Abstract
Small firms are important drivers of employment creation and innovation. Dismissal protection raises firms’ adjustment costs and thus reduces worker flows. In many countries, small firms are exempted from dismissal protection regulations in order to increase their flexibility. This paper exploits a shift in the firm-size threshold of the German dismissal protection law in 2004 to analyze the causal effects of relaxed dismissal protection on the hiring behavior of small firms. Using difference-in-differences techniques, we find positive effects on hirings. Placebo treatment tests based on pre-treatment periods and a fake treatment group confirm the validity of our empirical strategy.
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