Working Paper No. 1061

Employment Protection and Labor Productivity

Published: March 16, 2015, revised April 2015, November 2017 and February 2018Pages: 53Keywords: Employment Protection; Labor Market Regulations; Labor Productivity; Last-in-First-out RulesJEL-codes: J23; J24; J32; J38; K31; M51; K31; D22
Published version

Employment Protection and Labor Productivity Carl Magnus Bjuggren


Current theoretical predictions of how employment protection affects firm productivity are ambiguous. In this paper, I study the effect of employment protection rules on labor productivity using Swedish register data. A reform of employment protection rules in 2001 enabled small firms with fewer than eleven employees to exempt two workers from the seniority rules. I treat this reform as a natural experiment. My results indicate that increased labor market flexibility increases labor productivity. This increase is explained by total factor productivity and capital intensity rather than the educational level of workers.

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