Job Protection Deregulation in Good and Bad Times

IMF Working Papers, December 14, 2017

Source details

Title: Job Protection Deregulation in Good and Bad Times
Authors: Romain A Duval, Davide Furceri, João Tovar Jalles
Date: December 14, 2017
Primary question: How does deregulating job protection for regular workers affect short-term employment, and how does this effect vary with prevailing business cycle conditions?

Coverage: major regular job protection reforms covering 26 advanced economies over the past four decades.
Unit of analysis: country-sector-level data.
Identification strategy: relies on the assumption that stringent dismissal regulations are more binding in sectors characterized by a higher “natural” propensity to regularly adjust their workforce.
Econometric approach: local projection method applied to a newly constructed “narrative” dataset of reforms.

The responses of sectoral employment to large job protection deregulation shocks depend crucially on the state of the economy at the time of reform:
- Positive employment responses in an expansion.
- Negative employment responses in a recession.
Findings are consistent with theoretical predictions about differential effects by business cycle state.

Results are robust to a broad range of robustness checks.
Instrumental Variable approach: uses political economy drivers of reforms as instruments; conclusions remain robust under this IV strategy.

The analysis provides a case for:
- Undertaking job protection reform in good times.
- Designing job protection reform in ways that enhance its short-term impact when implemented (implicitly to mitigate adverse effects in recessions).

Job Protection Deregulation in Good and Bad Times, WP/17/277, December 2017
- Job Protection Deregulation in Good and Bad Times, WP/17/277, December 2017 (Markdown version)
- Job Protection Deregulation in Good and Bad Times, WP/17/277, December 2017 (PDF)