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How Reducing Employment Protection Affects Job Creation and Job Destruction

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A reduction in employment protection is expected to encourage both job creation and job destruction. To estimate these two effects independently, Francesco Maria Esposito exploits a change in the Italian employment protection legislation, approved in 2012, which impacted firms differently depending on their size around the 15 employees cut-off.

Image courtesy of interviewee. July 11, 2024

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This video discusses the impact of employment protection legislation (EPL) on job creation and destruction. EPL consists of regulations that prevent unjustified dismissals by employers, aiming to protect workers. The author investigates how changes in EPL—specifically a reduction in employment protection—affect firms' behaviors regarding hiring (job creation) and layoffs (job destruction).

Previous literature suggests that reducing employment protection would lead to both increased job creation and job destruction because firms would be more willing to hire if they could easily let go of workers when necessary. However, the author finds through a study of Italian firms that after 2012, when EPL was relaxed, there was a notable increase in job destruction, but no corresponding increase in job creation for firms with around 15 employees—contrary to predictions.

This video study uses a difference-in-differences approach with treatment groups that include firms above the cutoff (15 employees) and those exactly at the cutoff, comparing them to a control group of smaller firms. Findings indicate that larger firms tended to fire more employees post-reform, while those at the cutoff did not increase hiring despite expectations.

The study highlights the importance of considering policy uncertainty when assessing the effects of labor laws, noting that firms might act conservatively due to fears of potential future policy reversals. The author emphasizes the need for stability in employment policies to ensure firms can make confident hiring decisions without the anxiety of forthcoming regulatory changes.

Overall, the text suggests that the real-world effects of labor regulations can diverge from theoretical expectations due to factors like policy uncertainty, which can complicate the objectives of employment protection reforms.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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Employment protection legislation is the set

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of all regulations that are in place in order

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to prevent illegitimate dismissals of employers.

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So basically, when we want

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to protect workers from these illegitimate dismissals,

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governments put in place sort of regulations

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that include terms and

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and conditions for the worker to be, to be,

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to be basically fired.

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The, and this regulation must be respected somehow.

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Um, job creation

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and job destruction, instead referred to some measures

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of increasing or decreasing the firm side.

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So it's a firm level measure.

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So the,

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what I'm looking in this study is whether there is an effect

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and what is the effect of employ protection legislation on,

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behaviors, on firms behavior on creating

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and destroying jobs.

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So basically, my question specifically ask, what is,

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the effect of a reduction in employment,

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in employment protection on,

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job creation and job destruction?

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Now, the literature usually,

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about that says that, dynamic model of labor demand

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predict that when employment protection is reduced,

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this will increase both job creation and job destruction.

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So the reason it's simple,

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because if I reduce employment protection,

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so I basically make it easier for firms to fire workers,

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then firms, of course, they will far more easily.

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So they will far more,

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but at the same time, they'll also be incentivized

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and encouraged to hire more

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because they know that they can freely hire

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because in case they will need to fire these workers,

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they can easily do that.

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So there is basically a double effect, a two margins effect

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of a reduction

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or in general policy on employment protection.

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And this is the first paper that try to analyze

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what is the effect on these two margins separately.

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So that's more or less the context of this paper.

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Uh, it's better probably not to mention,

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authors in particular,

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but in general, the literature is concentrated

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and focused on firm sites, on the fact, on

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of employment production, on firm sites,

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and not on these two different margins

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of job creation and job destruction.

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So basically what they see, they simply see

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what they simply study, what is the effect of, a, a,

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a change in employ protection on the sides of the companies,

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but they don't know whether they have more incentive to grow

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or more incentive to decrease and to destroy jobs.

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So again, like employment protection may have this double

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effect, and it is really important

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for policy evaluation reasons to try to understand what is,

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the effect separately on

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job creation and job destruction.

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So the first thing is that most

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of the retailer refer to firm sites.

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The second thing is about the sample sites.

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So as I will explain later, I use, the entire population

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of Italian firms here.

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So I have administered, I have access

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to administrative dataset.

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So I'm, I'm actually able to see what happens

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to every company in a country, not just to a

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small subset of the, of the firms.

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One thing is saying, what is the effect of an introduction

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of employment protection?

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A different thing is saying, what is the effect

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of a reduction in employment protection?

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So there are some papers that study what is

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and analyze what is the effect of an introduction

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of employment protection,

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but that's not exactly symmetric in terms

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of, of the effect.

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So we may expect for some reason

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that if we increment the protection, there is something

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that happens, and if we reduce protection,

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there may be something else that actually happens.

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Until 2012 in Italy,

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there was a specific employment protection legislation

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that was different according

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to the firm sides of companies.

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So if you were up until 15 worker sites,

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so if you basically have small sites,

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then like a really light kind

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of employment protection was in place for firms instead

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that, are larger, were larger than 50 workers.

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Uh, before 2012,

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there was a much stricter employment protection,

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much stricter in the sense that all the,

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all the reasons allowed, for workers to,

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for employers to fire workers were really limited.

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And you needed to prove actually that there was a, a,

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a serious, issue with that worker in order to fire,

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to fire him or her.

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So, what happens is that

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after 2012, this regulation was changed in the sense

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that also it was, it, it was made much easier for firms

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above 15 workers as well to fire workers.

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Why this is the case.

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This is the case because a new reason

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for firing workers was introduced,

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which was the economic reason.

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So that, that was the, the biggest, introduction.

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So basically for firms above this cutoff, it was much easier

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after two, 2012 to fire workers

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because they could use the economic reason

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in order to firework.

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So if the firm was facing some cha some economic challenges,

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then Europe could use these,

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clouds in order to find work.

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So of course, the introduction of these

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For firms above 15 worker

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made substantial change in the behaviors of firms.

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So what happened is that

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before the, the 2012,

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there was a cutoff at 15 workers in firms size distribution.

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So for firms below the cutoff, it's easy to fire

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for firm above the cutoff.

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It's not that easy to fire

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after 2012, we start for firms both below and aft, below

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and, above the cutoff, it's easier to fire.

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So basically, firms above the cutoff have experienced

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after 2012

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and an easiness of, firing workers.

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So I wanna mention something which is really important

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for this study is that the cutoff is sharp in the sense

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that up until 15 workers included is much easier

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to fire workers before 2012, strictly

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above 15 workers in.

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Instead, it was much, much harder.

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Now why I'm saying like this,

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because we expect that firms strictly above 15 workers

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after the policy, since now it's easier to fire,

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they will start firing the case in which

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instead we will see whether there is also an effect on the

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hiring margins

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or on the job creation Margin is on firms at 15 workers

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because those firms were able to fire workers

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without issues before their form.

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But, but after the reform for them, now,

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they should have an incentive to harm new workers

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because they are at 15, probably

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before the reform, they were afraid of surpassing the cutoff

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because once you enter in the 15,

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above the 15 firm sites regulation, then it's hard to,

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for any of your workers.

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So before the, the

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before the reform, you don't wanna, absolutely,

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surpass the cutoff, but after the reform study you want.

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So that's the double margin effect that they evaluate.

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So basically I want to evaluate what is the fact

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of firms above the cutoff.

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They should be more incentivized to fire workers as opposed

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to, hiring new ones, while instead firms exactly 15,

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they should have, been encouraged by these reform

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to hire new workers, while instead they should not,

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see any effects in terms of firing

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because they were able

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to fire workers also before the reform.

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So basically this reform made us a big change in the firm

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site's distribution and in this cutoff.

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So I'm using a difference in difference design

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with two different treatment groups.

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One which is made of firms above the cutoff,

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one other which is made of firms exactly at the cutoff

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and one control group, which is made

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by firms which are below the cutoff.

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Because remember that this firm do not see any effect

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of the reform on them because they were able to hire

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and fire before the reform as well, without any issue.

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So that's the perfect control group.

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So what they do, I do a difference in difference

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between these two treatment groups

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and the control group respectively, to estimate

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what is the effect on job destruction and job creation.

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Again, job destruction using the treatment made of firms

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above, strictly above the cutoff, while instead,

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I evaluate the fact on job creation using firms which are

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exactly at the cutoff, surprisingly,

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and I'm saying surprisingly

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because again, dynamic law, dynamic model

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of labor demand predict

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that a reduction in employment protection would increase

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both job creation and job destruction.

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For the reasons that I've explained at the beginning

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of this interview, what I find is that as a response

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to this policy, there has been a change in, in, for firms

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above the cutoff because they have

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started to fire more workers.

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But at the same time,

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there was no effect on firms at the cutoff in the sense

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that firms with exactly 15 workers didn't start hiring

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and creating new jobs.

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So there was an effect on job destruction,

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but no effect on job creation.

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And this is surprising

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and striking also in light of the motivations.

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Uh, if we look at the motivation that this policy had,

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at the beginning because this, when this policy was made,

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was made because there was a big discussion in Italy

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about firms being reluctant in hiring new workers

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because of this policy.

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So politicians were saying, look, if we remove this policy,

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you will see that, firms will hire new workers

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because they will know that they're free

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to fire them if they wanna to do so.

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But actually what they find in this study is

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that this is not what is happening.

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So always be careful when there are some policy

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and some expectation from theoretical model,

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because there may be something,

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there may be some assumptions of,

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theoretical models which are not verified in reality,

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and that's why we may observe different behaviors

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of firms in response of this policy.

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So in this particular case, what is the insight

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that we have?

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What is theoretical?

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What is the theoretical, assumptions that,

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that models are missing from the general picture?

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In my opinion, what they are missing is the uncertainties,

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what they call policy uncertainty.

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So the reason why we may observe a job destruction in

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this setting and not of creation is

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because there was policy uncertainty about

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this same policy to come back in place in the close future

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is indeed there was like a, a, a hard discussion

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between, policymaker

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but also politicians

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to reintroduce this policy in the next years.

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And if you're a firm

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and you know that now it's easier for you to file,

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but you may know that the year

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after the same policy come back in place again,

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then you know that if you are someone, then you'll,

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you may be stalked at 16, 17 workers say,

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not be able to fire workers

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because they have reintroduced this law.

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So always take into account

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that uncertainty may play a role, in the actual,

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effectiveness of this kind of policy.

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And they provide some suggestive evidence in the paper

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that this is the case because they show that also

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after the policy, the reform was implemented, firms

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above the cutoff are more likely to fire the exact number

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of workers in order to reach exactly the cutoff

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as opposed to fire, different numbers of workers.

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So basically, if you are 16 workers before the reform,

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after this reform is much more likely

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that you file just one worker as opposed

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to two workers or zero workers.

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And if you are 17, worker company is much more likely

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that you file two as opposed to fir three or one.

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Why is this the case?

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Because you know that the same regulation can

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come back in place in the future.

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So you want to make sure that you are at the cutoff so

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that if the regulation come back in place,

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you are not gonna constrain by this regulation.

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So again, this is suggestive of the fact that,

13:44.055 --> 13:47.365
there may be some, aspect

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that may be relevant about uncertainty

13:50.285 --> 13:51.445
and policy uncertainty

13:51.445 --> 13:54.205
that we should consider in future research.

13:54.835 --> 13:57.645
Depending on the setting, it may be more relevant

13:57.645 --> 14:01.125
to protect workers or not protect workers.

14:01.425 --> 14:04.525
So of course, it depends on the institutional settings

14:04.945 --> 14:08.805
and also on the behaviors of the usual behaviors of firms

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and, and workers in specific countries.

14:12.225 --> 14:14.605
So I wouldn't,

14:17.495 --> 14:21.485
bring out so much external validity in this terms.

14:22.145 --> 14:25.005
But what is really important is that, is

14:25.275 --> 14:28.405
that once the policy is implemented,

14:28.955 --> 14:32.165
implemented once the, politicians

14:32.345 --> 14:36.445
and policymaker have chosen one direction, not

14:36.445 --> 14:40.245
to change their mind in the close future,

14:40.515 --> 14:42.245
because if they do that,

14:42.835 --> 14:46.325
they may actually have opposite effect compared to

14:46.325 --> 14:48.085
what they wanna achieve.

14:48.825 --> 14:50.765
So nothing to

14:50.765 --> 14:55.325
Say about general, feasibility

14:56.025 --> 14:58.925
of employment protection depends on the setting.

14:59.345 --> 15:03.605
But be really careful in when you implement this, these

15:04.205 --> 15:08.685
policies to make them last for a few years at least, so

15:08.925 --> 15:11.445
that firms and consumers

15:11.705 --> 15:15.645
or whoever, is gonna be, in place in

15:15.645 --> 15:19.565
that moment feel okay doing whatever they wanna do.

15:19.595 --> 15:22.245
They don't need to feel constrained with pressure,

15:22.555 --> 15:26.325
otherwise opposite effect may be achieved.

The Impact of Employment Protection Legislation on Job Creation and Destruction**

00:00:00 - Employment protection legislation is the set of all regulations that are in place in order to prevent illegitimate dismissals of employers. So basically, when we want to protect workers from these illegitimate dismissals, governments put in place sort of regulations that include terms and and conditions for the worker to be, to be, to be basically fired. The, and this regulation must be respected somehow. job creation and job destruction, instead referred to some measures of increasing or decreasing the firm side. So it's a firm level measure. So the, what I'm looking in this study is whether there is an effect
00:00:49 - behaviors, on firms behavior on creating and destroying jobs. So basically, my question specifically ask, what is, the effect of a reduction in employment, in employment protection on, job creation and job destruction? Now, the literature usually, about that says that, dynamic model of labor demand predict that when employment protection is reduced, this will increase both job creation and job destruction.
00:01:26 - because if I reduce employment protection, so I basically make it easier for firms to fire workers, then firms, of course, they will far more easily. So they will far more, but at the same time, they'll also be incentivized and encouraged to hire more because they know that they can freely hire because in case they will need to fire these workers, they can easily do that. So there is basically a double effect, a two margins effect of a reduction or in general policy on employment protection. And this is the first paper that try to analyze what is the effect on these two margins separately.
00:02:09 - it's better probably not to mention, authors in particular, but in general, the literature is concentrated and focused on firm sites, on the fact, on of employment production, on firm sites, and not on these two different margins of job creation and job destruction. So basically what they see, they simply see what they simply study, what is the effect of, a, a, a change in employ protection on the sides of the companies, but they don't know whether they have more incentive to grow or more incentive to decrease and to destroy jobs.
00:02:49 - effect, and it is really important for policy evaluation reasons to try to understand what is, the effect separately on job creation and job destruction. So the first thing is that most of the retailer refer to firm sites. The second thing is about the sample sites. So as I will explain later, I use, the entire population of Italian firms here. So I have administered, I have access to administrative dataset. So I'm, I'm actually able to see what happens to every company in a country, not just to a
00:03:30 - One thing is saying, what is the effect of an introduction of employment protection? A different thing is saying, what is the effect of a reduction in employment protection? So there are some papers that study what is and analyze what is the effect of an introduction of employment protection, but that's not exactly symmetric in terms of, of the effect. So we may expect for some reason that if we increment the protection, there is something that happens, and if we reduce protection, there may be something else that actually happens. Until 2012 in Italy,

"Changes in Employment Protection Legislation: Impacts on Firm Behavior and Job Security"

00:04:10 - that was different according to the firm sides of companies. So if you were up until 15 worker sites, so if you basically have small sites, then like a really light kind of employment protection was in place for firms instead that, are larger, were larger than 50 workers. before 2012, there was a much stricter employment protection, much stricter in the sense that all the, all the reasons allowed, for workers to,
00:04:53 - And you needed to prove actually that there was a, a, a serious, issue with that worker in order to fire, to fire him or her. So, what happens is that after 2012, this regulation was changed in the sense that also it was, it, it was made much easier for firms above 15 workers as well to fire workers. Why this is the case. This is the case because a new reason for firing workers was introduced, which was the economic reason. So that, that was the, the biggest, introduction.
00:05:37 - after two, 2012 to fire workers because they could use the economic reason in order to firework. So if the firm was facing some cha some economic challenges, then Europe could use these, clouds in order to find work. So of course, the introduction of these For firms above 15 worker made substantial change in the behaviors of firms. So what happened is that before the, the 2012, there was a cutoff at 15 workers in firms size distribution. So for firms below the cutoff, it's easy to fire
00:06:18 - It's not that easy to fire after 2012, we start for firms both below and aft, below and, above the cutoff, it's easier to fire. So basically, firms above the cutoff have experienced after 2012 and an easiness of, firing workers. So I wanna mention something which is really important for this study is that the cutoff is sharp in the sense that up until 15 workers included is much easier to fire workers before 2012, strictly above 15 workers in.
00:07:00 - Now why I'm saying like this, because we expect that firms strictly above 15 workers after the policy, since now it's easier to fire, they will start firing the case in which instead we will see whether there is also an effect on the hiring margins or on the job creation Margin is on firms at 15 workers because those firms were able to fire workers without issues before their form. But, but after the reform for them, now, they should have an incentive to harm new workers because they are at 15, probably
00:07:43 - because once you enter in the 15, above the 15 firm sites regulation, then it's hard to, for any of your workers. So before the, the before the reform, you don't wanna, absolutely, surpass the cutoff, but after the reform study you want. So that's the double margin effect that they evaluate. So basically I want to evaluate what is the fact of firms above the cutoff. They should be more incentivized to fire workers as opposed to, hiring new ones, while instead firms exactly 15, they should have, been encouraged by these reform

"Analyzing the Impact of Employment Protection Reforms on Job Creation and Destruction: A Policy Uncertainty Perspective"**

00:08:26 - see any effects in terms of firing because they were able to fire workers also before the reform. So basically this reform made us a big change in the firm site's distribution and in this cutoff. So I'm using a difference in difference design with two different treatment groups. One which is made of firms above the cutoff, one other which is made of firms exactly at the cutoff and one control group, which is made by firms which are below the cutoff. Because remember that this firm do not see any effect of the reform on them because they were able to hire
00:09:07 - So that's the perfect control group. So what they do, I do a difference in difference between these two treatment groups and the control group respectively, to estimate what is the effect on job destruction and job creation. Again, job destruction using the treatment made of firms above, strictly above the cutoff, while instead, I evaluate the fact on job creation using firms which are exactly at the cutoff, surprisingly, and I'm saying surprisingly because again, dynamic law, dynamic model of labor demand predict that a reduction in employment protection would increase
00:09:46 - For the reasons that I've explained at the beginning of this interview, what I find is that as a response to this policy, there has been a change in, in, for firms above the cutoff because they have started to fire more workers. But at the same time, there was no effect on firms at the cutoff in the sense that firms with exactly 15 workers didn't start hiring and creating new jobs. So there was an effect on job destruction, but no effect on job creation. And this is surprising and striking also in light of the motivations. if we look at the motivation that this policy had, at the beginning because this, when this policy was made,
00:10:32 - about firms being reluctant in hiring new workers because of this policy. So politicians were saying, look, if we remove this policy, you will see that, firms will hire new workers because they will know that they're free to fire them if they wanna to do so. But actually what they find in this study is that this is not what is happening. So always be careful when there are some policy and some expectation from theoretical model, because there may be something, there may be some assumptions of, theoretical models which are not verified in reality,
00:11:14 - of firms in response of this policy. So in this particular case, what is the insight that we have? What is theoretical? What is the theoretical, assumptions that, that models are missing from the general picture? In my opinion, what they are missing is the uncertainties, what they call policy uncertainty. So the reason why we may observe a job destruction in this setting and not of creation is because there was policy uncertainty about this same policy to come back in place in the close future
00:11:57 - between, policymaker but also politicians to reintroduce this policy in the next years. And if you're a firm and you know that now it's easier for you to file, but you may know that the year after the same policy come back in place again, then you know that if you are someone, then you'll, you may be stalked at 16, 17 workers say, not be able to fire workers because they have reintroduced this law. So always take into account that uncertainty may play a role, in the actual,

"Navigating Policy Uncertainty: The Impact of Employment Protection Reforms on Firm Behavior"

00:12:39 - And they provide some suggestive evidence in the paper that this is the case because they show that also after the policy, the reform was implemented, firms above the cutoff are more likely to fire the exact number of workers in order to reach exactly the cutoff as opposed to fire, different numbers of workers. So basically, if you are 16 workers before the reform, after this reform is much more likely that you file just one worker as opposed to two workers or zero workers. And if you are 17, worker company is much more likely
00:13:24 - Why is this the case? Because you know that the same regulation can come back in place in the future. So you want to make sure that you are at the cutoff so that if the regulation come back in place, you are not gonna constrain by this regulation. So again, this is suggestive of the fact that, there may be some, aspect that may be relevant about uncertainty and policy uncertainty that we should consider in future research. Depending on the setting, it may be more relevant to protect workers or not protect workers.
00:14:04 - and also on the behaviors of the usual behaviors of firms and, and workers in specific countries. So I wouldn't, bring out so much external validity in this terms. But what is really important is that, is that once the policy is implemented, implemented once the, politicians and policymaker have chosen one direction, not to change their mind in the close future, because if they do that,
00:15:22 - what they wanna achieve. So nothing to Say about general, feasibility of employment protection depends on the setting. But be really careful in when you implement this, these policies to make them last for a few years at least, so that firms and consumers or whoever, is gonna be, in place in that moment feel okay doing whatever they wanna do. They don't need to feel constrained with pressure, otherwise opposite effect may be achieved.

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