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The Economics of Prozac: Do Employees Really Gain from Strong Employment Protection?

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  • Wasmer, Etienne

    () (Sciences Po, Paris)

Abstract

Unlike many other contracts, employment contracts are subject to various external administrative procedures governing separations, ranging from compulsory severance payments and advance notice periods (usually seniority based), to collective layoff procedures (usually depending on the firm’s size), and other forms of protections against arbitrary dismissal. These external constraints may raise the wellbeing of workers if everything remains constant, but may fail to do so once other economic channels are accounted for. Here, we explore the effect of such legislation on the firm’s attitude towards insiders (i.e. protected workers), notably worker monitoring, working environment, and ultimately what we could term harassment. We show that during downturns, harassing workers in order to induce a quit is a substitute for greater dismissal freedom, and that intense monitoring and depreciated working conditions will occur. Thus, a more protected workforce may loose more than it gains from non-pecuniary pressures exerted by the firm. We test these mechanisms using data from a panel of Canadian individuals (the National Public Health Survey) including details on work-related stress and the consumption of various medications, including anti-depressants. By exploiting cross-province differences in employment protection legislation (EPL), we cannot reject the theoretical hypothesis: we even find positive links between individual employment protection and some dimensions of stress, and weaker but positive links between employment protection, depression and the consumption of various psychotropic drugs. Tenure and firm size information from another dataset is then used to generate further variance in EPL by imputation. This confirms the previous results, as well as falsification exercises: family stress for instance is not correlated with regional EPL, while financial stress is negatively correlated with EPL.

Suggested Citation

  • Wasmer, Etienne, 2006. "The Economics of Prozac: Do Employees Really Gain from Strong Employment Protection?," IZA Discussion Papers 2460, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp2460
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    Cited by:

    1. Fischer, Justina AV & Sousa-Poza, Alfonso, 2010. "The impact of institutions on firms’ rejuvenation policies: Early retirement with severance pay versus simple lay-off. A Cross-European Analysis," MPRA Paper 20343, University Library of Munich, Germany.
    2. Salvatori, Andrea, 2010. "Labour contract regulations and workers' wellbeing: International longitudinal evidence," Labour Economics, Elsevier, vol. 17(4), pages 667-678, August.
    3. Vladimir Gimpelson & Aleksey Oshchepkov, 2012. "Does more unemployment cause more fear of unemployment?," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 1(1), pages 1-26, December.
    4. Baumann, Florian & Friehe, Tim, 2012. "On the evasion of employment protection legislation," Labour Economics, Elsevier, vol. 19(1), pages 9-17.
    5. Christian Breuer & Horst Rottmann, 2014. "Do Labor Market Institutions Influence Suicide Mortality? An International Panel Data Analysis," CESifo Working Paper Series 4875, CESifo Group Munich.
    6. Lücke, Christine, 2017. "How much does others’ protection matter? Employment protection and well-being," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168096, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    stress at work; employment protection; personnel economics;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J53 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Labor-Management Relations; Industrial Jurisprudence
    • J81 - Labor and Demographic Economics - - Labor Standards - - - Working Conditions

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