Job Protection Deregulation in Good and Bad Times

45 Pages Posted: 18 Jan 2018

See all articles by Romain Duval

Romain Duval

International Monetary Fund (IMF)

Davide Furceri

International Monetary Fund (IMF)

José Tavares

Nova School of Business and Economics - Universidade Nova de Lisboa ; Centre for Economic Policy Research (CEPR)

Date Written: December 2017

Abstract

This paper explores the short-term employment effect of deregulating job protection forregular workers and how it varies with prevailing business cycle conditions. We apply a localprojection method to a newly constructed 'narrative' dataset of major regular job protectionreforms covering 26 advanced economies over the past four decades. The analysis relies oncountry-sector-level data, using as an identifying assumption the fact that stringent dismissalregulations are more binding in sectors that are characterized by a higher 'natural' propensityto regularly adjust their workforce. We find that the responses of sectoral employment to largejob protection deregulation shocks depend crucially on the state of the economy at the timeof reform--they are positive in an expansion, but become negative in a recession. Thesefindings are consistent with theory, and are robust to a broad range of robustness checksincluding an Instrumental Variable approach using political economy drivers of reforms asinstruments. Our results provide a case for undertaking job protection reform in good times,or for designing it in ways that enhance its short-term impact.

Keywords: Structural Reforms, Labor Market, Deregulation, Employment Protection; Growth; Employment, Employment Protection, Growth, Employment, Labor Economics Policies, Labor Force and Employment, Size, and Structure, Institutions and Growth

JEL Classification: E32, J08, J21, J65, O43, O47

Suggested Citation

Duval, Romain and Furceri, Davide and Tavares, José, Job Protection Deregulation in Good and Bad Times (December 2017). IMF Working Paper No. 17/277, Available at SSRN: https://ssrn.com/abstract=3104547

Romain Duval (Contact Author)

International Monetary Fund (IMF) ( email )

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Washington, DC 20431
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Davide Furceri

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

José Tavares

Nova School of Business and Economics - Universidade Nova de Lisboa

Campus de Carcavelos
Rua da Holanda, 1
Lisboa, 2775-405
Portugal
+351 21 380 1669 (Phone)
+351 21 388 9073 (Fax)

HOME PAGE: http://josetavares.pt

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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