The Labour Market Impact Of ”Age-Dependent Employment Protection”

Higher employment protection for older workers can have damaging effects on younger workers, according to research by Professor Jean-Olivier Hairault and colleagues, published in the December 2011 issue of the Economic Journal. Their study suggests that on balance such schemes are beneficial for employment, but they should be designed so that the cost of laying off older workers decreases gradually as they near retirement.

Faced with low employment rates for older workers, most OECD countries have experimented with employment protection specifically designed for older workers. These include penalties for firms that lay off older workers (”firing taxes”), subsidies for firms that hire them and provisions related to the longer tenure that older workers tend to have had, including longer notice periods and higher severance payments.

This study analyses the likely impact of such ”age-dependent employment protection”. It finds that:

  • First, the impact of firing taxes is greater for older workers than for younger ones. Indeed firing taxes at the end of the working life can impede lay-offs until retirement, which eventually allows firms to avoid the firing tax.
  • Second, there are perverse effects on younger workers of higher employment protection for older workers. The expectation of higher taxes after a given age pushes firms to lay off workers just before this age to avoid paying high firing taxes in the future.

The researchers conclude that a well-designed age-dependent employment protection should implement age-decreasing firing taxes for the older workers. The expectation of lower taxes in the future would give the right incentives for firms to postpone job destructions.

If firing costs were declining with the age of the workers, firms would weigh the benefits of firing a worker today against the benefits of waiting until next year, when the firing costs of that worker will be lower. This policy would generalise the virtue of the proximity to retirement for the impact of firing taxes.

”Age-dependent Employment Protection” by Arnaud Cheron, Jean-Olivier Hairault and Francois Langot is published in the December 2011 issue of the Economic Journal.

Jean-Olivier Hairault

Paris School of Economics | +33 1 44 07 82 10 | Jean-Olivier.Hairault@univ-paris1.fr

Arnaud Cheron

University of Le Mans

Francois Langot

University of Le Mans