Does Employment Protection Reduce Productivity? Evidence from U.S. States

Posted: 20 Aug 2008 Last revised: 2 Jun 2009

See all articles by David H. Autor

David H. Autor

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

William Kerr

Harvard University - Entrepreneurial Management Unit

Adriana D. Kugler

McCourt School of Public Policy ; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics; National Bureau of Economic Research (NBER)

Date Written: June 1, 2007

Abstract

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.

Keywords: dismissal costs, employment fluctuations, entry and exit, labor productivity, TFP, entrepreneurship

JEL Classification: J11, J21, J31, J61

Suggested Citation

Autor, David H. and Kerr, William R. and Kugler, Adriana Debora, Does Employment Protection Reduce Productivity? Evidence from U.S. States (June 1, 2007). Economic Journal, Vol. 117, No. 521, pp. 189-217, 2007, Available at SSRN: https://ssrn.com/abstract=1230066

David H. Autor

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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William R. Kerr (Contact Author)

Harvard University - Entrepreneurial Management Unit ( email )

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Adriana Debora Kugler

McCourt School of Public Policy ( email )

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IZA Institute of Labor Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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