firing costs in Colombia increased the exit rate out of unemployment and employment and reduced average job tenure. Other studies in Latin America have linked reductions in EPL with lower average tenure and increased turnover (Saavedra and Torero 2004 for Peru; Hopenhayn 2004 for Argentina). Some studies have also shown that the strength of the relationship between EPL and labor market dynamics may depend on a country’s rule of law. Cross-country analyses by Caballero et al _._ (2004) and Micco and Pagés (2006) find that the effect of EPL on job and worker flows is very important where the rule of law is strong and may largely disappear where the rule of law is weak. This is an important finding in the context of developing countries.

By affecting the process of job creation and destruction, employment protection legislation can have an impact on the way that labor markets adjust to external shocks, such as a recession or labor-saving technology. However, this relationship may be complicated. Whereas protective job security rules limit the ability of firms to lay off workers in the event of a shock, they may also increase unemployment by slowing the speed of firms’ adjustment and extending the duration of jobless spells. Consistent with this phenomenon, empirical work in the OECD has found that stricter EPL may moderate the initial adverse effects of a shock but may subsequently contribute to its persistence (OECD 2006; Bassanini and Duvall 2006). Blanchard and Wolfers (2000) find that the second effect dominates, at least in Europe, concluding that strong job security rules increase the negative impact of shocks on unemployment **.** Examining the recent financial crisis, Bentolila et al. (2011) estimate that real differences in EPL (i.e., reflecting differences in enforcement) explain much of why the unemployment rate in France did not rise as much as it did in Spain, where job security protections are stronger.<sup>17</sup> Not all studies, however, support a negative relationship between strong EPL and adjustments to shocks. Petrin and Sivadsadan (2006) find that 1991 and 1994 changes in Chile’s EPL had no impact on the speed of adjustment. Additionally, Eichhorst et al. (2010), examining the way that different G20 countries adjusted to the recent financial crisis, find no systematic impact of different EPL levels.

# _Impacts on earnings_

Changes in EPL are mostly expected to affect employment, not wages. Accordingly, few studies have examined any earnings effects. The research that exists pertains to the distribution of wages and is essentially limited to developed countries. The most extensive analysis of this issue was conducted by the OECD (2011) in its recent study of inequality, which concluded that less strict EPL is associated with more wage dispersion.

# _Impacts on productivity_

Theoretical expectations about the productivity effects of job security rules are indeterminate. Empirical work, mostly limited to OECD countries, is somewhat inconclusive as well. Some researchers have identified a positive relationship between the level of EPL and productivity or productivity growth, although often with conditions. For example, analyzing OECD countries, Belot, Boone, and van Ours (2007) find that stricter EPL increased productivity, but only in environments where workers invested in firm-specific skills.<sup>18</sup> Nickell and Layard (1999) and Koeniger (2005) identify positive relationships between EPL and both labor and multifactor productivity growth in OECD countries, although their results were generally weak and depended on model specifications. Autor, Kerr, and Kugler (2007) find that effectively stricter 17