Does employment protection unprotect workers? The labor market effects of job reinstatements in Peru

Abstract

We investigate the labor market effects of the reestablishment of workers’ right to reinstatement for unfair dismissals, which occurred in 2002 in Peru. Using data from Household Surveys from 2004 to 2015, and the Specialized Employment Survey 1998–2001, we estimate a series of quasi-experimental difference-in-difference models for permanent and temporary hiring. We evaluate the potential effects of reinstatement rights on the private sector with respect to the non-private sector. We find that reinstatement rights are associated with increases in the hiring of temporary workers and reductions in wages. However, further tests indicate that none of these associations is a causal effect, with a remarkable exception: we find that the right to reinstatement increases private permanent hiring by 2.5 percentage points relative to non-private hiring. These effects hold under a battery of alternative specifications and are robust to placebo tests. Our findings call into question the effectiveness of removing reinstatement laws as a policy to increase permanent hiring and wages.