The Effects of Eliminating Employer Protection

Abstract

How does employment protection legislation (EPL) shape the jobs and labor market outcomes of insiders with maximal seniority? We provide a comprehensive analysis of the sharp and complete elimination of EPL that occurs at age 67 in Sweden, as well as reform-driven shifts in this cutoff. First, focusing on direct separation effects, we find that 8.4% of jobs separate in response to the elimination of EPL. Effects stem from jobs with stronger initial EPL (long-tenure, firms subject to ``last in, first out'' rules), and those in the public sector. Separations appear to be involuntary to workers, with firms targeting plausibly unproductive (sick) workers. Second, we focus on the effects of continuing jobs. While wages appear rigid to EPL, we uncover novel, sizable intensive-margin hours reductions among continuing jobs, and a sizeable drop in earnings. Third, we estimate total equilibrium effects at the cohort level, where separations fully pass through into employment and total earnings effects, with no offsetting effect from hiring. Overall, our study reveals that EPL can provide a moderate boost to the length of the working life by extending the duration and quality of workers' last jobs, albeit at potential equilibrium costs to firms and younger workers.