Does job security hamper employment prospects?

We use a reform in the Swedish employment protection legislation (EPL) that decreased dismissal costs for small firms only, to investigate the effect of EPL on the propensity to hire workers who were unemployed or in active labor market programs (ALMPs). The results indicate that less stringent EPL increased the share of workers hired from unemployment. In addition, our results suggest that transitions from some ALMPs to employment increased. Taken together, our results suggest that there was less screening of new hires after the reform, and that liberalization of EPL mitigates the stigma associated with unemployment and participation in ALMPs.