P15

P 15 - Size-dependent threshold values

Project Team:
Prof. Dr. Claus Schnabel, University of Erlangen-Nürnberg
Prof. Dr. Joachim Wagner, University of Lüneburg
Dipl.-Sozw. Lena Koller, IAB

Like in many other countries, relations between employers and employees in Germany are governed by a huge number of laws. Often these rules do apply only in establishments above a critical size, and often these thresholds are defined by the number of employees. Crossing such a size threshold can result in substantial cost effects for the employer. A case in point is the German dismissal law that (before the most recent revision) did only apply in establishments with five or more employees. If a firm with four employees hired a fifth worker, the law applied to all five employees, and the costs of dismissals increased sharply. The reverse is also true: If a firm manages to leap below a threshold of this type due to a reduction in the number of employees, total costs decrease by more than the labour costs saved.

These extra costs and benefits caused by crossing a threshold from below and above, respectively, are often considered to form a barrier to job creation in small firms by inducing firms just at a threshold not to hire and firms just behind a threshold to fire. Costs and benefits do vary considerably between the various thresholds, and, therefore, these rules of law introduce a specific type of multi-dimensional heterogeneity on the demand side of the labour market.

Threshold values abound in the so-called Mittelstand – firms with up to 250 employees (often managed by their owners and members of their families) that form the backbone of the German economy. Based on theoretical considerations this project will empirically investigate the consequences of selected thresholds for job dynamics in small and medium-sized firms using longitudinal data. The results will help to inform ongoing debates over the potential benefits that could be expected from changes in the law aimed at increasing the flexibility of firms and of the labour market