Working Paper: CEPR ID: DP5303
Authors: Fabiano Schivardi; Roberto Torrini
Abstract: We study the effects of the more stringent employment protection legislation (EPL) that applies in Italy to firms with over 15 employees. We consider firms' propensity to grow when close to that threshold and changes in employment policies when they pass it. Using a comprehensive matched employer-employees dataset, we find that the probability of firms' growth is reduced by around 2 percentage points near the threshold. Using the stochastic transition matrix for firm size, we compute the long-run effects of EPL on the size distribution, finding that they are quantitatively modest. We also find that, contrary to the implications of more stringent firing restrictions, workers in firms just above the threshold have on average less stable employment relations than those just below it. We document that this is because firms above the threshold make greater use of flexible employment contracts, arguably to circumvent the stricter regulation on open-end contracts.
Keywords: employment policies; firing costs; firm size distribution; matched data
JEL Codes: D21; J63; J65; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| EPL threshold crossing (C22) | employment relations stability (J63) |
| EPL threshold crossing (C22) | worker separation probability (J63) |
| EPL (Z21) | firm size (L25) |
| firm size (L25) | firm growth probability (D25) |
| EPL threshold crossing (C22) | firm growth probability (D25) |