How Do Firing Costs Affect Innovation and Growth when Workers' Ability is Unknown? Employment Protection as a Burden on a Firm's Screening Process
AbstractThis paper analyzes the implication of employment protection legislation on a firm's screening process. We present a model in which human-capital-intensive firms (high-tech firms) with imperfect information about their workers' type attempt during a trial period to identify those incompetent workers they will subsequently dismiss. However, employment protection measures place a burden on this screening process thereby motivating innovators to embark on medium-tech projects which are more flexible in their human capital requirements. As such, employment protection legislation distorts the pattern of specialization in favor of medium-tech firms over high-tech firms and consequently slows down the process of economic growth. The results of the paper are consistent with documented data on Europe versus US productivity growth and specialization patterns.
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Bibliographic InfoArticle provided by Cattaneo University (LIUC) in its journal The European Journal of Comparative Economics.
Volume (Year): 9 (2012)
Issue (Month): 1 (April)
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Severance Payments; Firing Costs; Screening Costs; Specialization; Growth;
Find related papers by JEL classification:
- J2 - Labor and Demographic Economics - - Demand and Supply of Labor
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
- F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
- K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
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