Relaxation of employment protection and labour reallocation

Employment law reform enforced in Estonia in mid-2009 provides a good opportunity to examine the outcomes of employment protection legislation (EPL). The purpose of this paper is to evaluate the effects of the reduction in EPL on labour reallocation.

The author exploits the micro-data of the Labour Force Survey to estimate the probabilities of one-year worker flows with probit models, and uses a difference in differences (DID) approach to identify the effects of the EPL reform.

The author finds that the reduction in EPL seems to have increased the probability of transitions out of employment. At the same time, she does not find any significant effect of this reform on the probability of flows into employment. The evaluation also gives evidence of a lowered probability of job-to-job transitions resulting from the reduction in EPL.

In this paper, the DID estimation is conducted by using Lithuanians as the control group for Estonians. However, it should be noted that this approach assumes strong similarities between these countries in order to obtain reliable estimates.

The findings of this paper raise the possibility that the reduction in EPL alone may not have been sufficient for achieving a better reallocation of labour and this is important to consider in the context of further developments in other labour market institutions.