Small Business Economics

, Volume 40, Issue 2, pp 293–307 | Cite as

Dismissal protection and small firms’ hirings: evidence from a policy reform

  • Stefan Bauernschuster


Small firms are important drivers of employment creation and innovation. Dismissal protection raises firms’ adjustment costs and thus reduces worker flows. In many countries, small firms are exempted from dismissal protection regulations in order to increase their flexibility. This paper exploits a shift in the firm-size threshold of the German dismissal protection law in 2004 to analyze the causal effects of relaxed dismissal protection on the hiring behavior of small firms. Using difference-in-differences techniques, we find positive effects on hirings. Placebo treatment tests based on pre-treatment periods and a fake treatment group confirm the validity of our empirical strategy.


Dismissal protection Small firms Difference-in-differences 

JEL Classifications

J38 K31 M21 L26 



I am indebted to Oliver Falck, participants of the 2009 EEA/ESEM Conference in Barcelona and the 2009 EALE Conference in Tallinn. Moreover, I am thankful to the associate editor Miriam van Praag, and two anonymous referees for very constructive comments.


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Copyright information

© Springer Science+Business Media, LLC. 2011

Authors and Affiliations

  1. 1.Ifo Institute - Leibniz Institute for Economic Research at the University of MunichMunichGermany
  2. 2.CESifoMunichGermany

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