Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1061: Employment Protection and Labor Productivity

Carl Magnus Bjuggren ()
Additional contact information
Carl Magnus Bjuggren: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: 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.

Keywords: Employment Protection; Labor Market Regulations; Labor Productivity; Last-in-First-out Rules

JEL-codes: D22; J23; J24; J32; J38; K31; M51

50 pages, First version: March 16, 2015. Revised: November 30, 2017. Earlier revisions: April 16, 2015.

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