The impact of firing costs on turnover and unemployment: Evidence from the Colombian labour market reform

Adriana Kugler

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Reductions in firing costs are often advocated as a way of increasing the dynamism of labour markets in both developed and less developed countries. Evidence from Europe and the U.S. on the impact of firing costs has, however, been mixed. Moreover, legislative changes both in Europe and the U.S. have been limited. This paper, instead, examines the impact of the Colombian Labour Market Reform of 1990, which substantially reduced dismissal costs. I estimate the incidence of a reduction in firing costs on worker turnover by exploiting the temporal change in the Colombian labour legislation as well as the variability in coverage between formal and informal sector workers. Using a grouping estimator to control for common aggregate shocks and selection, I find that the exit hazard rates into and out of unemployment increased after the reform by over 1% for formal workers (covered by the legislation) relative to informal workers (uncovered). The increase of the hazards implies a net decrease in unemployment of a third of a percentage point, which accounts for about one quarter of the fall in unemployment during the period of study.

Keywords: Firing costs; worker turnover; exit hazard rates; grouping estimators; selection biases; labour market reform (search for similar items in EconPapers)
JEL-codes: J41 J42 J63 J64 J65 (search for similar items in EconPapers)
Date: 1999-05
New Economics Papers: this item is included in nep-lab and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (143)

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Journal Article: The Impact of Firing Costs on Turnover and Unemployment: Evidence from the Colombian Labour Market Reform (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:388

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