Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy

Abstract: To estimate the causal effect of employment protection on firms’ worker selection, we study a policy change that reduced dismissal costs for the employers of over a tenth of Sweden’s workforce. Our difference-in-differences analysis of firms’ hiring uses individual ability measures including estimated worker fixed effects, GPA at age 15, and military test scores. We find that the reform reduced minimum hire quality by around 2%. Our results show that firms both decrease their hiring thresholds and hire more workers. We find that firms increasingly hire young, foreign born and long-term non-employed individuals, suggesting potential welfare gains of the reform.

Keywords: worker selection; screening; hiring standard; employment protection; dismissal costs.

JEL-codes: D22; J24; J38; M51

Language: English

61 pages, November 27, 2025

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