Dismissal Protection and Long-term Sickness Absence - First Evidence from Germany

This paper analyses the causal effects of weaker dismissal protection on the incidence of long-term sickness (> six weeks). We exploit a German policy change, which shifted the threshold exempting small establishments from dismissal protection from five to ten workers. Using administrative data, we find a significantly negative reform effect on transitions into long-term sickness in the second year after a worker has entered an establishment. This response is due to a behavioural, rather than a compositional effect and is mainly driven by less skilled workers. Our results further indicate that the reform did not alter the probability of involuntary unemployment after sickness.