[Journal:] Zeitschrift für ArbeitsmarktForschung – Journal for Labour Market Research [ISSN:] 2510-5027 [Volume:] 38 [Year:] 2005 [Issue:] 2/3 [Pages:] 284-304
German employment protection legislation has recently come under criticism. Some complain that the employment protection legislation no longer protects the employment relationship against the arbitrary termination by the employer. Others emphasize that dismissal protection restricts firms' capacity to act and is at least one reason for Germany's persistent mass unemployment. The parties agree, however, that the extensive and complex case-law creates considerable legal uncertainty for both parties. The present study examines the costs generated by employment protection legislation and identifies the factors influencing the incidence and magnitude of severance pay. Empirical research on the labour market consequences of employment protection does not reach clear-cut results. If dismissal protection has any effect on economic outcomes at all, then these effects may be more negative. An economically efficient dismissal protection must create incentives for both parties of the employment contract to choose an efficient adjustment path that minimises the expected damage caused by the dismissal. Which reform proposal fulfils this demand is finally discussed.