Mutually agreed termination, job destruction and dismissals. An empirical analysis based on French firm data (2006-2009)

• Date: 07 November 2016
• DOI: https://doi.org/10.1108/IJM-11-2014-0224
• Pages: 1365-1386
• Published date: 07 November 2016
• Author: Camille Signoretto
• Subject Matter: Economics,Labour economics

Mutually agreed termination, job

destruction and dismissals

An empirical analysis based on French firm

data (2006-2009)

Camille Signoretto

Department of Economics, Centre d’Etudes de l’emploi,

Noisy le Grand, France and

Department of Economics, Centre d’Economie de la Sorbonne,

University of Paris 1, Paris, France

Abstract

Purpose –The purpose of this paper is to study the implementation of a new open-ended contract

termination in 2008 in France, called the rupture conventionnelle (RC), which is a mutually agreed

contract termination. More precisely, this paper analyses first the impact of the RC on the employers’

termination decisions (termination or not?). Then it seeks to provide empirical evidence of a

substitution between the RC and other contract terminations (if there is termination, what types?).

Design/methodology/approach –The approach is first empirical. The author uses two matched

firms’data sets: one relating to the movement of employees and other from accounting data from 2006

to 2009. Using a propensity score matching method, the author creates two similar (from observable

characteristics) firms’groups –those that used RC in 2009 and those not. The author compares the

evolution of the employment decisions between the two groups between 2008 and 2009 in order to

identify the specific effect of the RC in the user firms.

Findings –The results indicate that the introduction of the RC tends to increase workforce exits and

does lead to much more job destruction in the user firms, i.e. job destruction would have been weaker in

the user firms if the RC had not been implemented. Substitutions with dismissals for personal reasons

and for economic reasons also may have appeared, albeit weakly.

Originality/value –The RC seems an important measure to make the labour market more flexible,

especially in France where EPL is often criticize for its rigidities. But few studies analyse the

consequences of this new institutional rule on firms’behaviour and with firms’data set. Then this

paper provides first some understanding and assessment of the economic effects of the RC.

Keywords Dismissals, Employment protection legislation, Firm database,

Human resources strategies, Job destruction, Mutually agreed termination

Paper type Research paper

1. Introduction

Since 2008, French labour law has included a new way of terminating open-ended

employment contracts (contrats à durée indéterminée or CDI). The specificity of this

new termination procedure –in French rupture conventionnelle (RC) –is based on its

mutual agreement, i.e. RC cannot be imposed either by employers or by the employees.

Such contract termination by mutual agreement can be seen as a relaxation of

regulation concerning CDIs, and especially of the dismissal legislation (OECD, 2009).

Indeed, economic analysis essentially treats such separation rules as labour market

International Journal of Manpower

Vol. 37 No. 8, 2016

pp. 1365-1386

©Emerald Group Publis hing Limited

0143-7720

DOI 10.1108/IJM-11-2014-0224

Received 18 November 2014

Revised 2 July 2015

4 September 2015

Accepted 22 September 2015

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0143-7720.htm

The author would like to thank Julie Valentin and Corinne Perraudin for their comments and

suggestions, as well as the participants of the AFSE symposium 2013 and of the SASE 25th

Annual Meeting. The usual disclaimer applies. This work was partly supported by a grant from

GESTES/Ré

gion Île-de-France.

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Empirical

analysis based

on French

firm data

rigidities, and so recommendations based on this economic analysis have focused on a

relaxation of contract termination rules, to make the labour market more flexible and

improve the reallocation of labour, which is an important source of productivity growth

and thus economic activity (OECD, 2010). These macroeconomic considerations are

reflected in employers’behaviour in arbitrating between costs and benefits when

deciding on whether to hire or fire. But, they also affect the choice of the type of hiring

and/or separation used, by changing the relative cost between different types of

separation, for example.

In this context,and given its strong growthin the CDI terminations (Sanzeri,2013), RC

appears to be a success,and its consequences on the labour marketare not insignificant.

This is especially true in France where employment protection legislation (EPL) is often

criticized forits rigidities. Yet, few studies haveanalysed the effects of this new legalrule

on firms’behaviour, using firms’data sets. This paper therefore provides some initial

understanding and assessment of the economic effects of RC. One of its novelties is to

rely on two types of theoretical and empirical literature: first, the traditional literature

concerning workerand job flows; and second, more recentwork related to the economics

of law, studying the strategic use of the differenttypes of separation by employers. More

precisely, the purpose of the paper is to study the possible impact of the introduction of

the RC on two decisionsby employers: first, the decisionto separate with an employee or

even to destroy a job; and second,the use of one form of separation rather than another.

The approach I use here is essentially empirical,focusing on an econometric analysis of a

sample of firms constituted by matchinga database on employee movements (the EMMO-

DMMO) with surveys of company accounts (EAE-Esane).

The rest of the paper is organized as follows. Section 2 reviews the theoretical and

empirical literature examining the impact of the presence of separation costs on the level

of job and worker flows,as well as on employers’use of the different waysin which CDIs

may be terminated. In line with these theoretical and empirical results, Section 3 shows

why the introduction of RC or mutually agreed termination may be considered as a

relevant subject of study in analysing the impact of how the law changes the costs and

difficultiesof dismissal. This then allows hypothesesto be formulated for testing. Section

4 presents the construction of the sample of firms and selection of appropriate variables,

as well as the econometric approach used. The latter is based on the construction of two

similar firm groups, regarding their use of RC. Then, I compare the evolution of the

employment decisions of each group using a difference-in-differences approach. Finally,

Section 4 also comments the results of the econometric estimations.

2. Theoretical and empirical literature

2.1 Impact of dismissal costs on employment levels and flows

Theoretically, the rules governing termination of the employment relationship are

primarily perceived through the associated costs to employers. Analysis of the effect of

adjustment costs on the level and flows of jobs is usually carried out in inter-temporal

models of labour demand with adjustment costs (Bertola, 1990; Bentolila and Bertola,

1990; Bentolila and Saint-Paul, 1994), as well as in matching models, which endogenize

the decisions on whether to create or destroy jobs (Pissarides, 2000; Mortensen and

Pissarides, 1994, 1999). According to these models, the existence of separation costs can

affect the choice made by an employer in terms of hiring and firing. In downswings of

the economic cycle, the high costs of separation will reduce dismissals due to costs.

In contrast, in upswings, the high costs of separation reduce hirings as employers

anticipate these costs, should they have to lay off employees in a subsequent downturn.

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