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Employment Protection, Technology Choice, and Worker Allocation

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  • Eric J. Bartelsman

    (VU University Amsterdam, IZA)

  • Pieter A. Gautier

    (VU University Amsterdam, CEPR, IZA)

  • Joris de Wind

    (De Nederlandsche Bank, University of Amsterdam)

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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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-042/3.

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Date of creation: 19 Apr 2010
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Handle: RePEc:dgr:uvatin:20100042

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Keywords: employment protection legislation; exit costs; Information and Communications Technology; heterogeneous productivity; sectoral allocation;

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Cited by:
  1. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2013. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," American Economic Review, American Economic Association, American Economic Association, vol. 103(1), pages 305-34, February.
  2. Bassanini, Andrea & Garnero, Andrea, 2012. "Dismissal Protection and Worker Flows in OECD Countries: Evidence from Cross-Country/Cross-Industry Data," IZA Discussion Papers 6535, Institute for the Study of Labor (IZA).
  3. Ritzen, Jo & Zimmermann, Klaus F., 2013. "A Vibrant European Labor Market with Full Employment," IZA Policy Papers, Institute for the Study of Labor (IZA) 73, Institute for the Study of Labor (IZA).
  4. Hyytinen, Ari & Maliranta, Mika, 2011. "Firm Lifecycles and External Restructuring," Discussion Papers, The Research Institute of the Finnish Economy 1253, The Research Institute of the Finnish Economy.
  5. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 49(2), pages 326-65, June.
  6. 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, Universidade do Porto, Faculdade de Economia do Porto 1104, Universidade do Porto, Faculdade de Economia do Porto.
  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, Centre for European Studies, Alexandru Ioan Cuza University, vol. 4, pages 127-143, June.
  8. 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.

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