Employment Protection and Productivity: Evidence from firm-level panel data in Japan

Author Name OKUDAIRA Hiroko (Okayama University) / TAKIZAWA Miho (Toyo University) / TSURU Kotaro (Senior Fellow, RIETI)
Creation Date/NO. December 2011 11-E-078
Research Project Reform of Labor Market Institutions
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Recent developments in the literature on employment protection legislation (EPL) have revealed that changing the stringency of employment protection can lead to extensive consequences outside of the labour market, by affecting firms' production decisions or workers' commitment levels. This paper provides the first empirical evaluation of the comprehensive effect of restrictions on firing employees in Japan, by exploiting the variations in court decisions. We find that judgments lenient to workers significantly reduce firms' total-factor productivity growth rate. The effect on capital is mixed and inconclusive, although we obtain modest evidence that an increase in firing costs induces a negative scale effect on capital inputs.

Published: Hiroko Okudaira, Miho Takizawa and Kotaro Tsuru, 2013. "Employment Protection and Productivity: Evidence from Firm-level Panel Data in Japan," Applied Economics, Vol. 45(15), pp. 2091-2105