The effect of high dismissal protection on bureaucratic turnover and productivity

This paper studies 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 a minimum seniority and implement a difference-in-differences strategy comparing eligible and ineligible teachers. We find that high dismissal protection reduces turnover by 25 percent in the first two years. The reduction is only statistically significant among teachers at the bottom and top of the distribution of baseline performance. We then examine the impact on teacher productivity and find a significant decline in the learning of students taught by teachers with low baseline performance. 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, but at the cost of making it more difficult to separate and motivate low-performing employees.