The effect of employment protection on firms’ worker selection

To estimate the causal effect of employment protection on firms’ worker selection, we study apolicychangethatreduced dismissalcosts fortheemployersof overatenth of Sweden’s workforce. Our difference-in-differences analysis of firms’ hiring uses individual ability mea-sures including estimated worker fixed effects, GPA at age 15, and military test scores. We find that the reform reduced minimum hire quality by around 2%. Our results show that firms both decrease their hiring thresholds and hire more workers. We find that firms increas-ingly hire young, foreign born and long-term non-employed individuals, suggesting potential welfare gains of the reform.