Dismissals for cause: the difference that just eight paragraphs can make

This paper provides evidence about the effects of dismissals-for-cause requirements, a specific component of employment protection legislation that has received little attention despite its potential relevance. We study a quasi-natural experiment generated by a law introduced in Portugal in 1989: out of the 12 paragraphs in the law that dictated the costly procedure required for dismissals for cause, eight did not apply to firms employing 20 or fewer workers. Using detailed matched employer-employee longitudinal data and difference-in-differences matching methods, we examine the impact of that differentiated change in firing costs upon several variables, measured from 1991 to 1999. Unlike predicted by theory, we do not find robust evidence of effects on worker flows. However, firm performance improves considerably while wages fall. Overall, the results suggest that firing costs of the type studied here decrease workers’ effort and increase their bargaining power.