DP13767 The Detrimental Effect of Job Protection on Employment: Evidence from France

Author(s): Pierre Cahuc, Franck Malherbet, Julien Prat
Publication Date: May 2019
Keyword(s): Dismissal costs, Employment protection legislation, unemployment
JEL(s): J32, J63, J65
Programme Areas: Labour Economics, Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13767

According to French law, employers have to pay at least six months salary to employees whose seniority exceeds two years in case of unfair dismissal. We show, relying on data, that this regulation entails a hike in severance payments at two-year seniority which induces a significant rise in the job separation rate before the two-year threshold and a drop just after. The layoff costs and its procedural component are evaluated thanks to the estimation of a search and matching model which reproduces the shape of the job separation rate. We find that total layoff costs increase with seniority and are about four times higher than the expected severance payments at two years of seniority. Counterfactual exercises show that the fragility of low-seniority jobs implies that layoff costs reduce the average job duration and increase unemployment for a wide set of empirically relevant parameters.