Do Employment Protections Reduce Productivity? Evidence from U.S. States

49 Pages Posted: 7 Feb 2007

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)

Multiple version iconThere are 2 versions of this paper

Date Written: January 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, Do Employment Protections Reduce Productivity? Evidence from U.S. States (January 2007). IZA Discussion Paper No. 2571; US Census Bureau Center for Economic Studies Paper No. CES-WP-07-04. Available at SSRN: https://ssrn.com/abstract=961376

David H. Autor

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

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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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William R. Kerr

Harvard University - Entrepreneurial Management Unit ( email )

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Boston, MA 02163
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Adriana Debora Kugler (Contact Author)

McCourt School of Public Policy ( email )

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United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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