Employment protection legislation and firm operating performance

• In Event: Valuation, Future Performance and Benchmarking

Abstract

We find that operating profit increases (decreases) following the adoption of laws that increase (decrease) employee protection (EPL) across the OECD countries. Consistent with EPL increasing labor productivity, firms maintain their sales levels while reducing their payrolls and capital expenditures after an increase in employee protection. The positive EPL effect attenuates as the level of employee protection increases and is driven by firms from common-law countries. More importantly, while the effect is positive for firms from English-law countries, it is negative for firms from French-law countries. The EPL effect disappears when the level of unionization in a country is high.

Authors

• Henock Louis, Penn State University

• Oktay Urcan, University of Illinois-Urbana-Champaign