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 Örm growth in Sweden. A reform of the last-in-Örst-out principle increased employment growth with over 4,000 additional jobs per year in Örms with less than eleven employees. Firms with ten employees became 3.4 percentage points less likely to increase their workforce, indicating that an introduced threshold kept them from growing. Thus, employment protection legislation seems to act as a growth barrier for small Örms.

Does Job Security Hamper Employment Prospects?

“…Our results indicate that the reform increased the share of workers hired from unemployment by 5-10 percent, depending on specification. We obtain mixed results concerning transitions from 6 The 2001 reform has been exploited as a natural experiment in several previous studies, investigating effects on sickness absence (Olsson 2009), parental childcare (Olsson, 2017), job flows (von Below and Skogman Thoursie, 2010), labor productivity (Bjuggren, 2018), and firm growth (Bornhäll et al, 2017). A different approach is used by Böckerman et al (2018), who analyze the impact of seniority rules on worker mobility and wages by comparing firms in Sweden with the same firms operating in Finland, where there are no such rules in legislation.…”

Labor Unions and Corporate Cash Holdings: Evidence From International Data

“…They find that labor‐friendly reforms are associated with a reduction in firm leverage. Bornhall, Daunfeldt, and Rudholm () examine the employment protection legislation in Sweden and find that employment protection legislation seems to act as a growth barrier for small firms. Borisov, Gupta, and Subramanian () exploit within‐country variation provided by changes in employment protection laws in Organisation of Economic Co‐operation and Development (OECD) countries to examine the effect of stronger dismissal laws on merger and acquisition activity by U.S. firms in these countries.…”

The diversity of labor market institutions and entrepreneurship

“…For instance, the employment protection legislation indicator does not reflect the variety in the execution of the rules. For instance, Swedish reform in 2001 made it possible for firms with fewer than 11 employees to exclude two from the last-in-first-out principle in case of layoffs (Bornhä ll et al, 2017), which gives less incentive to small business owners to grow their businesses. Another example is the variety of policies, such as using pension funds as a source for finance for entrepreneurs, as in the case of Denmark.…”