Seniority rules and selection into job loss

How much are employers willing to pay to sidestep employment protection? I study this in the context of seniority rules, aiming to shield tenured workers from job loss. Using detailed and unique Swedish layoff notification data matched with administrative registers, I identify the set of workers at risk of dismissal and construct counterfactual displacement lists based on the mandated layoff order. I find that workplaces with relatively more productive junior workers are significantly less likely to follow the seniority order. A one-standard-deviation increase in the relative productivity of recent hires reduces compliance by 7.7 percentage points. To circumvent the default order, employers provide higher severance pay and longer advance notice to senior workers, indicating that firms pay for the right to retain more productive workers. These results indicate that seniority rules impose efficiency costs on employers as employment protection is traded for financial compensation.