Employment protection legislation and firm growth: evidence from a natural experiment

Abstract

A natural experiment is used to identify the causal relationship between employment protection legislation and …rm growth. The natural experiment occurred in Sweden in 2001, when an exemption made it possible for …rms with less than eleven employees to exclude two workers from the last-in-…rst-out principle when dismissing personel. The estimated average treatment e¤ect of the reform show that the number of employees increased with 0.135 percent in …rms with 5-9 employees relative to …rms 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-…rst-out rule prevented these …rms from growing. Thus, employment protection legislation seems to act as a growth barrier for small …rms.

Flexible Production and Entry: Institutional, Technological, and Organizational Determinants

“…In particular, the negative correlation between firm entry and employment protection legislation could be driven by a number of country-level factors that are not captured by control variables. The interaction e↵ects and the firm lifecycle results provide additional evidence in support of specific mechanisms, but further research, perhaps relying on a natural experimental setting such as that in Bornhäll et al (2017), is certainly needed.…”

“…An example of a threshold is in France at 10 employees, where employers must pay monthly rather than quarterly social security obligations, transport aid, and a higher training tax (Garicano et al, 2016). Similarly, some employment protection laws (EPLs) in Sweden only a↵ect firms that employ more than ten employees (Bornhäll et al, 2017).…”

“…Bloom et al (2007) and Stein & Stone (2013) are recent empirical studies that demonstrate the adverse e↵ects of uncertainty on a number of firm policies including spending on physical assets, R&D, hiring, and advertising campaigns. Bornhäll et al (2017) examine the e↵ects of a sudden change in labor regulation in Sweden, and show that employment protection law can act as a growth barrier for small firms. 3 Uncertainty and irreversibility have also been shown to be important determinants of firms' entry and exit decisions (O'Brien et al, 2003;O'Brien & Folta, 2009;Folta & O'Brien, 2004;Ghosal, 1996Ghosal, , 2009.…”

Team formation processes in new ventures

“…This, in turn, increases the risks of hiring employees (Davidsson and Henrekson 2002;Henrekson et al 2010). Accordingly, Bornhäll et al (2016) point to the Swedish case, where employment protection (in this case exemptions from the last-in/first-out principle) becomes more severe once a venture employs more than ten workers: accordingly, the authors illustrate that the likelihood of hiring employees decreases significantly once ventures come close to this threshold which, in turn, illustrates the negative influence of rigid labormarket institutions on employee hiring.…”

Habitual entrepreneurs in the making: how labour market rigidity and employment affects entrepreneurial re-entry

“…It is well known that 'entrepreneurs' is a heterogeneous group, with most of the entrepreneurs having no or very few employees (Davidsson and Henrekson 2002;Davidsson et al 2006). Whilst stringent labour market regulations may discourage novice individuals with high growth expectations from engaging in entrepreneurial activities as they may hamper the growth of their firms, there is still limited evidence in regard to how labour market regulations affect entrepreneurial team formation (Held et al 2018) and start-up growth (Bornhall et al 2017).…”