Deadwood Labor: The Effects of Eliminating Employment Protection

We study the role of employment protection legislation (EPL) in boosting employment among older workers. Our analysis juxtaposes the quantitative employment gains with the qualitative “deadwood labor†problem that such gains entail. We do so by conducting 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 age cutoff. First, focusing on direct separation effects, we find that 8% 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 involuntary to workers, with firms targeting plausibly unproductive (sick) workers. Second, we focus on effects of continuing jobs. While wages appear rigid to EPL, we uncover novel, sizable intensive-margin hours reductions among continuing jobs, and an 8% drop in earnings conditional on staying on the job. Third, we estimate total equilibrium effects at the cohort level, where separations fully pass through into employment to population rate effects, with no offsetting effect from hiring. On a per-capita basis, total earnings of older workers causally drop by 21.5% due to EPL elimination. We validate these local effects by leveraging a reform-driven shift in the age cutoff from 67 to 68.