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Employment Protection, Technology Choice, and Worker Allocation

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  • Bartelsman, Eric J
  • de Wind, Joris
  • Gautier, Pieter A.

Abstract

Using a country-industry panel dataset (EUKLEMS) we uncover a robust empirical regularity, namely that high-risk innovative sectors are relatively smaller in countries with strict employment protection legislation (EPL). To understand the mechanism, we develop a two-sector matching model where firms endogenously choose between a safe technology with known productivity and a risky technology with productivity subject to sizeable shocks. Strict EPL makes the risky technology relatively less attractive because it is more costly to shed workers upon receiving a low productivity draw. We calibrate the model using a variety of aggregate, industry and micro-level data sources. We then simulate the model to reflect both the observed differences across countries in EPL and the observed increase since the mid-1990s in the variance of firm performance associated with the adoption of information and communication technology. The simulations produce a differential response to the arrival of risky technology between low- and high-EPL countries that coincides with the findings in the data. The described mechanism can explain a considerable portion of the slowdown in productivity in the EU relative to the US since 1995.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7806.

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Date of creation: May 2010
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Handle: RePEc:cpr:ceprdp:7806

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Keywords: employment protection; Information and Commications Technology; search; sectoral allocation;

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References

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  8. Reinhart, Carmen M. & Rogoff, Kenneth S., 2008. "Is the 2007 US Sub-Prime Financial Crisis So Different? An International Historical Comparison," Scholarly Articles 11129156, Harvard University Department of Economics.
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  11. Christopher Martin, . "Evidence from UK Establishments," Economics and Finance Discussion Papers 98-07, Economics and Finance Section, School of Social Sciences, Brunel University.
  12. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
  13. Roberto M. Samaniego, 2006. "Employment Protection and High-Tech Aversion," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 224-241, April.
  14. Mary O'Mahony & Marcel P. Timmer, 2009. "Output, Input and Productivity Measures at the Industry Level: The EU KLEMS Database," Economic Journal, Royal Economic Society, vol. 119(538), pages F374-F403, 06.
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  18. Giuseppe Nicoletti & Stefano Scarpetta & Olivier Boylaud, 2000. "Summary Indicators of Product Market Regulation with an Extension to Employment Protection Legislation," OECD Economics Department Working Papers 226, OECD Publishing.
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Citations

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Cited by:
  1. Bassanini, Andrea & Garnero, Andrea, 2013. "Dismissal protection and worker flows in OECD countries: Evidence from cross-country/cross-industry data," Labour Economics, Elsevier, vol. 21(C), pages 25-41.
  2. Chad Syverson, 2010. "What Determines Productivity?," NBER Working Papers 15712, National Bureau of Economic Research, Inc.
  3. Eric J. Bartelsman, 2010. "Searching for the sources of productivity from macro to micro and back," Industrial and Corporate Change, Oxford University Press, vol. 19(6), pages 1891-1917, December.
  4. Bartelsman, Eric & Haltiwanger, John C. & Scarpetta, Stefano, 2009. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," IZA Discussion Papers 4578, Institute for the Study of Labor (IZA).
  5. Ritzen, Jo & Zimmermann, Klaus F., 2013. "A Vibrant European Labor Market with Full Employment," IZA Policy Papers 73, Institute for the Study of Labor (IZA).
  6. Hyytinen, Ari & Maliranta, Mika, 2011. "Firm Lifecycles and External Restructuring," Discussion Papers 1253, The Research Institute of the Finnish Economy.
  7. Olivér KOVÁCS, 2013. "Black swans or creeping normalcy? – An attempt to a holistic crisis analysis," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 4, pages 127-143, June.
  8. Carlos Miguel Silva & Ana Paula Ribeiro, 2011. "The Impacts of Structural Changes in the Labor Market: a Comparative Statics Analysis Using Heterogeneous-agent Framework," CEF.UP Working Papers 1104, Universidade do Porto, Faculdade de Economia do Porto.

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