute.
  12. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  13. Roberto M. Samaniego, 2006. "Employment Protection and High-Tech Aversion," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 224-241, April.
  14. Bassanini, Andrea & Nunziata, Luca & Venn, Danielle, 2008. "Job Protection Legislation and Productivity Growth in OECD Countries," IZA Discussion Papers 3555, Institute for the Study of Labor (IZA).
  15. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
  16. Bartelsman, Eric & Haltiwanger, John C. & Scarpetta, Stefano, 2004. "Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries," IZA Discussion Papers 1374, Institute for the Study of Labor (IZA).
  17. Riphahn, Regina T., 2004. "Employment protection and effort among German employees," Economics Letters, Elsevier, vol. 85(3), pages 353-357, December.
  18. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  19. David H. Autor & William R. Kerr & Adriana D. Kugler, 2007. "Does Employment Protection Reduce Productivity? Evidence From US States," Economic Journal, Royal Economic Society, vol. 117(521), pages 189-217, 06.
  20. Cahuc, Pierre & Postel-Vinay, Fabien, 2001. "Temporary Jobs, Employment Protection and Labor Market Performance," IZA Discussion Papers 260, Institute for the Study of Labor (IZA).
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