Dismissal regulation and hiring and dismissal decisions: a decisive factor? the case of the French labor market reforms

Abstract

Following the example of other European countries in recent years, two major reforms of dismissal regulation were implemented in France in 2016 and 2017. The aim of this article is to assess, from a microeconomic perspective, the effects of these reforms on the hiring and dismissal decisions of French firms. Does making dismissals easier increase dismissals and stimulate hiring? We also ask what is the role of this institutional factor in firms' decisions relative to two other factors: the strategies used by firms in their use of the law and in the management of their workforce; as well as the aggregate effects or the business climate. To this end, we constructed an original database that follows a panel of firms between 2016 and 2019. To take into account the great heterogeneity of employment management practices across firm sizes, this database is then divided into 4 bases—from very, very small firms (fewer than 5 employees) to large firms (50 employees or more). Based on the estimation of several fixed-effects models, we show that the reforms may have played a role in employment decisions, but only in hiring, and especially for small firms (less than 10 employees). However, for these small firms, hiring decisions are also, if not more, driven by employee departures in a human resource management logic. Large firms however are less affected. Finally, aggregate effects reflecting the macroeconomic business climate largely explain the trend in hiring and dismissals over the period, except in the case of large firms, where changes in individual practices may have had a temporary effect on these trends without changing the overall trend.