From Ultima Ratio to Mutual Consent: The Effects of Changing Employment Protection Doctrine

In many countries, the termination of employment contracts has to be either on employer initiative or on employee initiative. Furthermore, the cost of the procedure is borne mainly by the contracting party who takes the initiative and there is little room for sharing costs. The implicit doctrine is that employment termination has to be the last resort, the ultima ratio. In 2008, the French government initiated a change in doctrine: it became possible to terminate employment contracts by mutual consent, at lower costs. Building on firm-level data, we develop an event analysis which reveals that the reform was followed by a decline in dismissals as well as by a significant rise in overall separation rates. By promoting separation by mutual consent, the reform reduced labor litigation risks, boosted workers' flows, but, eventually, we do not detect any effect on firms' employment levels.