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Relaxation of employment protection and labour reallocation

Liina Malk (Department of Finance and Economics, Tallinn University of Technology and Economics and Research Department, Bank of Estonia, Tallinn Estonia)

International Journal of Manpower

ISSN: 0143-7720

Article publication date: 26 August 2014




Employment law reform enforced in Estonia in mid-2009 provides a good opportunity to examine the outcomes of employment protection legislation (EPL). The purpose of this paper is to evaluate the effects of the reduction in EPL on labour reallocation.


The author exploits the micro-data of the Labour Force Survey to estimate the probabilities of one-year worker flows with probit models, and uses a difference in differences (DID) approach to identify the effects of the EPL reform.


The author finds that the reduction in EPL seems to have increased the probability of transitions out of employment. At the same time, she does not find any significant effect of this reform on the probability of flows into employment. The evaluation also gives evidence of a lowered probability of job-to-job transitions resulting from the reduction in EPL.

Research limitations/implications

In this paper, the DID estimation is conducted by using Lithuanians as the control group for Estonians. However, it should be noted that this approach assumes strong similarities between these countries in order to obtain reliable estimates.


The findings of this paper raise the possibility that the reduction in EPL alone may not have been sufficient for achieving a better reallocation of labour and this is important to consider in the context of further developments in other labour market institutions.



JEL Classifications — J60, K31

The author would like to thank Tairi Rõõm, Jaanika Meriküll, Orsolya Soosaar, Karsten Staehr, four anonymous referees and participants in the internal presentations of the paper in the Bank of Estonia for their valuable comments or other forms of input. The author would also like to thank Statistics Estonia and Statistics Lithuania for providing the data of the Labour Force Surveys and gratefully acknowledges the help of Aurelijus Dabušinskas in acquiring the Lithuanian data. All remaining errors are wholly the responsibility of the author alone.


Malk, L. (2014), "Relaxation of employment protection and labour reallocation", International Journal of Manpower, Vol. 35 No. 6, pp. 898-926.



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