The Detrimental Effect of Job Protection on Employment: Evidence from France

56 Pages Posted: 11 Jun 2019

See all articles by Pierre Cahuc

Pierre Cahuc

Ecole Polytechnique, Paris

Franck Malherbet

ENSAE; Universite Paris I Pantheon-Sorbonne

Julien Prat

University of Vienna; IZA Institute of Labor Economics

Date Written: May 2019

Abstract

According to French law, employers have to pay at least six months salary to employees whose seniority exceeds two years in case of unfair dismissal. We show, relying on data, that this regulation entails a hike in severance payments at two-year seniority which induces a significant rise in the job separation rate before the two-year threshold and a drop just after. The layoff costs and its procedural component are evaluated thanks to the estimation of a search and matching model which reproduces the shape of the job separation rate. We find that total layoff costs increase with seniority and are about four times higher than the expected severance payments at two years of seniority. Counterfactual exercises show that the fragility of low-seniority jobs implies that layoff costs reduce the average job duration and increase unemployment for a wide set of empirically relevant parameters.

Keywords: Dismissal costs, Employment protection legislation, unemployment

JEL Classification: J32, J63, J65

Suggested Citation

Cahuc, Pierre and Malherbet, Franck and Prat, Julien, The Detrimental Effect of Job Protection on Employment: Evidence from France (May 2019). CEPR Discussion Paper No. DP13767. Available at SSRN: https://ssrn.com/abstract=3401854

Pierre Cahuc (Contact Author)

Ecole Polytechnique, Paris ( email )

1 rue Descartes
Paris, 75005
France

Franck Malherbet

ENSAE ( email )

92245 Malakoff Cedex
France

Universite Paris I Pantheon-Sorbonne

15 Boulevard Gabriel Peri
92245 Malakoff Cedex
France
+33 1 4117 3550 (Phone)
+33 1 4117 7634 (Fax)

Julien Prat

University of Vienna ( email )

Bruenner Strasse 72
Vienna 1210, Vienna
Austria

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

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