Employment Protection, Threat and Incentive Effects on Worker Effort

This paper provides new evidence on the effect of changes in employment protection on worker effort. We use novel multi-organization data to examine changes in worker absence as workers move from temporary to permanent employment contracts. Earlier research has demonstrated very large negative effects of employment protection on effort. We find that the magnitudes of these effects are substantially smaller than those identified in previous studies. It has been suggested that the negative effect on effort is due to a fear of dismissal. We demonstrate that the absence behaviour of temporary workers is also influenced by incentives to attain jobs with protection that are unrelated to threat of dismissal, this has not been considered in earlier research. This channel of employment protection effects has important policy implications.