Evidence on the impact of firing restrictions from Indonesia

This paper investigates the impact of an increase in the cost of firing employees on the performance of manufacturing firms in Indonesia. This analysis uses difference-indifferences analysis to measure the impact of the policy change on the output, employment, wages, and input mix of firms. The new law applied to all formal sector firms in Indonesia. So, in order to identify treatment and control groups, I argue that the government is unable to enforce the law equally across all firms. I use the firms that are mostly likely to comply with the new law (large and foreign firms) as the treatment group, and the firms that less likely to comply as the control group (small-domestic firms). I find that firms are responding to the policy as theory would predict, which has a mixed impact on the labor market.