IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Firing Cost and Firm Size: A Study of Sri Lanka's Severance Pay System

  • Abidoye, Babatunde
  • Orazem, Peter
  • Vodopivec, Milan

Sri Lanka's Termination of Employment of Workmen Act (TEWA) requires that firms with 15 or more employees justify layoffs and provide generous severance pay to displaced workers, with smaller firms being exempted. Athough formally subject to TEWA, firms in Export Processing Zones (EPZs) may have been partially exempt from TEWA due to lax enforcement in that sector. A theoretical model shows that firms subject to TEWA will tend to mass at or below the threshold of 14 workers until they get an atypically large productivity shock that would propel them beyond the threshold. EPZ firms will be largely unaffected by the law. In addition, EPZ firms receive preferential tax treatment and exemptions from customs duty. Consequently, firms that anticipate rapid growth will have an incentive to locate in the EPZ sector. We test these predictions using 1995-2003 panel data on the universe of all private, formal sector firms in Sri Lanka. We find that at all sizes, EPZ firms are more likely to add employees than nonEPZ firms. Above the threshold, nonEPZ firms are more likely to shed workers while EPZ firms are more likely to add workers. Once passing the threshold, nonEPZ firms grow faster than nonEPZ firms below the threshold, consistent with a theoretical prediction that only atypically productive nonEPZ firms would cross the threshold. Finally, evidence is consistent with the the hypothesis that TEWA restrictions retard the growth of nonEPZ firms below the threshold, but only some of the evidence passes tests of statistical significance. The combined impacts of retarded growth below the threshold, the need for a large productivity shock to cross the threshold, and slower employment growth above the threshold suggest that the TEWA failed to lower unemployment. Instead, it slowed employment growth of nonEPZ firms and induced other firms to seek the EPZ sector in order to evade the law.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p3882-2008-04-20.pdf
Download Restriction: no

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12922.

as
in new window

Length:
Date of creation: 20 Apr 2008
Date of revision:
Handle: RePEc:isu:genres:12922
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Richard B. Freeman, 2007. "Labor Market Institutions Around the World," NBER Working Papers 13242, National Bureau of Economic Research, Inc.
  2. Liedholm, Carl & Mead, Donald C., 1987. "Small Scale Industries in Developing Countries: Empirical Evidence and Policy Implications," Food Security International Development Papers 54062, Michigan State University, Department of Agricultural, Food, and Resource Economics.
  3. Addison, John T. & Teixeira, Paulino, 2001. "The Economics of Employment Protection," IZA Discussion Papers 381, Institute for the Study of Labor (IZA).
  4. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
  5. World Bank, 2007. "Sri Lanka : Strengthening Social Protection," World Bank Other Operational Studies 19638, The World Bank.
  6. Dean Baker & Andrew Glyn & David Howell & John Schmitt, 2002. "Labor Market Institutions and Unemployment: A Critical Assessment of the Cross-Country Evidence," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2002-17, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  7. James J. Heckman & Carmen Pages, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," NBER Working Papers 7773, National Bureau of Economic Research, Inc.
  8. Carmen Pagés-Serra, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  9. Ahsan, Ahmad & Pages, Carmen, 2007. "Are all labor regulations equal ? Assessing the effects of job security, labor dispute, and contract labor laws in India," Policy Research Working Paper Series 4259, The World Bank.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:isu:genres:12922. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephanie Bridges)

The email address of this maintainer does not seem to be valid anymore. Please ask Stephanie Bridges to update the entry or send us the correct address

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.