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Small Business Economics

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01.02.2013

Dismissal protection and small firms’ hirings: evidence from a policy reform

verfasst von: Stefan Bauernschuster

Erschienen in: Small Business Economics | Ausgabe 2/2013

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Abstract

Small firms are important drivers of employment creation and innovation. Dismissal protection raises firms’ adjustment costs and thus reduces worker flows. In many countries, small firms are exempted from dismissal protection regulations in order to increase their flexibility. This paper exploits a shift in the firm-size threshold of the German dismissal protection law in 2004 to analyze the causal effects of relaxed dismissal protection on the hiring behavior of small firms. Using difference-in-differences techniques, we find positive effects on hirings. Placebo treatment tests based on pre-treatment periods and a fake treatment group confirm the validity of our empirical strategy.

Vorheriger Artikel Disaggregating entrepreneurial orientation: the non-linear impact of innovativeness, proactiveness and risk-taking on SME performance

Nächster Artikel Entrepreneurial skills and workers’ wages in small firms

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Martins (2009), for example, studies the effects of relaxed dismissal protection for small firms in Portugal, whereas Boeri and Jimeno (2005) or Kugler and Pica (2008) analyze these effects for Italy.

Starting in 2004, in case of dismissals on operational grounds, dismissed workers can choose between appeal to court and a legal compensation payment of half a month’s earnings per year employed, but only if this is explicitly pointed out in the letter of notice.

Some of the reforms affected marginal employment contracts (so-called “mini” or “midi jobs”) or the financial support of hiring unemployed and handicapped persons. However, none of these reforms interferes with the establishment size threshold we will exploit in this paper. Although we do not see any obvious problems here, we should note that these reforms would blur a clean identification of the causal effects of relaxed dismissal protection if establishments with more than 5 and up to 10 employees reacted differently to these policy changes than establishments with more than 10 and up to 20 employees.

Access to the data was granted via controlled data teleprocessing at the Research Data Centre of the German Federal Employment Agency (BA) at the Institute for Employment Research (IAB).

Every employer in Germany has to report information about every employee subject to obligatory social insurance to the German Social Insurance Statistics.

As long as any seasonal patterns of hirings are similar across treatment and control group, this does not hamper the identification of our treatment effects. However, even if they were different across these groups, as long as the difference would not vary over time, this would pose no identification problems due to our double differences approach.

According to Sect. 23 I KSchG, employees working not more than 20 h a week are weighted by a factor of 0.5, whereas employees working more than 20 h but not more than 30 h are weighted by 0.75. Slight modifications of our global weight do not affect the results.

The results for the absolute number of hirings are not qualitatively different and are available from the authors upon request.

The detailed results of this regression can be found in Table 7 of the Appendix.

We also ran placebo treatment tests taking all establishments with more than 20 but less than 30 full-time equivalent workers and compare them to our control group consisting of establishments with more than ten and up to 20 full-time equivalent workers. The number of observations increases to 1,308; yet, the results are not qualitatively different.

At the same time, this result suggests that we can rely on our main difference-in-differences findings from Table 1 and do not necessarily need to restrict our control group as in Table 2. This is because the entire control group shows homogenous time trends.

The dataset allows us to identify the number of workers who left an establishment because they retired or died. These individuals are not included in our dismissal variables.

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Titel: Dismissal protection and small firms’ hirings: evidence from a policy reform
verfasst von: Stefan Bauernschuster
Publikationsdatum: 01.02.2013
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 2/2013
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-011-9370-3

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