Dismissal protection and long‐term sickness absence: Evidence from a policy change

Abstract

This paper studies whether a decline in employment protection reduces workers' long‐term sickness absences (of >6 weeks). We exploit exogenous variation from a German policy change that shifted the threshold exempting small establishments from dismissal protection from 5 to 10 workers. Using German register data, we find that the reform significantly reduced employees' transitions into long‐term sickness during their second year after being hired. This response is due to a behavioral rather than a compositional effect and is particularly pronounced among the medium‐skilled and younger males. Further results indicate that the reform did not alter the probability of involuntary unemployment after sickness.