Do Employment Protections Reduce Productivity?Evidence from U.S. States

Theory predicts that mandated employment protections may reduce productivity by distortingproduction choices. Firms facing (non-Coasean) worker dismissal costs will curtail hiringbelow efficient levels and retain unproductive workers, both of which should affectproductivity. These theoretical predictions have rarely been tested. We use the adoption ofwrongful-discharge protections by U.S. state courts over the last three decades to evaluatethe link between dismissal costs and productivity...