Scandinavian Working Papers in Economics

HUI Working Papers,
HUI Research

No 102: Employment Protection Legislation and Firm Growth: Evidence from a Natural Experiment

Anders Bornhäll (), Sven-Olov Daunfeldt and Niklas Rudholm
Additional contact information
Anders Bornhäll: HUI Research, Postal: SE-10329 Stockholm, Sweden
Sven-Olov Daunfeldt: HUI Research, Postal: SE-10329 Stockholm, Sweden, Dalarna University, SE-79188 Falun, Sweden
Niklas Rudholm: HUI Research, Postal: SE-10329 Stockholm, Sweden, Dalarna University, SE-79188 Falun, Sweden

Abstract: A natural experiment is used to identify the causal relationship between employment protection legislation and firm growth. The natural experiment occurred in Sweden in 2001, when an exemption made it possible for firms with less than eleven employees to exclude two workers from the last-in-first-out principle when dismissing personel. The estimated average treatment effect of the reform show that the number of employees increased with 0.135 percent in firms with 5-9 employees relative to firms with 10-15 employees, which corresponds to over 5,000 additional jobs per year created by the reform. Firms with ten employees, just below the size threshold, became 3.4 percent less likely to increase their workforce to a level surpassing the threshold, indicating that the last-in-first-out rule prevented these firms from growing. Thus, employment protection legislation seems to act as a growth barrier for small firms.

Keywords: firm growth; growth barriers; employment protection

JEL-codes: D22; J23; K31; L25

50 pages, March 5, 2014

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