Employment protection and firm-level job reallocation: adjusting for coverage

This paper finds that employment protection legislation (EPL) had a significant impact on employmentadjustmentin Europe over 2001-2013, once we account forfirm-sizerelated exemptions to EPL. We constructa novel coverage-adjusted EPL indicator and find that EPL hinders employmentgrowth at the firm leveland increases the share of firms that remain in the same size class. This suggests that stricter EPL restrains job creationbecausefirms fear the costs of shedding jobsduringdownturns.We do not find evidence that EPL has positive effects on employment by limiting joblossesafter adverse shocks. In addition to standard controlsfor the share of credit-constrained firmsand the position in the business cycle, we also control forsize-related corporate tax exemptions and findthat thesealso significantly constrain job creation among incumbent firms.