Dismissal protection and worker flows in OECD countries: Evidence from cross-country/cross-industry data

Exploiting a unique dataset including cross-country comparable hiring and separation rates by type of transition for 24 OECD countries, 23 business-sector industries and 13 years, we study the effect of dismissal regulations on different types of gross worker flows, defined as one-year transitions. We use both a difference-in-difference approach – in which the impact of regulations is identified by exploiting likely cross-industry differences in their impact – and standard time-series analysis – in which the effect of regulations is identified through regulatory changes over time. We find that the more restrictive the regulation, the smaller is the rate of within-industry job-to-job transitions, in particular towards permanent jobs. By contrast, we find no significant effect as regards separations involving an industry change or leading to non-employment. The extent of reinstatement in the case of unfair dismissal appears to be the most important regulatory determinant of gross worker flows. We also present a large battery of robustness checks that suggest that our findings are robust.

► We study the effect of EPL on gross worker flows using cross-country data.
► We use both a difference-in-difference approach and standard time-series analysis.
► The more stringent the EPL, the smaller the rate of within-industry transitions.
► EPL has no effect on separations leading to industry change/non-employment.
► The extent of reinstatement is found the key regulatory determinant of gross flows.