Dismissals Protection and Employment: does the Lazear Model Work for Portugal?

Abstract

Although there is considerable academic controversy over the labor market consequences of statutory employment protection, many observers would appear to accept that adverse effects are more likely to be encountered in southern European nations. In the present paper we examine the applicability of Lazear's (1990) pioneering empirical model to one such country, namely, Portugal, for the sample period 1966-91. The apparently strong contribution of severance pay to rising levels of Portuguese unemployment is shown to be sensitive to the inclusion of additional controls representing elements of that country's unemployment insurance system. Indeed, the coefficient estimate for this job protection measure abruptly changes in sign. Quite contrary to the empirical suggestion in Lazear, we conclude that the model is not relevant to Portugal.