Employment Protection Legislation, Labor Courts, and Effective Firing Costs

Labor courts may influence firing costs. Apart from the procedural costs, there is the likelihood that labor courts declare firings as unfair or nil, which significantly increase severance payments over those established for fair dismissals by Employment Protection Legislation. In this paper we model the determinants of the wedge between mandated and effective firing costs arising from labor courts resolution of dismissals, and show how it is affected by EPL reforms, looking at recent EPL reforms in Spain (implemented in 2010 and 2012) that significantly widened the definition of fair economic dismissals.