Seniority rules and firms’ hiring criteria

Previous research has shown that labour legislation affects how many workers firms hire. Less is known, however, about whether it also affects who gets hired. This project examines whether changes in seniority rules influence firms’ hiring criteria. The question is important both for understanding the allocation of individuals in the labour market and for its distributional consequences.

According to theoretical models, lower dismissal costs can lead to less selective hiring, which in turn may benefit disadvantaged groups such as young people and the long-term unemployed. To test this, the project studies the 2001 reform of the seniority rules, which allowed small firms to exempt two employees from the order of dismissal. The reform created an exogenous variation in dismissal costs based on firm size, enabling a quasi-experimental difference-in-differences analysis, where firms not affected by the reform serve as a control group. We use labour market data from Statistics Sweden (SCB) and psychological and cognitive test data from the Swedish Military Service Administration (Pliktverket).