Heterogeneous Firing Costs, Worker Types, and Productivity: Evidence from a Natural Experiment 

Abstract

We investigate the effect of firing costs on total factor productivity (TFP) in a setting in which firing costs change simultaneously for the entire firm-size distribution, but heterogeneously across workers. We show formally and empirically that the estimated effects on TFP are biased when the production function fails to account for heterogeneously affected worker types. Our bias-corrected results strengthen existing evidence that firing costs negatively affect TFP and corroborate evidence on hiring and firing freezes. They also offer novel evidence on how firing costs affect workforce composition and utilization. Instead, we observe no capital-intensive technology adoption or human capital investments.

Keywords: firing costs, employment protection, productivity, misallocation

JEL Classification: D24, D25, J63, J65