Firm’s Employment Adjustment in Response to Labor Regulation

Abstract

In this paper, we examine the impact of the labor regulation on firm's employment. South Korea's labor reform in 2007 restricted the duration of the specific types of temporary contract — fixed term and dispatched contract — to maximum two years and required those temporary contracts to be converted into permanent contracts after the maximum duration. We exploit the fact that the impact of the reform is larger for the establishments that used those temporary workers intensively and apply a difference-in-difference framework. Our empirical analysis shows that stronger employment protection reduces the establishment's labor use. Moreover, we find that businesses try to mitigate the impact of the employment protection by reducing the use of fixed-term and dispatched contracts and increasing the use of atypical temporary contract that are not restricted by the reform. We also find that this shift towards legally less burdensome contract workers becomes more prevalent when the labor union exists.