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Employment Protection Legislation and the Size of Firms

Andrea Borgarello, Pietro Garibaldi and Lia Pacelli

No 23, LABORatorio R. Revelli Working Papers Series from LABORatorio R. Revelli, Centre for Employment Studies

Abstract: The existing literature ignores the fact that in most European countries the strictness of Employment Protection Legislation (EPL) varies across the firm size distribution. In Italy firms are obliged to rehire an unfairly dismissed worker only if they employ more than 15 employees. Theoretically, the paper solves a baseline model of EPL with threshold effects, and shows that firms close to the threshold are characterized by an increase in inaction and by a reluctance to grow. Empirically, the paper estimates transition probability matrices on firmlevel employment using a longitudinal data set based on Italian Social Security (INPS) records, and finds two results. First, firms close to the 15 employees threshold experience an increase in persistence of 1.5 percent with respect to a baseline statistical model. Second, firms with 15 employees are more likely to move backward than upward. Finally, the paper tests the effect of a 1990 reform which tightened the regulation on individual dismissal only for small firms. It finds that the persistence of small firms relative to large firms increased significantly. Overall, these threshold effects are significant and robust, but quantitatively small.

Keywords: Employment Protection Legislation; Firm Size. (search for similar items in EconPapers)
JEL-codes: J4 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2003
References: Add references at CitEc
Citations: View citations in EconPapers (27)

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Journal Article: Employment Protection Legislation and the Size of Firms (2004) Downloads
Working Paper: Employment Protection Legislation and the Size of Firms (2003) Downloads
Working Paper: Employment Protection Legislation and the Size of Firms (2003) Downloads
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