Costs of hiring and firing
Costs of hiring and firing can influence innovation in firms by affecting the risks and costs associated with investments and other business strategies that involve labour decisions. There is evidence to suggest that lower costs in hiring and firing can facilitate the creation and growth of companies, and have a lesser impact on direct productivity gains. The costs of hiring/firing differ across OECD countries, notably because of differences in employment protection legislation and regulations regarding minimum wages. The costs of hiring and firing can critically affect access to skilled labour, including from abroad. It helps shape the administrative framework for entry and growth, and can therefore impact competition. Policies can influence the costs of hiring/firing in relation to innovative businesses in several ways, such as supporting workers rather than jobs and ensuring that employment legislation is as clear and simple as possible.
- administrative burdens (keeping records, ensuring employees are legally employed)
- compliance with related regulations, such as anti-discrimination legislation (which affects recruitment practices) and provision for maternity leave and pensions
- direct costs related to minimum wages and obligatory social charges
- searching for adequate personnel, which involves substantial costs
- difficulties in understanding complicated and changing legislation, including difficulties in understanding the exact limits of the law and possible sanctions for breaking it
- employment protection legislation (EPL), which limits the employer’s ability to dismiss workers individually or collectively. EPL consists of the set of norms and procedures regulating the individual or collective dismissals of redundant workers (Boeri and Van Ours, 2008). EPL imposes extra costs when work contracts are terminated early and generally limits the situations in which dismissals are allowed. Lay-offs are often challenged in court, which add an uncertain cost factor, especially in countries that have less efficient civil justice systems.
Impacts on firms’ growth
Investment and risk-taking
Job turnover and reallocation dynamics
Arguments as to why hiring/firing costs are not necessarily detrimental to innovative firms
The empirical evidence on the effects of hiring and firing costs on successful innovative firms
Direct effects on firms’ productivity
Minimum wages
Figure 1. Real hourly minimum wages (in US$ PPP), 2012

Source: data extracted from OECD.Stat
Indicators to assess costs of hiring and firing
- Individual dismissal of workers with regular contracts. This incorporates three aspects of dismissal protection:
- Additional costs for collective dismissals. Most countries impose additional delays, costs or notification procedures when an employer dismisses a large number of workers at one time.
- Regulation of temporary contracts. This quantifies regulation of fixed-term and temporary work agency contracts with respect to the types of work for which these contracts are allowed and their duration. This also quantifies regulation governing the establishment and operation of temporary work agencies, and requirements for agency workers to receive the same pay and/or conditions as equivalent workers in the user firm, which can increase the cost of using temporary workers relative to permanent employees.
Based on these indicators, the strictness of EPL varies widely across OECD member countries (Figure 2). The degree of variation is even larger when the different sub-components of EPL (e.g. regulation of temporary contracts or of collective dismissals) are examined individually.
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- World Bank (2013). Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group. http://dx.doi.org/10.1596/978-0-8213-9615-5 [1]