Employment Protection and Organizational Structure

We study how business groups are affected by changes in employment protection. A 2012 reform lowering dismissal costs in Spain stimulated employment growth in standalone firms significantly more than in comparable group-affiliated firms. Response to the reform was most muted in group firms with better access to the internal labor market (ILM), e.g. due to geographic proximity to affiliates, suggesting that ILMs partly insulate groups from labor market frictions. We then provide causal evidence that group affiliation became less pervasive in Spain following the reform, in line with claims that labor market frictions shape organizations, favoring the emergence of groups.

Keywords: Business Groups, Dismissal Costs, Employment Protection, Internal Labor Markets, Organizations

JEL Classification: G34, L41, J63

Suggested Citation: Suggested Citation

Cestone, Giacinta and Tao, Jiajun and Urzua, Francisco, Employment Protection and Organizational Structure (December 06, 2024). European Corporate Governance Institute – Finance Working Paper No. 1026/2024, Available at SSRN: https://ssrn.com/abstract=5049385 or http://dx.doi.org/10.2139/ssrn.5049385