dismissal rules in some U.S. states (through exceptions to the at-will employment doctrine) were associated with a rise in labor productivity but a decrease in total factor productivity.

Other studies have found a negative relationship between the strictness of EPL and productivity. Bassanini and Venn (2007; OECD 2007) and Bassanini, Nunziata, and Venn (2009) find that more protective job security for regular contracts reduced the annual growth rate for labor and multifactor productivity growth in OECD countries. However, their analyses do not find that restrictions on the use of temporary employment had any effect. In their analysis of 14 European countries, Cingano et al. (2010) find negative impacts of EPL on labor productivity, particularly in sectors with high rates of labor reallocation.

The very limited evidence for developing countries is also inconclusive. Analyzing a sample of both developed and developing countries, Caballero et al. (2004) find that increased employment protection has a significant negative impact on total factor productivity growth (of approximately 1% annually) in countries with strong rule of law but no effect where the rule of law is weak (presumably, many developing countries). Using a similar sample of countries, Micco and Pagés (2006) conclude that stricter EPL does not robustly affect labor productivity, although it does affect output, primarily through a decline in firm entry.

These results reflect the diverse and often opposing ways in which EPL may affect productivity. By slowing labor reallocation, strict job security rules can limit the potential efficiency gains from the movement of workers from low- to high-productivity sectors and firms. Indeed, some researchers have established a link between strict EPL, reduced labor flows, and lower productivity (e.g., Caballero et al. 2004). However, productivity impacts are not always evident despite the clear dampening effect of job security rules on labor reallocation. Martin and Scarpetta (2012) note two possible reasons for this. First, a considerable amount of mobility in the labor market is “churning” and not reallocation from lower- to higher-productivity activities. Second, although firm entry and exit effects are important, productivity growth is largely driven by “within-firm” performance, at least among OECD countries.

Where positive productivity impacts have been found, this tends to be due to adjustments made by firms or workers in response to job security rules. For example, Autor, Kerr, and Kugler (2007) attribute higher labor productivity growth in states adopting stricter dismissal rules to capital and skills deepening on the part of firms. Belot, Boone, and van Ours (2007) link positive productivity impacts to more training resulting from longer expected tenure in highEPL jurisdictions. Examining the U.S., Germany, India, the U.K., and France, Acharya (2010) finds that higher dismissal costs are positively related to innovation, which he attributes to the security this provides for employees to engage in risky activities. However, the relationship between job security and innovation is not straightforward: Calmfors and Holmlund (2000) find that high firing costs reduce employers’ incentives to introduce new technology.

# _Summary_

The impacts of employment protection rules are summarized in Table 2.

Table 2. Summary of impacts of EPL 18