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Job Protection Deregulation in Good and Bad Times

Author

Listed:
  • Mr. Romain A Duval
  • Davide Furceri
  • João Tovar Jalles
Abstract
This paper explores the short-term employment effect of deregulating job protection for regular workers and how it varies with prevailing business cycle conditions. We apply a local projection method to a newly constructed “narrative” dataset of major regular job protection reforms covering 26 advanced economies over the past four decades. The analysis relies on country-sector-level data, using as an identifying assumption the fact that stringent dismissal regulations are more binding in sectors that are characterized by a higher “natural” propensity to regularly adjust their workforce. We find that the responses of sectoral employment to large job protection deregulation shocks depend crucially on the state of the economy at the time of reform——they are positive in an expansion, but become negative in a recession. These findings are consistent with theory, and are robust to a broad range of robustness checks including an Instrumental Variable approach using political economy drivers of reforms as instruments. Our results provide a case for undertaking job protection reform in good times, or for designing it in ways that enhance its short-term impact.

Suggested Citation

  • Mr. Romain A Duval & Davide Furceri & João Tovar Jalles, 2017. "Job Protection Deregulation in Good and Bad Times," IMF Working Papers 2017/277, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/277
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    as
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    More about this item

    Keywords

    WP; business cycle; EPL reform; differential employment effect; labour market; layoff rate; Structural Reforms; Labor Market; Deregulation; Employment Protection; Growth; Employment; severance pay; Business cycles; Labor market frictions; Southern Europe;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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