Do Employment Protections Reduce Productivity? Evidence from U.S. States
Massachusetts Institute of Technology (MIT) - Department of Economics; Institute for the Study of Labor (IZA); National Bureau of Economic Research (NBER)
William R. Kerr
Harvard University - Entrepreneurial Management Unit
Adriana D. Kugler
Georgetown University - Public Policy Institute (GPPI); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA); National Bureau of Economic Research (NBER)
NBER Working Paper No. w12860
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.
Number of Pages in PDF File: 48working papers series
Date posted: January 24, 2007
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