The effect of high dismissal protection on bureaucratic turnover and productivity

Abstract

We study the impact of high dismissal protection on bureaucratic turnover and productivity in the context of public school teachers in Chile. We take advantage of a law that required education administrators to grant a permanent contract to temporary teachers with at least three consecutive years of experience in 2014. Using a difference-in-differences estimation, we first compare the subsequent turnover of teachers with temporary contracts who had two and three years of experience in 2010–2014. We find that on average high dismissal protection reduces turnover by 25 percent in the first two years. The reduction in turnover is only statistically significant among teachers at the bottom and top of the distribution of baseline performance. We then examine the impact of dismissal protection on teacher productivity, and find a significant decline in the learning of students taught by teachers with low baseline performance. Together, these findings are consistent with the hypothesis that high dismissal protection can be a double-edged sword. It can help to retain high-performing employees by increasing the value of staying on the job, but at the cost of making it more difficult to separate and motivate low-performing employees.