I was trying to explain to my friend why I don't think raising the minimum wage will benefit workers. He said "what if we just made layoffs illegal through legislation?". Is this even possible? If so, what would be the economic impact? Thanks.

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    $\begingroup$ You would see no companies actually hiring full time employees but rather use short term contracts for everyone in the company $\endgroup$
    – ssn
    Nov 22 '19 at 19:16
  • $\begingroup$ Why is that? Also, what would be the effect on already employed workers? $\endgroup$
    – Tom Hahn
    Nov 22 '19 at 19:23
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    $\begingroup$ If I was a business owner with a somewhat uncertain future for my company it would be a huge risk for me to hire a person that I can not let go again if I need. Eventually I might need to let my company go bankrupt because I cannot cut down on staff cost. Using fixed term contracts help me solve that - however this is definitively not to the benefit of any if my employees. $\endgroup$
    – ssn
    Nov 23 '19 at 21:21

We can infer from what happens in countries where layoffs are difficult, e.g. France. There employees are (or at least were) harrassed to quit instead.

There's a practice in France called being sent to the closet — "le placard."

It's when your employer makes your work life so miserable that you are forced to quit. [...]

Being sent to the closet is a pretty awful practice, but it's something that a number of French employers resort to because it's so hard to fire people legally there.

Many workers in France have contracts called CDIs — contrat à durée indéterminée — or contracts of indeterminate length. Once you have one, you can lose your job only in very limited circumstances.

I think there is/was a similar practice in Japan with the so-called "boredom room" instituted for a similar reason.

As for broader economic effects, the IMF generally has working papers favoring labor market flexibility (which among other things entail easy layoffs) because it seems to lower overall unemployment, e.g.

The aim of this paper is to analyze the relationship between labor market flexibility and unemployment outcomes. Using a panel of 97 countries from 1985 to 2008, the results of the paper suggest that improvements in labor market flexibility have a statistically and significant negative impact on unemployment outcomes (over unemployment, youth unemployment and long-term unemployment). Among the different labor market flexibility indicators analyzed, hiring and firing regulations and hiring costs are found to have the strongest effect.


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