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

  • David H. Autor
  • William R. Kerr
  • Adriana D. Kugler

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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File URL: http://www.nber.org/papers/w12860.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12860.

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Date of creation: Jan 2007
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Publication status: published as Autor, David H., Adriana R. Kugler, and William D. Kerr. “Do Employment Protections Reduce Productivity? Evidence from U.S. States.” The Economic Journal 117, 521 (June 2007): 189-217.
Handle: RePEc:nbr:nberwo:12860
Note: LE LS PR
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  1. Adriana Kugler & Juan F. Jimeno & Virginia Hernanz, . "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labor Market Reforms," Working Papers 2003-14, FEDEA.
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  19. Aghion, Philippe & Hermalin, Benjamin, 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 381-409, Fall.
  20. Max Schanzenbach, 2003. "Exceptions to Employment at Will: Raising Firing Costs or Enforcing Life-Cycle Contracts?," American Law and Economics Review, Oxford University Press, vol. 5(2), pages 470-504, August.
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  25. Miles, Thomas J, 2000. "Common Law Exceptions to Employment at Will and U.S. Labor Markets," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(1), pages 74-101, April.
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  28. David H. Autor & John J. Donohue & Stewart J. Schwab, 2004. "The Employment Consequences of Wrongful-Discharge Laws: Large, Small, or None at All?," American Economic Review, American Economic Association, vol. 94(2), pages 440-446, May.
  29. Eli Berman & John Bound & Zvi Griliches, 1993. "Changes in the Demand for Skilled Labor within U.S. Manufacturing Industries: Evidence from the Annual Survey of Manufacturing," NBER Working Papers 4255, National Bureau of Economic Research, Inc.
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